Exhibit 13

WATSCO, INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA *



|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | -------- | - | --------- | -------- |  | ---- | --------- |  | ---- | --------- | - |  | - | --------- | -
|Years Ended December 31, (In thousands, except per share data)                                                       |  | 2008 |           | 2007 (1) |   |           | 2006 (2) |  | 2005 |           |  | 2004 |          
|OPERATIONS                                                                                                           |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Revenues                                                                                                             |  | $    | 1,700,237 |          | $ | 1,758,022 |          |  | $    | 1,771,214 |  | $    | 1,658,249 |   |  | $ | 1,294,715 |  
|Gross profit                                                                                                         |  |      | 441,994   |          |   | 446,985   |          |  |      | 457,270   |  |      | 418,479   |   |  |   | 333,619   |  
|Operating income                                                                                                     |  |      | 98,608    |          |   | 111,154   |          |  |      | 135,394   |  |      | 117,283   |   |  |   | 84,094    |  
|Net income from continuing operations                                                                                |  |      | 60,369    |          |   | 67,489    |          |  |      | 82,233    |  |      | 70,528    |   |  |   | 49,370    |  
|(Loss) income from discontinued operations, net of income taxes                                                      |  |      |          |          |   | (1,912    | )        |  |      | 131       |  |      | (509      | ) |  |   | (1,265    | )
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Net income                                                                                                           |  | $    | 60,369    |          | $ | 65,577    |          |  | $    | 82,364    |  | $    | 70,019    |   |  | $ | 48,105    |  
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|                                                                                                                     |  |      |           |          |  
|SHARE AND PER SHARE DATA                                                                                             |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Diluted earnings per share for Common and Class B common stock (3):                                                  |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Net income from continuing operations                                                                                |  | $    | 2.18      |          | $ | 2.43      |          |  | $    | 2.95      |  | $    | 2.54      |   |  | $ | 1.83      |  
|Net (loss) income from discontinued operations                                                                       |  |      |          |          |   | (0.07     | )        |  |      |          |  |      | (0.02     | ) |  |   | (0.05     | )
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Net income                                                                                                           |  | $    | 2.18      |          | $ | 2.36      |          |  | $    | 2.96      |  | $    | 2.52      |   |  | $ | 1.79      |  
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Cash dividends declared and paid per share:                                                                          |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Common stock                                                                                                         |  | $    | 1.75      |          | $ | 1.31      |          |  | $    | 0.95      |  | $    | 0.62      |   |  | $ | 0.38      |  
|Class B common stock                                                                                                 |  | $    | 1.75      |          | $ | 1.31      |          |  | $    | 0.95      |  | $    | 0.62      |   |  | $ | 0.38      |  
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share |  |      | 27,736    |          |   | 27,824    |          |  |      | 27,829    |  |      | 27,769    |   |  |   | 26,931    |  
|Common stock outstanding                                                                                             |  |      | 28,326    |          |   | 27,969    |          |  |      | 27,833    |  |      | 27,463    |   |  |   | 26,855    |  
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|                                                                                                                     |  |      |           |          |  
|BALANCE SHEET INFORMATION                                                                                            |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  
|Total assets                                                                                                         |  | $    | 716,061   |          | $ | 750,113   |          |  | $    | 710,368   |  | $    | 677,884   |   |  | $ | 607,209   |  
|Long-term obligations                                                                                                |  |      | 20,783    |          |   | 55,042    |          |  |      | 30,118    |  |      | 40,189    |   |  |   | 50,155    |  
|Shareholders equity                                                                                                 |  |      | 570,660   |          |   | 549,957   |          |  |      | 516,386   |  |      | 450,650   |   |  |   | 402,738   |  
|                                                                                                                     |  |      |           |          |   |           |          |  |      |           |  |      |           |   |  |   |           |  



|* | On July 19, 2007, we divested of our non-core staffing unit. All amounts related to this operation are restated as discontinued operations for all periods presented
consistent with the 2007 presentation.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Effective January 1, 2006, the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, were adopted using the modified
prospective transition method.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Earnings per Common and Class B common share are calculated on an individual basis and, because of rounding, the summation of earnings from continuing operations and earnings (loss)
from discontinued operations may not equal the amount calculated for earnings as a whole.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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WATSCO, INC. AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information should be read in conjunction with the information contained in Item 1A, Risk Factors and the
consolidated financial statements included under Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Company Overview

Watsco, Inc. and its subsidiaries (collectively, Watsco, which may be referred to as we, us or
our) was incorporated in 1956 and is the largest independent distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (HVAC/R) in the United States. We operate from 417 locations in 34
states at December 31, 2008.

Revenues primarily consist of sales of air conditioning, heating and refrigeration equipment and related parts and
supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions and marketing expenses that tend to be variable in nature and correlate to changes in sales.
Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts and facility rent, which are payable mostly under non-cancelable operating leases.

Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. Furthermore, results of operations can be impacted favorably or
unfavorably based on the severity or mildness of weather patterns during summer or winter selling seasons. Demand related to the residential central air conditioning replacement market is highest in the second and third quarters with demand for
heating equipment usually highest in the fourth quarter. Demand related to the new construction sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic
conditions.

Critical Accounting Policies

Managements discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and
estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

Our significant accounting policies are discussed in Note 1 to the consolidated financial statements. Management believes that the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered
to be critical accounting policies. Management has discussed the development and selection of critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosures relating to them.

Allowance for Doubtful Accounts

An allowance for doubtful
accounts is maintained for estimated losses resulting from the inability of customers to make required payments. Accounting for doubtful accounts contains uncertainty because management must use judgment to assess the collectability of these
accounts. When preparing these estimates, management considers a number of factors, including the aging of a customers account, past transactions with customers, creditworthiness of specific customers, historical trends and other information.
Our business is seasonal and our customers businesses are also seasonal. Sales are lowest during the first and fourth quarters and past due accounts receivable balances as a percentage of total trade receivables generally increase during these
quarters. We review our accounts receivable reserve policy periodically, reflecting current risks, trends and changes in industry conditions.

The
allowance for doubtful accounts was $3.9 million and $5.1 million at December 31, 2008 and 2007, respectively, a decrease of $1.2 million. The decrease from December 31, 2007 is primarily due to the decrease in net sales coupled with an
improvement in the



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underlying quality of our accounts receivable portfolio at December 31, 2008. Accounts receivable balances greater than 90 days past due as a percent of
accounts receivable at December 31, 2008 decreased to 3.4% compared to 3.7% at December 31, 2007. This decrease is attributable to lower net sales and an increase in write-offs. Accounts receivable net write-offs as a percent of sales
increased for the year ended December 31, 2008 to .3% compared to .06% for the year ended December 31, 2007. This was primarily the result of higher write-offs and bad debt expense in 2008.

Although we believe the allowance for doubtful accounts is sufficient, the continuing declining economic conditions could lead to further deterioration in the financial
condition of customers, resulting in an impairment of their ability to make payments and additional allowances may be required that could materially impact our consolidated results of operations. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers comprising the customer base and their dispersion across many different geographical regions. We also have access to a credit insurance program which is used as an additional means
to mitigate credit risk.

Inventory Valuation

Inventories
consist of air conditioning, heating and refrigeration equipment and related parts and supplies and are valued at the lower of cost or market on a weighted-average cost basis. As part of the valuation process, inventory reserves are established to
state excess, slow-moving and damaged inventories at their estimated net realizable value. The valuation process for excess, slow-moving and damaged inventory contains uncertainty because management must use judgment to estimate when the inventory
will be sold and the quantities and prices at which the inventory will be sold in the normal course of business. Inventory reserve policies are periodically reviewed, reflecting current risks, trends and changes in industry conditions. A reserve for
estimated inventory shrinkage is also maintained and reflects the results of cycle count programs and physical inventories. When preparing these estimates, management considers historical results, inventory levels and current operating trends.

Inventory reserves of $5.0 million and $6.3 million at December 31, 2008 and 2007, respectively, have been established. The decrease in inventory
reserves is primarily due to reduced levels of excess and slow-moving inventory on hand at December 31, 2008 compared to December 31, 2007, which is attributed to improved inventory management. Inventory reserves are affected by a number
of factors, including general economic conditions and other factors affecting demand as well as the effectiveness of the inventory management process for controlling inventory shrinkage. In the event the estimates differ from actual results,
inventory-related reserves may be adjusted and could materially impact the consolidated results of operations.

Valuation of Goodwill and Indefinite Life
Intangible Assets

The recoverability of goodwill and indefinite life intangibles is evaluated at least annually and when events or changes in circumstances
indicate that the carrying amount of goodwill and indefinite life intangibles may not be recoverable. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting unit and contains uncertainty
because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. Indefinite life intangibles not subject to amortization are assessed for impairment by comparing the fair value of the
intangible asset to its carrying amount to determine if a write-down to fair value is required. The estimates of fair value of the reporting unit and indefinite life intangibles are based on the best information available as of the date of the
assessment and incorporate management assumptions about expected future cash flows and contemplate other valuation techniques. Future cash flows can be affected by changes in the industry, the continuing declining economic environment or market
conditions.

On January 1, 2009, the annual impairment tests were performed and it was determined there was no impairment. No factors have developed
since the last impairment tests that would indicate that the carrying value of goodwill and indefinite life intangibles may not be recoverable. The carrying amount of goodwill and intangibles at December 31, 2008 was $230.5 million. Although no
impairment has been recorded to date, there can be no assurances that future impairments will not occur. An adjustment to the carrying value of goodwill and intangibles could materially impact the consolidated results of operations.

Self-Insurance Reserves

Self-insurance reserves are maintained for
company-wide casualty insurance programs and for one subsidiarys health benefit program. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance



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coverage. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims
experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are
adequate. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required that could materially impact the consolidated results of operations. The estimation process contains
uncertainty since management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. Reserves in the amount of $3.9
million and $4.6 million at December 31, 2008 and 2007, respectively, were established related to such insurance programs. The decrease in the self-insurance reserves reflects the settlement (close-out) of the 2003 policy year with our carrier
as well as an improvement in the frequency and severity of claims experience during 2008.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. The use of estimates by management is required to
determine income tax expense, deferred tax assets and any related valuation allowance and deferred tax liabilities. The valuation allowance is based on estimates of future taxable income by jurisdiction in which the deferred tax assets will be
recoverable. These estimates can be affected by a number of factors, including possible tax audits or general economic conditions or competitive pressures that could affect future taxable income. Although management believes that the estimates are
reasonable, the deferred tax asset and any related valuation allowance will need to be adjusted if managements estimates of future taxable income differ from actual taxable income. An adjustment to the deferred tax asset and any related
valuation allowance could materially impact the consolidated results of operations. At December 31, 2008 and 2007, there was no valuation allowance recorded.

Discontinued Operations

During June 2007, our Board of Directors approved and we executed an agreement to sell the stock of our non-core
staffing unit, Dunhill Staffing Systems, Inc. (Dunhill). The transaction closed on July 19, 2007. The amounts related to this operation are presented as discontinued operations in our consolidated statements of income and our
consolidated statements of cash flows for all periods presented. See Note 13 to the consolidated financial statements for further information.

Results
of Operations

The following table summarizes information derived from the consolidated statements of income expressed as a percentage of revenues for
the years ended December 31, 2008, 2007 and 2006:



|                                                                |  |       |   |  |       |   |  |       |  
|--------------------------------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                |  | 2008  |   |  | 2007  |   |  | 2006  |  
|Revenues                                                        |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                                   |  | 74.0  |   |  | 74.6  |   |  | 74.2  |  
|                                                                |  |       |   |  |       |   |  |       |  
|                                                                |  |       |  
|Gross profit                                                    |  | 26.0  |   |  | 25.4  |   |  | 25.8  |  
|Selling, general and administrative expenses                    |  | 20.2  |   |  | 19.1  |   |  | 18.2  |  
|                                                                |  |       |   |  |       |   |  |       |  
|                                                                |  |       |  
|Operating income                                                |  | 5.8   |   |  | 6.3   |   |  | 7.6   |  
|Interest expense, net                                           |  | 0.1   |   |  | 0.2   |   |  | 0.2   |  
|                                                                |  |       |   |  |       |   |  |       |  
|                                                                |  |       |  
|Income from continuing operations before income taxes           |  | 5.7   |   |  | 6.1   |   |  | 7.4   |  
|Income taxes                                                    |  | 2.1   |   |  | 2.3   |   |  | 2.8   |  
|                                                                |  |       |   |  |       |   |  |       |  
|                                                                |  |       |  
|Net income from continuing operations                           |  | 3.6   |   |  | 3.8   |   |  | 4.6   |  
|(Loss) income from discontinued operations, net of income taxes |  |      |   |  | (0.1  | ) |  | 0.1   |  
|                                                                |  |       |   |  |       |   |  |       |  
|Net income                                                      |  | 3.6   | % |  | 3.7   | % |  | 4.7   | %
|                                                                |  |       |   |  |       |   |  |       |  



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The following narratives include the results of operations for businesses acquired during 2007 and 2006. The operating
results of the acquisitions have been included in the consolidated results beginning on their respective dates of acquisition. The proforma effect of acquisitions, excluding ACR Group, Inc. (ACR), was not deemed significant on either an
individual or an aggregate basis in the related acquisition year. There were no businesses acquired during 2008. In the following narratives, computations and disclosure information referring to same-store basis exclude the effects of
locations acquired or locations opened or closed during the prior twelve months unless they are within close geographical proximity to existing locations. Additionally, the following narratives include the results of operations of our continuing
operations only and exclude the results of our discontinued operation, Dunhill.

2008 Compared to 2007

Revenues

Revenues in 2008 decreased $57.8 million, or 3%, as compared
to 2007, including a $133.4 million contribution from locations acquired and opened during the last 12 months, offset by $13.6 million from closed locations. On a same-store basis, revenues declined $177.6 million, or 10.2%, over 2007 and reflected
a decline of 10% in sales of HVAC equipment, an 11% decline in sales of other HVAC products and a 5% decline in sales of refrigeration products. Revenues in 2008 were impacted by significantly lower demand in the new construction market.

Gross Profit

Gross profit in 2008 decreased $5.0 million, or 1%,
as compared to 2007. Gross profit margin improved 60 basis-points to 26.0% in 2008 from 25.4% in 2007 and improved 70 basis-points on a same-store basis. The expansion of gross profit margin is primarily due to increased sales of high-efficiency air
conditioning systems, an improved sales mix to the repair and replacement market and execution on gross profit margin enhancement initiatives.

Selling,
General and Administrative Expenses

Selling, general and administrative expenses in 2008 increased $7.6 million, or 2%, over 2007. Selling, general and
administrative expenses as a percent of revenues increased to 20.2% in 2008 from 19.1% in 2007 primarily as a result of lower same-store revenues and the relative inefficiency of fixed operating costs following a decline in revenues. On a same-store
basis, including locations closed during 2008, selling, general and administrative expenses decreased 6% compared to 2007 primarily due to decreases in selling expenses related to our decreased revenues, other cost reductions and efficiency
initiatives including facility rationalization and headcount reductions and lower incentive-based compensation as a result of our decreased revenues.

Interest Expense, Net

Net interest expense in 2008 decreased $1.2 million, or 36%, compared to 2007, primarily due to a 24% decrease in
average outstanding borrowings and a lower effective interest rate.

Income Taxes

The effective tax rate was 37.5% in 2008 and 2007.

Net Income from Continuing Operations

Net income from continuing operations for 2008 decreased $7.1 million, or 11%, compared to 2007. The decrease in net income from continuing operations was primarily a
result of lower revenues.

2007 Compared to 2006

Revenues

Revenues in 2007 decreased $13.2 million, or 1%, as compared to 2006, including a $121.2 million contribution from locations
acquired and opened during the last 12 months, offset by $.5 million from closed locations. On a same-store basis, revenues declined $133.9 million, or 7.6%, over 2006 and reflected a decline of 5% in sales of HVAC equipment and an 11% decrease in
the sale of other HVAC products, primarily related to a decline in sales to the new construction market, partially offset by a 10% increase in sales of refrigeration products.



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Gross Profit

Gross
profit in 2007 decreased $10.3 million, or 2%, as compared to 2006, primarily as a result of decreased revenues. Gross profit margin declined 40 basis-points to 25.4% in 2007 from 25.8% in 2006, resulting from a shift in sales mix to a higher
proportion of lower-margin HVAC equipment, lower margins on copper-based products that are sensitive to changes in commodity prices and generally more competitive pricing conditions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2007 increased $14.0
million, or 4%, over 2006. Selling, general and administrative expenses as a percent of revenues increased to 19.1% in 2007 from 18.2% in 2006 primarily as a result of lower same-store revenues and the relative inefficiency of fixed operating costs
following a decline in revenues. On a same-store basis, selling, general and administrative expenses decreased 4% compared to 2006 primarily due to decreases in selling expenses related to our decreased revenues and lower incentive-based
compensation.

Interest Expense, Net

Net interest
expense in 2007 decreased $.6 million, or 17%, compared to 2006, primarily due to a 9% decrease in average outstanding borrowings and a lower effective interest rate.

Income Taxes

The effective tax rate was 37.5% in 2007 and 2006.

Net Income from Continuing Operations

Net income from continuing
operations for 2007 decreased $14.7 million, or 18%, compared to 2006. The decrease in net income from continuing operations was primarily driven by the lower revenues and lower gross profit margin as discussed above.

Liquidity and Capital Resources

We assess our liquidity in terms of
our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand of HVAC/R products, which peak in the months of May through August. Significant factors which
could affect our liquidity include the following:



| |  |  | cash flows generated from operating activities;
| | - |  | -----------------------------------------------



| |  |  | the adequacy of available bank lines of credit;
| | - |  | -----------------------------------------------



| |  |  | the ability to attract long-term capital with satisfactory terms;
| | - |  | -----------------------------------------------------------------



| |  |  | acquisitions;
| | - |  | -------------



| |  |  | dividend payments;
| | - |  | ------------------



| |  |  | the timing and extent of common stock repurchases; and
| | - |  | ------------------------------------------------------



| |  |  | capital expenditures.
| | - |  | ---------------------

We rely on cash flows from
operations and our line of credit to fund seasonal working capital needs, financial commitments and short-term liquidity needs, including funds necessary for business acquisitions. Disruptions in the capital and credit markets, such as has been
experienced during 2008, could adversely affect our ability to draw on our line of credit. Our access to funds under the line of credit is dependent on the ability of the banks to meet their funding commitments. Recent disruptions in capital and
credit markets have also affected the determination of interest rates for borrowers, particularly rates based on LIBOR, as is our line of credit. Continued disruptions in these markets and their affect on interest rates could result in increased
borrowing costs under our line of credit. We believe that, at present, cash flows from operations combined with those available under our line of credit are sufficient to satisfy our current liquidity needs, including our anticipated dividend
payments and capital expenditures.

Overview

Cash flows
provided by operating activities supply us with a significant source of liquidity. Our cash flows from operating activities of continuing operations were $113.5 million in 2008 compared to $106.8 million in 2007. The increase in operating cash flows
resulted primarily from lower reductions in accounts payable and other liabilities in 2008 compared to 2007, partially offset by lower reductions in inventories in 2008 compared to 2007.



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Net cash used in investing activities of continuing operations decreased to $3.7 million in 2008 from $108.0 million in
2007. The decrease is primarily due to businesses acquired in 2007 for cash consideration of $109.0 million and a $2.1 million decrease in capital expenditures, partially offset by $3.3 million in proceeds from the 2007 sale of Dunhill and $3.3
million in net proceeds from the sale of marketable securities realized in 2007.

Net cash used in financing activities increased to $77.8 million in 2008
from $24.9 million in 2007. The increase is primarily attributable to $48.0 million of net debt repayments and an increase of $12.6 million in dividends paid partially offset by a reduction of $4.6 million of stock repurchases in 2008.

Working capital decreased to $348.9 million at December 31, 2008 from $359.8 million at December 31, 2007.

Revolving Credit Agreement

We maintain a bank-syndicated, unsecured
revolving credit agreement that provides for borrowings of up to $300.0 million. Borrowings are used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends, stock repurchases and issuances
of letters of credit. The credit facility matures in August 2012. At December 31, 2008 and 2007, $20.0 million and $54.0 million, respectively, were outstanding under the revolving credit agreement.

The revolving credit agreement contains customary affirmative and negative covenants including two financial covenants with respect to consolidated leverage and interest
coverage ratios and limits capital expenditures, dividends and share repurchases in addition to other restrictions. We were in compliance with all covenants and financial ratios at December 31, 2008.

Contractual Obligations and Off-Balance Sheet Arrangements

As of
December 31, 2008, our significant contractual obligations were as follows (in millions):



|                                           |  |                        |      |      |   |      |  |      |      |      |   |            |  |       |      |  |   |      |  |   |      
|------------------------------------------ |  | ---------------------- | ---- | ---- | - | ---- |  | ---- | ---- | ---- | - | ---------- |  | ----- | ---- |  | - | ---- |  | - | -----
|                                           |  | Payments due by Period
|Contractual Obligations                    |  | 2009                   |      | 2010 |   | 2011 |  | 2012 |      | 2013 |   | Thereafter |  | Total
|Non-cancelable operating lease obligations |  | $                      | 46.3 |      | $ | 36.7 |  | $    | 26.9 |      | $ | 18.7       |  | $     | 12.1 |  | $ | 14.7 |  | $ | 155.4
|Minimum royalty payments                   |  |                        | 1.0  |      |   | 1.0  |  |      | 1.0  |      |   |           |  |       |     |  |   |     |  |   | 3.0  
|Other debt                                 |  |                        | 0.3  |      |   | 0.2  |  |      | 0.1  |      |   | 0.1        |  |       |     |  |   | 0.4  |  |   | 1.1  
|                                           |  |                        |      |      |   |      |  |      |      |      |   |            |  |       |      |  |   |      |  |   |      
|Total Contractual Obligations              |  | $                      | 47.6 |      | $ | 37.9 |  | $    | 28.0 |      | $ | 18.8       |  | $     | 12.1 |  | $ | 15.1 |  | $ | 159.5
|                                           |  |                        |      |      |   |      |  |      |      |      |   |            |  |       |      |  |   |      |  |   |      

Commercial obligations outstanding at December 31, 2008 under the revolving credit agreement consist of
borrowings totaling $20.0 million and standby letters of credit totaling $4.6 million. Borrowings under the revolving credit agreement at December 31, 2008 had revolving maturities of 30 days and letters of credit had varying terms expiring
through January 2010.

Standby letters of credit are primarily used as collateral under self-insurance programs and are not expected to result in any
material losses or obligation as the obligations under the programs will be met in the ordinary course of business. Accordingly, the estimated fair value of these instruments is zero at December 31, 2008. See Note 10 to the consolidated
financial statements for further information.



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Company Share Repurchase Program

In September 1999, our Board of Directors authorized the repurchase, at managements discretion, of 7.5 million shares of common stock in the open market or via private transactions. Shares repurchased under the program are
accounted for using the cost method and result in a reduction of shareholders equity. Repurchases totaled 105,600 shares at a cost of $4.8 million in 2008, 231,100 shares at a cost of $9.4 million in 2007 and 243,600 shares at a cost of $15.3
million in 2006. In aggregate, 6.4 million shares of Common stock and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. The remaining 1.1 million shares authorized for repurchase are
subject to certain restrictions included in our debt agreement.

Common Stock Dividends

Cash dividends of $1.75 per share, $1.31 per share and $0.95 per share of Common stock and Class B common stock were paid in 2008, 2007 and 2006, respectively. In February 2009, the Board of Directors approved an
increase to the quarterly cash dividend rate to $0.48 per share from $0.45 per share of Common and Class B common stock beginning with the next regular scheduled dividend declaration in April 2009. Future dividends and/or dividend rate increases
will be at the sole discretion of the Board of Directors and will depend upon such factors as profitability, financial condition, cash requirements, restrictions under our debt agreement, future prospects and other factors deemed relevant by our
Board of Directors.

Capital Resources

We believe we have
adequate availability of capital from operations and our current credit facility to fund working capital requirements and support the development of our short-term and long-term operating strategies. As of December 31, 2008, we had $41.4
million of cash and cash equivalents and $275.4 million of additional borrowing capacity under the revolving credit agreement to fund present operations and anticipated growth, including expansion in our current and targeted market areas. Potential
acquisitions are continually evaluated and discussions are conducted with a number of acquisition candidates. Should suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe our financial
position and earnings history provide a sufficient base for obtaining additional financing resources at competitive rates and terms or gives us the ability to raise funds through the issuance of equity securities.

Quantitative and Qualitative Disclosures about Market Risk

The
primary market risk exposure for Watsco is interest rate risk. The objective in managing the exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To
achieve this objective, interest rate swaps are used to manage net exposure to interest rate changes to our borrowings. These swaps are entered into with financial institutions with investment grade credit ratings, thereby minimizing the risk of
credit loss. All items described are non-trading. See Notes 1 and 10 to the consolidated financial statements for further information.

Interest rate swap
agreements reduce the exposure to market risks from changing interest rates under our revolving credit agreement. Under the swap agreements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts
calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on
the underlying obligation. Financial instruments are not held for trading purposes. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly,
changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

At December 31, 2008 and 2007, two interest rate swap agreements were in effect with notional amounts of $10.0 million each, to manage the net exposure to interest
rate changes related to $20.0 million of borrowings under our revolving credit agreement. One swap agreement matures in October 2009 and exchanges the variable rate of 30-day LIBOR to a fixed interest rate of 5.04%. The other swap agreement matures
in October 2011 and exchanges the variable rate of 30-day LIBOR to a fixed interest rate of 5.07%. The interest rate swaps were effective as cash flow hedges and no charge to earnings was required in 2008 and 2007.



---

We were party to an interest rate swap agreement with a notional amount of $30.0 million, which matured on
October 9, 2007, that was designated as a cash flow hedge and effectively exchanged the variable rate of 90-day LIBOR to a fixed interest rate of 6.25%. During 2007 and 2006, the hedging relationship was determined to be highly effective in
achieving offsetting changes in cash flows.

The negative fair value of the derivative financial instruments was $1.3 million and $.6 million at
December 31, 2008 and 2007, respectively, and is included, net of accrued interest, in deferred income taxes and other liabilities in the consolidated balance sheets.

At December 31, 2008 and 2007, our exposure to interest rate changes was limited to variable rate lease payments which are indexed to one month LIBOR. To assess our exposure to changes in interest rates, we
performed a sensitivity analysis to determine the impact to earnings associated with an immediate 100 basis-point fluctuation from one month LIBOR. Based on the results of this simulation, as of December 31, 2008 and 2007, net income would
decrease or increase by approximately $.1 million on an annual basis if there were an immediate 100 basis-point increase or decrease, respectively, in one month LIBOR. Recent disruptions in the capital and credit markets have also affected the
determination of interest rates for LIBOR-based borrowers. Continued disruptions in these markets and their affect on interest rates could result in increased borrowings than our sensitivity analysis determined. This information constitutes a
forward-looking statement and actual results may differ significantly based on actual borrowings and interest rates.

Recent Accounting
Pronouncements

Refer to Note 1, Summary of Significant Accounting PoliciesRecently Adopted Accounting Standards, in the notes to
consolidated financial statements for a discussion surrounding the adoption of these accounting standards.

Information about Forward-Looking Statements

This Annual Report contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby
identified as, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements regarding, among other items, (i) economic conditions, (ii) business and acquisition strategies,
(iii) potential acquisitions, (iv) financing plans and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based largely on managements
current expectations and are subject to a number of risks, uncertainties and changes in circumstances, certain of which are beyond their control.

Actual
results could differ materially from these forward-looking statements as a result of several factors, including:



| |  |  | general economic conditions;
| | - |  | ----------------------------



| |  |  | effects of supplier concentration;
| | - |  | ----------------------------------



| |  |  | competitive factors within the HVAC/R industry;
| | - |  | -----------------------------------------------



| |  |  | consumer spending;
| | - |  | ------------------



| |  |  | consumer debt levels;
| | - |  | ---------------------



| |  |  | new housing starts and completions;
| | - |  | -----------------------------------



| |  |  | capital spending in the commercial construction market;
| | - |  | -------------------------------------------------------



| |  |  | access to liquidity needed for operations;
| | - |  | ------------------------------------------



| |  |  | seasonal nature of product sales;
| | - |  | ---------------------------------



| |  |  | weather conditions;
| | - |  | -------------------



| |  |  | insurance coverage risks;
| | - |  | -------------------------



| |  |  | prevailing interest rates; and
| | - |  | ------------------------------



| |  |  | the continued viability of our business strategy.
| | - |  | -------------------------------------------------

In light of these uncertainties, there can be no assurance that the forward-looking information contained herein will be realized or, even if substantially realized, that the information will have the expected consequences to or effects on
Watsco or its business or operations. A discussion of certain of these risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements is included in our Annual Report to
Shareholders for the fiscal year ended December 31, 2008 in the section captioned Managements Discussion and Analysis of Financial Condition and Results of Operations, which section has been incorporated in the Form 10-K by
reference. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information or the discussion of such risks and uncertainties to reflect actual results, changes in assumptions
or changes in other factors affecting forward-looking information.



---

Corporate Governance

On June 26, 2008, Watsco submitted to the New York Stock Exchange (NYSE) the annual Chief Executive Officer Certification required under Section 303A 12(a) of the NYSE Listed Company Manual. In addition, Watsco filed
with the Securities and Exchange Commission the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2 and 31.3 to its Annual Report on Form 10-K for the year ended December 31, 2008.



---

WATSCO, INC. AND SUBSIDIARIES

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed
to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of our published consolidated financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect
misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and
with the participation of our management, including our Chief Executive Officer, Senior Vice President and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2008. The assessment was based on criteria established in the framework Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on this assessment under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008. The effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included herein.



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Watsco, Inc.

We have audited Watsco, Inc. (a Florida Corporation) and subsidiaries (the Company) internal control over financial reporting as of December 31,
2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Watsco, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on Watsco, Inc. and subsidiaries internal control over financial reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Watsco, Inc. and
subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Watsco, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, cash flows, and shareholders equity for each of the three years in the period ended December 31, 2008 and our
report dated February 27, 2009 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Miami, Florida

February 27, 2009



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Watsco, Inc.

We have audited the accompanying consolidated balance sheets of Watsco, Inc. (a Florida Corporation) and subsidiaries (the Company) as of December 31,
2008 and 2007, and the related consolidated statements of income, cash flows, and shareholders equity for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Watsco, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 5 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes on
January 1, 2007. As discussed in Notes 1 and 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123R Share-Based Payment on January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Watsco, Inc. and subsidiaries internal
control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

Miami, Florida

February 27, 2009



---

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- | ---- |  | - | ---------
|                                                                                                              |  | Years Ended December 31,
|(In thousands, except per share data)                                                                         |  | 2008                     |           | 2007 |   |           | 2006
|Revenues                                                                                                      |  | $                        | 1,700,237 |      | $ | 1,758,022 |      |  | $ | 1,771,214
|Cost of sales                                                                                                 |  |                          | 1,258,243 |      |   | 1,311,037 |      |  |   | 1,313,944
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Gross profit                                                                                                  |  |                          | 441,994   |      |   | 446,985   |      |  |   | 457,270  
|Selling, general and administrative expenses                                                                  |  |                          | 343,386   |      |   | 335,831   |      |  |   | 321,876  
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Operating income                                                                                              |  |                          | 98,608    |      |   | 111,154   |      |  |   | 135,394  
|Interest expense, net                                                                                         |  |                          | 2,018     |      |   | 3,172     |      |  |   | 3,821    
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Income from continuing operations before income taxes                                                         |  |                          | 96,590    |      |   | 107,982   |      |  |   | 131,573  
|Income taxes                                                                                                  |  |                          | 36,221    |      |   | 40,493    |      |  |   | 49,340   
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Net income from continuing operations                                                                         |  |                          | 60,369    |      |   | 67,489    |      |  |   | 82,233   
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|(Loss) income from discontinued operations, net of income taxes (Note 13)                                     |  |                          |          |      |   | (1,912    | )    |  |   | 131      
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Net income                                                                                                    |  | $                        | 60,369    |      | $ | 65,577    |      |  | $ | 82,364   
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|                                                                                                              |  |                          |          
|Basic earnings per share for Common and Class B common stock (1):                                             |  |                          |           |      |   |           |      |  |   |          
|Net income from continuing operations                                                                         |  | $                        | 2.28      |      | $ | 2.57      |      |  | $ | 3.14     
|Net (loss) income from discontinued operations                                                                |  |                          |          |      |   | (0.07     | )    |  |   | 0.01     
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Net income                                                                                                    |  | $                        | 2.28      |      | $ | 2.49      |      |  | $ | 3.15     
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|                                                                                                              |  |                          |          
|Diluted earnings per share for Common and Class B common stock (1):                                           |  |                          |           |      |   |           |      |  |   |          
|Net income from continuing operations                                                                         |  | $                        | 2.18      |      | $ | 2.43      |      |  | $ | 2.95     
|Net (loss) income from discontinued operations                                                                |  |                          |          |      |   | (0.07     | )    |  |   |         
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|Net income                                                                                                    |  | $                        | 2.18      |      | $ | 2.36      |      |  | $ | 2.96     
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          
|                                                                                                              |  |                          |          
|Weighted-average Common and Class B common shares and equivalent shares used to calculate earnings per share: |  |                          |           |      |   |           |      |  |   |          
|Basic                                                                                                         |  |                          | 26,453    |      |   | 26,297    |      |  |   | 26,150   
|Diluted                                                                                                       |  |                          | 27,736    |      |   | 27,824    |      |  |   | 27,829   
|                                                                                                              |  |                          |           |      |   |           |      |  |   |          

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



| | (1) | Earnings per Common and Class B common share are calculated on an individual basis and, because of rounding, the summation of earnings from continuing operations and earnings (loss)
from discontinued operations may not equal the amount calculated for earnings as a whole.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                          |  |              |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                          |  | December 31, |         
|(In thousands, except share and per share data)                                                                                           |  | 2008         |          |   | 2007 |  
|ASSETS                                                                                                                                    |  |              |          |   |      |   |          |  
|Current assets:                                                                                                                           |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                 |  | $            | 41,444   |   |      | $ | 9,405    |  
|Accounts receivable, net                                                                                                                  |  |              | 151,317  |   |      |   | 178,415  |  
|Inventories                                                                                                                               |  |              | 250,914  |   |      |   | 288,149  |  
|Other current assets                                                                                                                      |  |              | 13,028   |   |      |   | 13,203   |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                      |  |              | 456,703  |   |      |   | 489,172  |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Property and equipment, net                                                                                                               |  |              | 24,209   |   |      |   | 26,904   |  
|Goodwill                                                                                                                                  |  |              | 219,810  |   |      |   | 217,129  |  
|Other assets                                                                                                                              |  |              | 15,339   |   |      |   | 16,908   |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|                                                                                                                                          |  | $            | 716,061  |   |      | $ | 750,113  |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|                                                                                                                                          |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                                      |  |              |          |   |      |   |          |  
|Current portion of long-term obligations                                                                                                  |  | $            | 268      |   |      | $ | 275      |  
|Accounts payable                                                                                                                          |  |              | 63,850   |   |      |   | 88,596   |  
|Accrued expenses and other current liabilities                                                                                            |  |              | 43,706   |   |      |   | 40,493   |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                 |  |              | 107,824  |   |      |   | 129,364  |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Long-term obligations:                                                                                                                    |  |              |          |   |      |   |          |  
|Borrowings under revolving credit agreement                                                                                               |  |              | 20,000   |   |      |   | 54,000   |  
|Other long-term obligations, net of current portion                                                                                       |  |              | 783      |   |      |   | 1,042    |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Total long-term obligations                                                                                                               |  |              | 20,783   |   |      |   | 55,042   |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Deferred income taxes and other liabilities                                                                                               |  |              | 16,794   |   |      |   | 15,750   |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Commitments and contingencies (Notes 10 and 12)                                                                                           |  |              |          |   |      |   |          |  
|Shareholders equity:                                                                                                                     |  |              |          |   |      |   |          |  
|Common stock, $0.50 par value, 60,000,000 shares authorized; 30,882,931 and 30,513,096 shares issued in 2008 and 2007,
respectively       |  |              | 15,442   |   |      |   | 15,256   |  
|Class B common stock, $0.50 par value, 10,000,000 shares authorized; 3,813,620 and 3,721,687 shares issued in 2008 and 2007,
respectively |  |              | 1,907    |   |      |   | 1,861    |  
|Paid-in capital                                                                                                                           |  |              | 282,636  |   |      |   | 267,669  |  
|Accumulated other comprehensive loss, net of tax                                                                                          |  |              | (1,125   | ) |      |   | (431     | )
|Retained earnings                                                                                                                         |  |              | 386,225  |   |      |   | 375,207  |  
|Treasury stock, at cost, 6,370,913 and 6,265,313 shares of Common and Class B common stock in 2008 and 2007, respectively                 |  |              | (114,425 | ) |      |   | (109,605 | )
|                                                                                                                                          |  |              |          |   |      |   |          |  
|Total shareholders equity                                                                                                                |  |              | 570,660  |   |      |   | 549,957  |  
|                                                                                                                                          |  |              |          |   |      |   |          |  
|                                                                                                                                          |  | $            | 716,061  |   |      | $ | 750,113  |  
|                                                                                                                                          |  |              |          |   |      |   |          |  

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



---

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | - |  | ---------------------------------------- | ------ | - | -------------- | - | ------- | ------------------------------------- |  | - | --------------------------------- | - |  | ---------------- | ---- | - | ------------- | - | ------- | ----- |  | - | -------- | - |  | - | ------- | -
|(In thousands, except shareand per share data)                                                                           |  | Common StockandClass BCommon StockShares |   |  | Common StockandClass BCommon StockAmount |        |   | Paid-InCapital |   |         | DeferredCompensationonNon-VestedStock |  |   | AccumulatedOtherComprehensiveLoss |   |  | RetainedEarnings |      |   | TreasuryStock |   |         | Total | 
|Balance at December 31, 2005                                                                                             |  | 27,462,832                               |   |  | $                                        | 16,627 |   |                | $ | 264,903 |                                       |  | $ | (35,894                           | ) |  | $                | (478 | ) |               | $ | 290,383 |       |  | $ | (84,891  | ) |  | $ | 450,650 |  
|Net income                                                                                                               |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   | 82,364  |       |  |   |          |   |  |   | 82,364  |  
|Changes in unrealized gains and losses on available-for-sale securities and a derivative instrument, net of income taxes |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  | 352  |   |               |   |         |       |  |   |          |   |  |   | 352     |  
|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|Comprehensive income                                                                                                     |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 82,716  |  
|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|Retirement of common stock                                                                                               |  | (150,086                                 | ) |  |                                          | (75    | ) |                |   | (10,488 | )                                     |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | (10,563 | )
|Common stock contribution to 401(k) plan                                                                                 |  | 19,055                                   |   |  |                                          | 10     |   |                |   | 1,130   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 1,140   |  
|Stock issuances from exercise of stock options and employee stock purchase plan                                          |  | 460,144                                  |   |  |                                          | 230    |   |                |   | 8,143   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 8,373   |  
|Excess tax benefit from share-based compensation                                                                         |  |                                          |   |  |                                          |        |   |                |   | 8,371   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 8,371   |  
|Issuances of non-vested (restricted) shares of common stock                                                              |  | 287,359                                  |   |  |                                          | 144    |   |                |   | 12,235  |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 12,379  |  
|Forfeitures of non-vested (restricted) shares of common stock                                                            |  | (2,873                                   | ) |  |                                          | (2     | ) |                |   | 2       |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |        |  
|Share-based compensation                                                                                                 |  |                                          |   |  |                                          |        |   |                |   | 5,020   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 5,020   |  
|Adoption of SFAS No. 123R, Share-Based Payment                                                                         |  |                                          |   |  |                                          |        |   |                |   | (35,894 | )                                     |  |   | 35,894                            |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |        |  
|Cash dividends declared on Common and Class B common stock, $0.95 per share                                              |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   | (26,372 | )     |  |   |          |   |  |   | (26,372 | )
|Purchase of treasury stock                                                                                               |  | (243,600                                 | ) |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   | (15,328  | ) |  |   | (15,328 | )
|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2006                                                                                             |  | 27,832,831                               |   |  |                                          | 16,934 |   |                |   | 253,422 |                                       |  |   |                                  |   |  |                  | (126 | ) |               |   | 346,375 |       |  |   | (100,219 | ) |  |   | 516,386 |  
|Net income                                                                                                               |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   | 65,577  |       |  |   |          |   |  |   | 65,577  |  
|Changes in unrealized gains and losses on available-for-sale securities and derivative instruments, net of income taxes  |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  | (305 | ) |               |   |         |       |  |   |          |   |  |   | (305    | )
|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|Comprehensive income                                                                                                     |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 65,272  |  
|                                                                                                                         |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |         |  
|Retirement of common stock                                                                                               |  | (17,291                                  | ) |  |                                          | (9     | ) |                |   | (893    | )                                     |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | (902    | )
|Common stock contribution to 401(k) plan                                                                                 |  | 27,111                                   |   |  |                                          | 14     |   |                |   | 1,265   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 1,279   |  
|Stock issuances from exercise of stock options and employee stock purchase plan                                          |  | 268,652                                  |   |  |                                          | 133    |   |                |   | 4,488   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 4,621   |  
|Excess tax benefit from share-based compensation                                                                         |  |                                          |   |  |                                          |        |   |                |   | 3,462   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 3,462   |  
|Issuances of non-vested (restricted) shares of common stock                                                              |  | 91,255                                   |   |  |                                          | 46     |   |                |   | (46     | )                                     |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |        |  
|Forfeitures of non-vested (restricted) shares of common stock                                                            |  | (1,988                                   | ) |  |                                          | (1     | ) |                |   | 1       |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   |        |  
|Share-based compensation                                                                                                 |  |                                          |   |  |                                          |        |   |                |   | 5,970   |                                       |  |   |                                   |   |  |                  |      |   |               |   |         |       |  |   |          |   |  |   | 5,970   |  



---

|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | - |  | ---------------------------------------- | ------ | - | -------------- | - | ------- | ------------------------------------- |  | --------------------------------- |  | - | ---------------- | - |  | ------------- | ------- | - | ----- | - | -------- | - |  | - | ------- | -
|(In thousands, except shareand per share data)                                                                          |  | Common StockandClass BCommon StockShares |   |  | Common StockandClass BCommon StockAmount |        |   | Paid-InCapital |   |         | DeferredCompensationonNon-VestedStock |  | AccumulatedOtherComprehensiveLoss |  |   | RetainedEarnings |   |  | TreasuryStock |         |   | Total |  
|Cash dividends declared on Common and Class B common stock, $1.31 per share                                             |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               | (36,745 | ) |       |   |          |   |  |   | (36,745 | )
|Purchase of treasury stock                                                                                              |  | (231,100                                 | ) |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   | (9,386   | ) |  |   | (9,386  | )
|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  
|Balance at December 31, 2007                                                                                            |  | 27,969,470                               |   |  |                                          | 17,117 |   |                |   | 267,669 |                                       |  |                                  |  |   | (431             | ) |  |               | 375,207 |   |       |   | (109,605 | ) |  |   | 549,957 |  
|Net income                                                                                                              |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               | 60,369  |   |       |   |          |   |  |   | 60,369  |  
|Changes in unrealized gains and losses on available-for-sale securities and derivative instruments, net of income taxes |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   | (694             | ) |  |               |         |   |       |   |          |   |  |   | (694    | )
|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  
|Comprehensive income                                                                                                    |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | 59,675  |  
|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  
|Retirement of common stock                                                                                              |  | (261,014                                 | ) |  |                                          | (131   | ) |                |   | (9,798  | )                                     |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | (9,929  | )
|Common stock contribution to 401(k) plan                                                                                |  | 33,986                                   |   |  |                                          | 17     |   |                |   | 1,232   |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | 1,249   |  
|Stock issuances from exercise of stock options and employee stock purchase plan                                         |  | 643,796                                  |   |  |                                          | 323    |   |                |   | 12,344  |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | 12,667  |  
|Excess tax benefit from share-based compensation                                                                        |  |                                          |   |  |                                          |        |   |                |   | 4,758   |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | 4,758   |  
|Issuances of non-vested (restricted) shares of common stock                                                             |  | 45,000                                   |   |  |                                          | 23     |   |                |   | (23     | )                                     |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |        |  
|Share-based compensation                                                                                                |  |                                          |   |  |                                          |        |   |                |   | 6,454   |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   | 6,454   |  
|Cash dividends declared on Common and Class B common stock, $1.75 per share                                             |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               | (49,351 | ) |       |   |          |   |  |   | (49,351 | )
|Purchase of treasury stock                                                                                              |  | (105,600                                 | ) |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   | (4,820   | ) |  |   | (4,820  | )
|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  
|Balance at December 31, 2008                                                                                            |  | 28,325,638                               |   |  | $                                        | 17,349 |   |                | $ | 282,636 |                                       |  |                                  |  | $ | (1,125           | ) |  | $             | 386,225 |   |       | $ | (114,425 | ) |  | $ | 570,660 |  
|                                                                                                                        |  |                                          |   |  |                                          |        |   |                |   |         |                                       |  |                                   |  |   |                  |   |  |               |         |   |       |   |          |   |  |   |         |  

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



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WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31, |        
|(In thousands)                                                                    |  | 2008                     |         |   | 2007 |   |          | 2006 | 
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Net income                                                                        |  | $                        | 60,369  |   |      | $ | 65,577   |      |  | $ | 82,364  |  
|Loss (income) from discontinued operations, net of income taxes                   |  |                          |        |   |      |   | 1,912    |      |  |   | (131    | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                     |  |                          | 7,071   |   |      |   | 6,420    |      |  |   | 5,786   |  
|Share-based compensation                                                          |  |                          | 6,454   |   |      |   | 5,970    |      |  |   | 5,020   |  
|Provision for doubtful accounts                                                   |  |                          | 3,816   |   |      |   | 3,086    |      |  |   | 3,484   |  
|Gain on sale of property and equipment                                            |  |                          | (170    | ) |      |   | (23      | )    |  |   | (199    | )
|Gain on sale of available-for-sale securities                                     |  |                          |        |   |      |   | (1,299   | )    |  |   |        |  
|Deferred income tax provision                                                     |  |                          | 447     |   |      |   | 4,117    |      |  |   | (659    | )
|Non-cash contribution for 401(k) plan                                             |  |                          | 1,249   |   |      |   | 1,279    |      |  |   | 1,140   |  
|Excess tax benefits from share-based compensation                                 |  |                          | (4,758  | ) |      |   | (3,462   | )    |  |   | (8,371  | )
|Changes in operating assets and liabilities, net of effects of acquisitions:      |  |                          |         |   |      |   |          |      |  |   |         |  
|Accounts receivable                                                               |  |                          | 23,416  |   |      |   | 23,519   |      |  |   | 10,181  |  
|Inventories                                                                       |  |                          | 37,153  |   |      |   | 46,416   |      |  |   | (18,026 | )
|Accounts payable and other liabilities                                            |  |                          | (23,020 | ) |      |   | (48,390  | )    |  |   | (10,193 | )
|Other, net                                                                        |  |                          | 1,446   |   |      |   | 1,649    |      |  |   | (2,057  | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities of continuing operations                |  |                          | 113,473 |   |      |   | 106,771  |      |  |   | 68,339  |  
|Net cash provided by operating activities of discontinued operations              |  |                          |        |   |      |   | 1,227    |      |  |   | 202     |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                          | 113,473 |   |      |   | 107,998  |      |  |   | 68,541  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Capital expenditures                                                              |  |                          | (3,973  | ) |      |   | (6,071   | )    |  |   | (9,883  | )
|Purchases of available-for-sale securities                                        |  |                          |        |   |      |   | (5,240   | )    |  |   | (2,847  | )
|Proceeds from sale of discontinued operations                                     |  |                          |        |   |      |   | 3,342    |      |  |   |        |  
|Proceeds from sale of available-for-sale securities                               |  |                          |        |   |      |   | 8,551    |      |  |   |        |  
|Business acquisitions, net of cash acquired                                       |  |                          | 76      |   |      |   | (108,972 | )    |  |   | (9,889  | )
|Proceeds from sale of property and equipment                                      |  |                          | 226     |   |      |   | 428      |      |  |   | 448     |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities of continuing operations                    |  |                          | (3,671  | ) |      |   | (107,962 | )    |  |   | (22,171 | )
|Net cash used in investing activities of discontinued operations                  |  |                          |        |   |      |   | (38      | )    |  |   | (109    | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities                                             |  |                          | (3,671  | ) |      |   | (108,000 | )    |  |   | (22,280 | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |          |      |  |   |         |  
|Dividends on Common and Class B common stock                                      |  |                          | (49,351 | ) |      |   | (36,745  | )    |  |   | (26,372 | )
|Net (repayments) proceeds under current revolving credit agreement                |  |                          | (34,000 | ) |      |   | 54,000   |      |  |   |        |  
|Purchase of treasury stock                                                        |  |                          | (4,820  | ) |      |   | (9,386   | )    |  |   | (15,328 | )
|Net (repayments) proceeds from other long-term obligations                        |  |                          | (266    | ) |      |   | 81       |      |  |   | (64     | )
|Net repayment under prior revolving credit agreement                              |  |                          |        |   |      |   | (30,000  | )    |  |   |        |  
|Repayment of long-term notes                                                      |  |                          |        |   |      |   | (10,000  | )    |  |   | (10,000 | )
|Payment of current revolving credit agreement costs                               |  |                          |        |   |      |   | (476     | )    |  |   |        |  
|Excess tax benefits from share-based compensation                                 |  |                          | 4,758   |   |      |   | 3,462    |      |  |   | 8,371   |  
|Net proceeds from issuances of common stock                                       |  |                          | 5,916   |   |      |   | 4,131    |      |  |   | 3,822   |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net cash used in financing activities                                             |  |                          | (77,763 | ) |      |   | (24,933  | )    |  |   | (39,571 | )
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | 32,039  |   |      |   | (24,935  | )    |  |   | 6,690   |  
|Cash and cash equivalents at beginning of year                                    |  |                          | 9,405   |   |      |   | 34,340   |      |  |   | 27,650  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                        | 41,444  |   |      | $ | 9,405    |      |  | $ | 34,340  |  
|                                                                                  |  |                          |         |   |      |   |          |      |  |   |         |  

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



---

WATSCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

1. Summary of Significant Accounting Policies

Nature of Operations

Watsco, Inc. and its subsidiaries (collectively,
Watsco, which may be referred to as we, us or our) is the largest independent distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (HVAC/R) in the United
States. At December 31, 2008, we operated from 417 locations in 34 states.

Financial Statement Presentation

On July 19, 2007, we divested of our non-core staffing unit (see Note 13). All amounts related to this operation are restated as discontinued operations for all
periods presented consistent with the 2007 presentation.

Basis of Consolidation

The consolidated financial statements include the accounts of Watsco and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, inventory and income taxes, reserves related to self-insurance
programs and valuation of goodwill and indefinite life intangible assets. Actual results could differ from those estimates.

Cash Equivalents

All highly liquid instruments purchased with original maturities of three months or less are considered to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable
primarily consists of trade receivables due from customers. Our customers are primarily independent contractors and dealers who service the replacement and new construction markets for residential and light commercial central air conditioning,
heating and refrigeration systems. We routinely grant credit to customers to facilitate revenue growth and maintain branch locations for product sales and distribution. When determining whether to grant or increase credit, management considers a
number of factors, which include creditworthiness, customer payment history, historical experience with the customer and other information. Consistent with industry practices, we normally require payment from our customers within 30 to 45 days. We
record our trade receivables at the invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of customers to make required payments. When preparing
these estimates, we consider a number of factors, including the aging of a customers account, past transactions with customers, creditworthiness of specific customers, historical trends and other information. We typically do not require our
customers to provide collateral. Accounts receivable reserve policies are reviewed periodically, reflecting current risks, trends and changes in industry conditions. The past due status of an account is determined based on stated payment terms. Upon
determination that an account is uncollectible, we write off the receivable balance. At December 31, 2008 and 2007, the allowance for doubtful accounts totaled $3,941 and $5,143, respectively. Although we believe the allowance is sufficient,
the continuing declining economic conditions could lead to further deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments and additional allowances may be required.

Inventories

Inventories consist of air conditioning, heating and
refrigeration equipment and related parts and supplies and are valued at the lower of cost or market on a weighted-average cost basis. As part of the valuation process, inventory reserves are established to state excess,



---

slow-moving and damaged inventories at their estimated net realizable value. Inventory reserve policies are reviewed periodically, reflecting current risks,
trends and changes in industry conditions. A reserve for estimated inventory shrinkage is also maintained to consider inventory shortages determined from cycle counts and physical inventories. At December 31, 2008 and 2007, inventory reserves
totaled $5,009 and $6,268, respectively.

Vendor Rebates

We
account for vendor rebates in accordance with Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. We have arrangements with
several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such
rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our
progress toward earning the rebates. We continually revise these estimates of earned vendor rebates based on actual purchase levels. At December 31, 2008 and 2007, we have $4,416 and $4,692, respectively, of rebates recorded as a reduction of
inventory. Substantially all vendor rebate receivables are collected within three months immediately following the end of the year.

Marketable Securities

Investments in marketable equity securities of $279 and $732 at December 31, 2008 and 2007, respectively, are included in other assets in our
consolidated balance sheets and are classified as available-for-sale. These equity securities are recorded at market using the specific identification method with unrealized holding losses, net of deferred taxes, reported in accumulated other
comprehensive loss (OCL) within shareholders equity. Dividend and interest income are recognized in the statement of income when earned. At December 31, 2008 and 2007, $347 and $65 of unrealized losses, net of deferred tax
benefits of $208 and $38, respectively, was included in accumulated OCL.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the
straight-line method. Buildings and improvements are depreciated or amortized over estimated useful lives ranging from 3-40 years. Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful lives.
Estimated useful lives for other depreciable assets range from 3-7 years. Depreciation and amortization expense related to property and equipment amounted to $6,612, $6,196 and $5,725 for the years ended December 31, 2008, 2007 and 2006,
respectively.

Goodwill and Intangible Assets

Goodwill is
recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, an annual impairment review is performed, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. The impairment
review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair
value of goodwill (as defined under SFAS No. 142) within the reporting unit is less than its carrying value (see Note 8).

Intangible assets primarily
consist of the value of trade names and trademarks, customer relationships and non-compete agreements. Indefinite life intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in
circumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its carrying amount to determine if a write-down to fair value is required. Intangible assets with finite lives are amortized using the straight-line
method over their respective estimated useful lives, which range from 4 to 15 years. Amortization expense related to intangible assets amounted to $459, $224 and $61 for the years ended December 31, 2008, 2007 and 2006, respectively. Based on
the current amount of finite lived intangible assets, we estimate amortization expense to be approximately $400 for each of the next five years (see Note 8).



---

Impairment of Long-Lived Assets Other than Goodwill

Long-lived assets, including intangible assets with finite lives, are tested for recoverability when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. In accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, recoverability is evaluated by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted
future operating cash flows. The amount of impairment if any, is measured based on projected discounted cash flows using a discount rate reflecting the average cost of funds and compared to the assets carrying value. As of December 31,
2008, there were no such events or circumstances.

Revenue Recognition

Revenue is recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (which superseded SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SAB 101A and 101B). Revenue primarily consists of sales of air conditioning, heating and refrigeration equipment and related parts and supplies and is recorded when shipment of products or delivery of services has
occurred. Assessment of collection is based on a number of factors, including past transactions, creditworthiness of customers, historical trends and other information. Substantially all customer returns relate to products that are returned under
warranty obligations underwritten by manufacturers, effectively mitigating our risk of loss for customer returns. Taxes collected from our customers and remitted to governmental authorities are presented in our consolidated statements of income on a
net basis.

Advertising Costs

Advertising costs are expensed
as incurred. Advertising expense amounted to $5,841, $6,314 and $6,050 for the years ended December 31, 2008, 2007 and 2006, respectively.

Shipping
and Handling

Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories
are sold. Shipping and handling costs associated with the delivery of products is included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses amounted to $6,444,
$6,747 and $6,914 for the years ended December 31, 2008, 2007 and 2006, respectively.

Share-Based Compensation

We account for share-based compensation in accordance with the recognition and measurement provisions of SFAS No. 123R, Share-Based Payment, and related
interpretations. See Note 6 for information on our share-based compensation plans.

Income Taxes

We record federal and state income taxes currently payable, as well as deferred taxes due to temporary differences between reporting income and expenses for financial
statement purposes versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial statement and income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the
enactment date. Watsco and its eligible subsidiaries file a consolidated United States federal income tax return. As income tax returns are generally not filed until well after the closing process for the December 31 financial statements is
complete, the amounts recorded at December 31 reflect estimates of what the final amounts will be when the actual income tax returns are filed for that calendar year. In addition, estimates are often required with respect to, among other
things, the appropriate state income tax rates to use in the various states that Watsco and its subsidiaries are required to file, the potential utilization of operating loss carryforwards and valuation allowances required, if any, for tax assets
that may not be realizable in the future.

In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions



---

meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax authority.

Earnings per Share

We calculate earnings per share using the two-class method in accordance with SFAS No. 128, Earnings per Share, as clarified by EITF Issue No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share. EITF Issue No. 03-6 requires the income per share for each class of common stock to be calculated assuming 100% of our earnings
are distributed as dividends to each class of common stock based on their respective dividend rights, even though we do not anticipate distributing 100% of our earnings as dividends. The effective result of EITF Issue No. 03-6 is that the
calculation of earnings per share for each class of our common stock yields the same basic and diluted earnings per share.

Basic earnings per share for
our Common and Class B common stock is computed by dividing net income allocated to Common stock and Class B common stock by the weighted-average number of shares of Common stock and Class B common stock outstanding, respectively. Non-vested
(restricted) stock is not included in the computation of basic earnings per share until the securities vest. Diluted earnings per share for our Common stock assume the conversion of all Class B common stock into Common stock and adjust for the
dilutive effects of outstanding stock options and shares of non-vested (restricted) stock using the treasury stock method.

For the basic earnings per
share calculation, net income available to shareholders is allocated among our two classes of common stock: Common stock and Class B common stock. The allocation among each class is based upon the two-class method on a one-for-one per share basis.
The following table shows how net income is allocated using this method:



|                                     |  |      |        |      |   |        |  |   |       
|------------------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Years Ended December 31,             |  | 2008 |        | 2007 |   | 2006  
|Net income available to shareholders |  | $    | 60,369 |      | $ | 65,577 |  | $ | 82,364
|Allocation of net income for Basic:  |  |      |        |      |   |        |  |   |       
|Common stock                         |  | $    | 54,811 |      | $ | 59,733 |  | $ | 74,891
|Class B common stock                 |  |      | 5,558  |      |   | 5,844  |  |   | 7,473 
|                                     |  |      |        |      |   |        |  |   |       
|                                     |  | $    | 60,369 |      | $ | 65,577 |  | $ | 82,364
|                                     |  |      |        |      |   |        |  |   |       

The diluted earnings per share calculation assumes the conversion of all of our Class B common stock into Common
stock as of the beginning of the year, so no allocation of earnings to Class B common stock is required.

The following summarizes the weighted-average
number of Common and Class B common shares outstanding during the year and is used to calculate earnings per share of Common and Class B common stock including the potentially dilutive impact of stock options and non-vested (restricted) stock,
calculated using the treasury stock method, as included in the calculation of diluted weighted-average shares:



|                                                                                           |  |            |  |            |  |           
|------------------------------------------------------------------------------------------ |  | ---------- |  | ---------- |  | ----------
|Years Ended December 31,                                                                   |  | 2008       |  | 2007       |  | 2006      
|Weighted-average Common and Class B common shares outstanding for basic earnings per share |  | 26,453,167 |  | 26,296,555 |  | 26,149,676
|                                                                                           |  |            |  |            |  |           
|Weighted-average Common shares outstanding for basic earnings per share                    |  | 24,017,621 |  | 23,952,942 |  | 23,776,968
|Diluted shares resulting from:                                                             |  |            |  |            |  |           
|Stock options                                                                              |  | 568,560    |  | 842,063    |  | 1,009,739 
|Non-vested (restricted) stock                                                              |  | 714,772    |  | 685,378    |  | 669,723   
|Effect of assuming conversion of Class B common shares into Common stock                   |  | 2,435,546  |  | 2,343,613  |  | 2,372,708 
|                                                                                           |  |            |  |            |  |           
|Shares for diluted earnings per share                                                      |  | 27,736,499 |  | 27,823,996 |  | 27,829,138
|                                                                                           |  |            |  |            |  |           

Diluted earnings per share excluded 261,015, 219,640 and 153,500 shares for the years ended December 31,
2008, 2007 and 2006, respectively, related to stock options with an exercise price per share greater than the average market value, resulting in an



---

anti-dilutive effect on diluted earnings per share. In addition, 338,765, 331,987 and 284,486 shares for the years ended December 31, 2008, 2007 and
2006, respectively, related to non-vested (restricted) stock were considered anti-dilutive and excluded from the earnings per share calculation.

Derivative Instruments

We apply the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not,
are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in OCL and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. See Note 10 for further information regarding hedging activities.

Comprehensive
Income

Comprehensive income consists of net income and changes in the unrealized (losses) gains on available-for-sale securities and the effective portion
of cash flow hedges as further discussed in Note 10. The components of comprehensive income are as follows:



|                                                                                                                                                                          |  |      |        |   |      |   |        |      |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|Years Ended December 31,                                                                                                                                                  |  | 2008 |        |   | 2007 |   |        | 2006
|Net income                                                                                                                                                                |  | $    | 60,369 |   |      | $ | 65,577 |      |  | $ | 82,364
|Changes in unrealized losses on derivative instruments, net of income tax (benefit) expense of $(248), $(137) and $205,
respectively                                      |  |      | (411   | ) |      |   | (230   | )    |  |   | 342   
|Changes in unrealized (losses) gains on available-for-sale securities arising during the period, net of income tax (benefit) expense of
$(170), $218 and $6, respectively |  |      | (283   | ) |      |   | 361    |      |  |   | 10    
|Reclassification adjustment for securities gains and losses on a derivative instrument realized in net income, net of income tax expense of
$0, $262 and $0, respectively |  |      |       |   |      |   | (436   | )    |  |   |      
|                                                                                                                                                                          |  |      |        |   |      |   |        |      |  |   |       
|Comprehensive income                                                                                                                                                      |  | $    | 59,675 |   |      | $ | 65,272 |      |  | $ | 82,716
|                                                                                                                                                                          |  |      |        |   |      |   |        |      |  |   |       

Recently Adopted Accounting Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS No. 159 were
effective for us beginning January 1, 2008. Upon adoption, we did not elect the fair value option for any items that were not already required to be measured at fair value in accordance with U.S. generally accepted accounting principles. As
such, there was no impact on our consolidated financial statements upon adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157, as originally issued, was effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, on February 12, 2008, the FASB issued Staff Position (FSP) No. SFAS 157-2, which deferred
the effective date of SFAS No. 157 for one year, as it relates to nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed in financial statements at fair value on a recurring basis (at least
annually). The provisions of SFAS No. 157 as they relate to financial assets and liabilities were effective for us beginning January 1, 2008. Upon adoption, there was no material impact on our consolidated financial statements. We are
currently assessing the potential effect of SFAS No. 157 for our nonfinancial assets and liabilities on our consolidated financial statements.

In
October 2008, the FASB issued FSP No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which amended SFAS No. 157 to illustrate key considerations in determining the fair
value of a financial asset in an inactive market. This FSP was effective for us beginning with the fourth quarter 2008 and did not have a material impact on our consolidated financial statements.



---

Recently Issued Accounting Standards

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. FSP EITF 03-6-1 requires that non-vested share-based payment awards that
contain nonforfeitable rights to dividends be considered participating securities and included in the computation of earnings per share pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. Upon adoption, all prior period earnings per share data presented in financial statements after the effective date shall be adjusted retrospectively to conform to the provisions of this FSP.
FSP EITF 03-6-1 is effective for us retroactively in the first quarter ending March 31, 2009. We do not expect the adoption of FSP EITF 03-6-1 to have an impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an Amendment of FASB Statement
No. 133, which requires enhanced disclosures about an entitys derivative and hedging activities. In addition to disclosing the fair values of derivative instruments and their gains and losses in a tabular format, entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations
and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. We will adopt SFAS No. 161 beginning January 1, 2009 and do not expect a material impact on our consolidated financial statements. SFAS No. 161 does not change the accounting for derivative
instruments.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS
No. 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, transaction costs, in-process research and development and restructuring costs. In addition, under
SFAS No. 141R, changes in an acquired entitys deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141R is effective for fiscal years beginning after
December 15, 2008 with early application prohibited. We will adopt SFAS No. 141R beginning January 1, 2009 and will change our accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research
Bulletin No. 51. This standard clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts
attributable to the parent. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. We will adopt SFAS No. 160 beginning January 1, 2009 and do not expect a material impact
on our consolidated financial statements.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the 2008 presentation. These reclassifications had no effect on net income or earnings per share as previously reported.

2. Supplier Concentration

We have seven key suppliers of HVAC/R
equipment products. Purchases from these seven suppliers comprised 48%, 48% and 47% of all purchases made in 2008, 2007 and 2006, respectively; with the largest supplier accounting for 16%, 17% and 17% of all purchases made in each of the years
ended December 31, 2008, 2007 and 2006. Any significant interruption by the suppliers or a termination of a distribution agreement could disrupt the operations of certain subsidiaries.



---

3. Property and Equipment

Property and equipment, net, consists of:



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|December 31,                                    |  | 2008 |         |   | 2007 |  
|Land                                            |  | $    | 1,106   |   |      | $ | 1,106   |  
|Buildings and improvements                      |  |      | 24,447  |   |      |   | 24,109  |  
|Machinery, vehicles and equipment               |  |      | 28,615  |   |      |   | 29,025  |  
|Furniture and fixtures                          |  |      | 17,374  |   |      |   | 18,004  |  
|                                                |  |      |         |   |      |   |         |  
|                                                |  |      | 71,542  |   |      |   | 72,244  |  
|Less: accumulated depreciation and amortization |  |      | (47,333 | ) |      |   | (45,340 | )
|                                                |  |      |         |   |      |   |         |  
|                                                |  | $    | 24,209  |   |      | $ | 26,904  |  
|                                                |  |      |         |   |      |   |         |  

4. Long-Term Obligations

Revolving Credit Agreement and Long-Term Notes

We maintain a bank-syndicated, unsecured revolving credit agreement that
provides for borrowings of up to $300,000. Borrowings are used for general corporate purposes, including seasonal working capital needs, dividends, stock repurchases, acquisitions and issuance of letters of credit. Included in the facility are a
$25,000 swingline subfacility and a $50,000 letter of credit subfacility. Borrowings bear interest at primarily LIBOR-based rates plus a spread which ranges from 37.5 to 112.5 basis-points depending upon our ratio of total debt to EBITDA (LIBOR plus
37.5 basis-points at December 31, 2008). We pay a variable commitment fee on the unused portion of the commitment, ranging from 7.5 to 20 basis-points (7.5 basis-points at December 31, 2008). Alternatively, we may elect to have borrowings
bear interest at the Prime Rate or the Federal Funds Rate plus our spread. The credit facility matures in August 2012. At December 31, 2008 and 2007, $20,000 and $54,000, respectively, were outstanding under the revolving credit agreement.

The $300,000 unsecured revolving credit agreement contains customary affirmative and negative covenants including two financial covenants with respect to
consolidated leverage and interest coverage ratios and limits capital expenditures, dividends and share repurchases in addition to other restrictions. We were in compliance with all covenants and financial ratios at December 31, 2008.

A $125,000 unsecured private placement shelf facility was also maintained as a source of long-term borrowings through December 10, 2007. This
uncommitted shelf facility provided fixed-rate financing as a complement to the variable rate borrowings available under the revolving credit agreement.

Other Long-Term Obligations

Other long-term obligations, net of current portion, of $783 and $1,042 at December 31, 2008 and 2007,
respectively, relate to a mortgage loan and capital leases on equipment. Interest rates on other debt range from 1.0% to 11.1% and mature at varying dates through 2020. Annual maturities of other long-term obligations for the years subsequent to
December 31, 2008 are as follows:



|           |  |   |      
|---------- |  | - | -----
|2009       |  | $ | 268  
|2010       |  |   | 163  
|2011       |  |   | 90   
|2012       |  |   | 56   
|2013       |  |   | 47   
|Thereafter |  |   | 427  
|           |  |   |      
|           |  | $ | 1,051
|           |  |   |      

Total cash payments for interest were $2,299, $4,557 and $4,345 for the years ended December 31, 2008, 2007
and 2006, respectively.



---

5. Income Taxes

The
components of income tax expense from continuing operations are as follows:



|                         |  |      |        |      |   |        |  |   |        |  
|------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|Years Ended December 31, |  | 2008 |        | 2007 |   | 2006   | 
|Federal                  |  | $    | 32,493 |      | $ | 37,387 |  | $ | 45,399 |  
|State                    |  |      | 3,728  |      |   | 3,106  |  |   | 3,941  |  
|                         |  |      |        |      |   |        |  |   |        |  
|                         |  | $    | 36,221 |      | $ | 40,493 |  | $ | 49,340 |  
|                         |  |      |        |      |   |        |  |   |        |  
|Current                  |  | $    | 35,774 |      | $ | 36,376 |  | $ | 49,999 |  
|Deferred                 |  |      | 447    |      |   | 4,117  |  |   | (659   | )
|                         |  |      |        |      |   |        |  |   |        |  
|                         |  | $    | 36,221 |      | $ | 40,493 |  | $ | 49,340 |  
|                         |  |      |        |      |   |        |  |   |        |  

Following is a reconciliation of the effective income tax rate:



|                                                     |  |      |   |  |      |   |  |      |  
|---------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Years Ended December 31,                             |  | 2008 |   |  | 2007 |   |  | 2006 |  
|Federal statutory rate                               |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
|State income taxes, net of federal benefit and other |  | 2.5  |   |  | 2.5  |   |  | 2.5  |  
|                                                     |  |      |   |  |      |   |  |      |  
|                                                     |  | 37.5 | % |  | 37.5 | % |  | 37.5 | %
|                                                     |  |      |   |  |      |   |  |      |  

The following is a summary of the significant components of our current and long-term deferred tax assets and
liabilities:



|                                                   |  |      |         |   |      |   |         |  
|-------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|December 31,                                       |  | 2008 |         |   | 2007 |  
|Current deferred tax assets:                       |  |      |         |   |      |   |         |  
|Allowance for doubtful accounts                    |  | $    | 1,626   |   |      | $ | 1,922   |  
|Capitalized inventory costs and inventory reserves |  |      | 3,074   |   |      |   | 1,167   |  
|Self-insurance reserves                            |  |      | 1,452   |   |      |   | 1,944   |  
|Other current deferred tax assets                  |  |      | 1,168   |   |      |   | 1,672   |  
|                                                   |  |      |         |   |      |   |         |  
|Total current deferred tax assets (1)              |  |      | 7,320   |   |      |   | 6,705   |  
|                                                   |  |      |         |   |      |   |         |  
|Long-term deferred tax assets (liabilities):       |  |      |         |   |      |   |         |  
|Deductible goodwill                                |  |      | (25,503 | ) |      |   | (22,680 | )
|Net operating loss carryforwards                   |  |      | 492     |   |      |   | 597     |  
|Unrealized loss on derivative instruments          |  |      | 483     |   |      |   | 236     |  
|Depreciation                                       |  |      | 1,287   |   |      |   | 1,296   |  
|Share-based compensation                           |  |      | 8,289   |   |      |   | 6,397   |  
|Other long-term net deferred tax assets            |  |      | 238     |   |      |   | 83      |  
|                                                   |  |      |         |   |      |   |         |  
|Total net long-term deferred tax liabilities       |  |      | (14,714 | ) |      |   | (14,071 | )
|                                                   |  |      |         |   |      |   |         |  
|Net deferred tax liabilities                       |  | $    | (7,394  | ) |      | $ | (7,366  | )
|                                                   |  |      |         |   |      |   |         |  



|(1) | Current deferred tax assets of $7,320 and $6,705 have been included in the consolidated balance sheets in other current assets at December 31, 2008 and 2007, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has determined that no valuation allowance was necessary at December 31, 2008 to reduce the
deferred tax assets to the amount that will more likely than not be realized. At December 31, 2008, there were state net operating loss carryforwards of $13,504, which expire in varying amounts from 2009 through 2028. These amounts are
available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2008.

We are subject to U.S.
federal income tax and income tax of multiple state jurisdictions. We are open to tax audits in the various jurisdictions until the respective statutes of limitations expire. In June 2008, the Internal Revenue Service finalized an
examination of



---

our federal income tax returns for the 2004 and 2005 tax years. The adjustments resulting from this examination did not have a material effect on our
consolidated financial position, results of operations or cash flows. We are no longer subject to U.S. federal tax examinations for tax years prior to 2005. For the majority of states, we are no longer subject to tax examinations for tax years
prior to 2004. In connection with our adoption of FIN No. 48, we analyzed the filing positions in the federal and all state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions.
There was no material impact on our consolidated financial statements upon adoption of FIN No. 48 on January 1, 2007.

As of December 31,
2008 and 2007, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $2,296 and $2,173, respectively. Of these totals, $1,803 and $1,723, respectively, (net of the federal benefit
received from state positions) represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing practice is to recognize penalties within selling, general and administrative expenses and
interest related to income tax matters in income tax expense in the consolidated statements of income. As of December 31, 2008 and 2007, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax
benefits was $362 and $217, respectively, and is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The change in gross unrecognized tax benefits during 2008 and 2007 is as follows:



|                                                             |  |   |       |  
|------------------------------------------------------------ |  | - | ----- | -
|Gross balance at January 1, 2007                             |  | $ | 894   |  
|Additions based on tax positions related to the current year |  |   | 1,226 |  
|Additions for tax positions of prior years                   |  |   | 303   |  
|Reductions for tax positions of prior years                  |  |   | (250  | )
|                                                             |  |   |       |  
|Gross balance at December 31, 2007                           |  |   | 2,173 |  
|Additions based on tax positions related to the current year |  |   | 256   |  
|Additions for tax positions of prior years                   |  |   | 69    |  
|Reductions for tax positions of prior years                  |  |   | (202  | )
|                                                             |  |   |       |  
|Gross balance at December 31, 2008                           |  | $ | 2,296 |  
|                                                             |  |   |       |  

Total cash payments, net of refunds, for income taxes were $25,270, $32,329 and $47,961 for the years ended
December 31, 2008, 2007 and 2006, respectively.

6. Share-Based Compensation and Benefit Plans

Share-Based Compensation Plans

We have two share-based compensation plans
for employees. The 2001 Incentive Compensation Plan (the 2001 Plan) provides for the award of a broad variety of share-based compensation alternatives such as non-qualified stock options, incentive stock options, non-vested (restricted)
stock, performance awards, dividend equivalents, deferred stock and stock appreciation rights at no less than 100% of the market price on the date the award is granted. To date, awards under the 2001 Plan consist of non-qualified stock options and
non-vested (restricted) stock. Under the 2001 Plan, awards for an aggregate of 3,000,000 shares of Common and Class B common stock may be granted. A total of 1,573,630 shares of Common stock, net of cancellations and 1,044,811 shares of Class B
common stock, net of cancellations have been awarded under the 2001 Plan as of December 31, 2008. There were 381,559 shares of common stock reserved for future grants as of December 31, 2008 under the 2001 Plan. There are 773,775 options
of common stock outstanding under the 2001 Plan at December 31, 2008. Options under the 2001 Plan vest over two to five years of service and have contractual terms of five to ten years.

Awards of non-vested (restricted) stock, which are granted at no cost to the employee, vest upon attainment of a certain age, generally the employees respective
retirement age. Vesting may be accelerated in certain circumstances prior to the original vesting date.

We also maintain the 1991 Stock Option Plan (the
1991 Plan), which expired during 2001; therefore, no additional options may be granted. There are 611,125 options of common stock outstanding under the 1991 Plan at December 31, 2008. Options under the 1991 Plan vest over two to
five years of service and have contractual terms of ten years.



---

A summary of stock option activity under the 2001 Plan and 1991 Plan as of December 31, 2008, and changes during
2008, is as follows:



|                                         |  |           |   |  |                               |       |                                                    |      |                         |   |       
|---------------------------------------- |  | --------- | - |  | ----------------------------- | ----- | -------------------------------------------------- | ---- | ----------------------- | - | ------
|                                         |  | Options   |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2008   |  | 1,970,908 |   |  | $                             | 20.37 |                                                    |      |                         |   |       
|Granted                                  |  | 53,500    |   |  |                               | 40.54 |                                                    |      |                         |   |       
|Exercised                                |  | (627,308  | ) |  |                               | 19.11 |                                                    |      |                         |   |       
|Forfeited                                |  | (9,600    | ) |  |                               | 36.36 |                                                    |      |                         |   |       
|Expired                                  |  | (2,600    | ) |  |                               | 19.89 |                                                    |      |                         |   |       
|                                         |  |           |   |  |                               |       |                                                    |      |                         |   |       
|Options outstanding at December 31, 2008 |  | 1,384,900 |   |  | $                             | 21.79 |                                                    | 2.03 |                         | $ | 26,722
|                                         |  |           |   |  |                               |       |                                                    |      |                         |   |       
|Options exercisable at December 31, 2008 |  | 1,129,365 |   |  | $                             | 16.28 |                                                    | 1.86 |                         | $ | 26,360
|                                         |  |           |   |  |                               |       |                                                    |      |                         |   |       

The weighted-average grant date fair value of stock options granted during 2008, 2007 and 2006 was $7.06, $11.07
and $14.99, respectively. The total intrinsic value of stock options exercised during 2008, 2007 and 2006 was $11,986, $3,841 and $22,390, respectively. The fair value of stock options that vested during 2008, 2007 and 2006 was $2,158, $1,120 and
$497, respectively.

A summary of non-vested (restricted) stock issued as of December 31, 2008, and changes during 2008, is shown below:



|                                                               |  |           |   |  |                                      |      
|-------------------------------------------------------------- |  | --------- | - |  | ------------------------------------ | -----
|                                                               |  | Shares    |   |  | Weighted-AverageGrant DateFair Value
|Non-vested (restricted) stock outstanding at January 1, 2008   |  | 1,755,999 |   |  | $                                    | 29.77
|Granted                                                        |  | 45,000    |   |  |                                      | 43.04
|Vested                                                         |  | (13,830   | ) |  |                                      | 50.93
|Forfeited                                                      |  |          |   |  |                                      |     
|                                                               |  |           |   |  |                                      |      
|Non-vested (restricted) stock outstanding at December 31, 2008 |  | 1,787,169 |   |  | $                                    | 29.94
|                                                               |  |           |   |  |                                      |      

The weighted-average grant date fair value of non-vested (restricted) stock granted during 2008, 2007 and 2006 was
$43.04, $52.34 and $67.94, respectively. The fair value of stock vested during 2008 and 2007 was $704 and $128, respectively. No non-vested (restricted) stock vested during 2006.

Share-Based Compensation Fair Value Assumptions

The fair value of each stock option award is estimated on the date of grant
using the Black-Scholes option pricing valuation model based on the weighted-average assumptions noted in the table below. The fair value of each stock option award, which is subject to graded vesting, is expensed, net of estimated forfeitures, on a
straight-line basis over the requisite service period for each separately vesting portion of the stock option. We use historical data to estimate stock option forfeitures within the valuation model. All of the awards granted during 2008 meet the
definition of plain vanilla options, as defined in SAB No. 107. The expected term of stock option awards granted represents the period of time that stock option awards granted are expected to be outstanding and was calculated using
the simplified method for plain vanilla options. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB No. 107, as amended by SAB
No. 110. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected
term of the stock option award. Expected volatility is based on historical volatility of our stock.



---

The weighted-average assumptions relating to the valuation of our stock options were as follows:



|                         |  |       |   |  |       |   |  |       |  
|------------------------ |  | ----- | - |  | ----- | - |  | ----- | -
|Years Ended December 31, |  | 2008  |   |  | 2007  |   |  | 2006  |  
|Expected term in years   |  | 4.25  |   |  | 4.25  |   |  | 4.25  |  
|Risk-free interest rate  |  | 2.13  | % |  | 4.38  | % |  | 4.91  | %
|Expected volatility      |  | 27.33 | % |  | 24.29 | % |  | 24.08 | %
|Expected dividend yield  |  | 3.40  | % |  | 2.26  | % |  | 1.35  | %

Share-Based Compensation Expense

Share-based compensation expense is included in selling, general and administrative expenses in our consolidated statements of income. The following table provides information on share-based compensation expense and
tax benefits recognized:



|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|Years Ended December 31,                     |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Share-based compensation expense             |  | $    | 6,454  |   |      | $ | 5,970  |      |  | $ | 5,020  |  
|Income tax benefit                           |  |      | (2,420 | ) |      |   | (2,239 | )    |  |   | (1,883 | )
|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Share-based compensation expense, net of tax |  | $    | 4,034  |   |      | $ | 3,731  |      |  | $ | 3,137  |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  

Cash received from Common stock issued as a result of stock options exercised during 2008, 2007 and 2006, was
$5,235, $3,351 and $2,214, respectively. During 2008, 2007 and 2006, 261,014 shares of Common and Class B common stock with an aggregate market value of $9,929, 17,291 shares of Common stock with an aggregate market value of $902 and 150,086 shares
of Common stock with an aggregate market value of $10,563, respectively, were delivered as payment in lieu of cash for stock option exercises and related tax withholdings. Upon delivery these shares were retired. The tax benefit realized for the tax
deductions from share-based compensation plans totaled $5,095, $3,542 and $8,396, for the years ended December 31, 2008, 2007 and 2006, respectively.

At December 31, 2008, there was $642 of unrecognized share-based compensation expense related to stock options granted under the 2001 Plan, which is expected to be recognized over a weighted-average period of 1.5 years. At
December 31, 2008, there was $34,471 of unrecognized share-based compensation expense related to non-vested (restricted) stock, which is expected to be recognized over a weighted-average period of 9.6 years. In the event that vesting is
accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings. Approximately $23,000 of the unrecognized share-based
compensation for shares of non-vested stock is related to awards granted to our Chief Executive Officer that vest in approximately 10 years upon his attainment of age 78.

Employee Stock Purchase Plan

The Watsco, Inc. Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the
Watsco ESPP) provides for up to 1,000,000 shares of Common stock to be available for purchase by our full-time employees with at least 90 days of service. The plan allows participating employees to purchase, through payroll
deductions or lump-sum contribution, shares of Common stock at specified times subject to certain restrictions. Effective January 1, 2006, the Watsco ESPP was amended to change the discount that employees can purchase shares of our Common stock
to 5% of the fair market value and to remove certain restrictions. Prior to the amendment, employees could purchase shares of our Common stock at 85% of the fair market value. During 2008, 2007 and 2006, employees purchased 9,058, 11,059 and 28,232
shares of Common stock at an average price of $39.81, $47.39 and $48.88 per share, respectively. Cash dividends received by the Watsco ESPP were reinvested in Common stock and resulted in additional shares issued in the amount of 7,430, 5,355 and
4,162 for the years ended December 31, 2008, 2007 and 2006, respectively. We received net proceeds of $681, $780 and $1,608, respectively, during 2008, 2007 and 2006, for shares of Watsco Common stock issued under the Watsco ESPP. At
December 31, 2008, 101,423 shares remained available for purchase under the plan.

401(k) Plan

We have a profit sharing retirement plan for our employees that is qualified under Section 401(k) of the Internal Revenue Code. Annual matching contributions are
made based on a percentage of eligible employee compensation deferrals. The contribution is made in cash or by the issuance of Common stock to the plan on behalf of our employees. For the years ended December 31, 2008, 2007 and 2006, the
aggregate contribution required to the plan was $1,249, $1,279 and $1,140, respectively. This contribution is made during the first quarter of the subsequent year.



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7. Acquisitions

In
August 2007, we acquired all of the assets and assumed all of the liabilities of ACR Group, Inc. (ACR), one of the nations largest distributors of air conditioning and heating products with 54 locations in Florida, Texas,
California, Georgia, Tennessee, Arizona, Colorado, Louisiana, Nevada, and New Mexico, for $108,332 in cash, including acquisition costs and net of cash acquired. Based on a third-party valuation, the purchase price, including acquisition costs,
resulted in the recognition of $67,361 in goodwill and other intangible assets, which is not deductible for tax purposes. The fair values of the assets acquired and liabilities assumed for the acquisition is as follows:



|                                               |  |   |         |  
|---------------------------------------------- |  | - | ------- | -
|Accounts receivable                            |  | $ | 27,493  |  
|Inventories                                    |  |   | 43,883  |  
|Property and equipment                         |  |   | 6,256   |  
|Goodwill                                       |  |   | 60,811  |  
|Intangibles                                    |  |   | 6,550   |  
|Current and other assets                       |  |   | 6,454   |  
|Accounts payable and accrued expenses          |  |   | (38,579 | )
|Other long-term liabilities                    |  |   | (4,536  | )
|                                               |  |   |         |  
|Cash used in acquisition, net of cash acquired |  | $ | 108,332 |  
|                                               |  |   |         |  

The unaudited proforma financial information combining our results of operations with the operations of ACR as if
the acquisition had occurred on January 1, 2006 is as follows:



|                                                                |  |      |           |      |   |          
|--------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|Years ended December 31,                                        |  | 2007 |           | 2006
|Revenues                                                        |  | $    | 1,893,218 |      | $ | 2,011,609
|Net income from continuing operations                           |  | $    | 67,989    |      | $ | 85,221   
|Basic earnings per share for Common and Class B common stock:   |  |      |           |      |   |          
|Net income from continuing operations                           |  | $    | 2.59      |      | $ | 3.26     
|Diluted earnings per share for Common and Class B common stock: |  |      |           |      |   |          
|Net income from continuing operations                           |  | $    | 2.44      |      | $ | 3.06     

This unaudited proforma financial information is presented for informational purposes only. The unaudited proforma
financial information from the beginning of the periods presented until the acquisition date includes adjustments to record income taxes at our effective tax rate, interest expense on borrowings incurred to acquire the business and does not include
adjustments to remove certain corporate expenses of ACR, which may not be incurred in future periods, adjustments for depreciation and amortization, or synergies (primarily related to improved gross profit and lower general and administrative
expenses) that may be realized subsequent to the acquisition date. The unaudited proforma financial information may not necessarily reflect our future results of operations or what the results of operations would have been had we owned and operated
ACR as of the beginning of the periods presented.

In July 2007, one of our subsidiaries acquired substantially all of the assets and assumed certain
liabilities of a wholesale distributor of air conditioning and heating products operating from one location in Gonzales, Louisiana. The purchase price of the acquisition included a cash payment of $467, net of cash acquired.

In December 2006, one of our subsidiaries completed the acquisition of a distributor of air conditioning and heating products with 10 locations in Nebraska, Missouri and
Kansas. The purchase price of the acquisition included a cash payment of $5,190.

In October 2006, one of our subsidiaries completed the acquisition of a
wholesale distributor of refrigeration equipment with eight locations in Tennessee, Mississippi and Arkansas. The purchase price of the acquisition included a cash payment of $3,705, net of cash acquired.



---

In March 2006, one of our subsidiaries completed the acquisition of a refrigeration equipment distributor with locations
in Birmingham and Montgomery, Alabama for cash consideration of $798, net of cash acquired.

In February 2006, one of our subsidiaries completed the
purchase of the net assets and business of a wholesale distributor of air conditioning and heating products operating from a single location in Kansas City, Missouri for cash consideration of $293, net of cash acquired.

The results of operations of these locations have been included in the consolidated financial statements from their respective dates of acquisition. The proforma effect
of these acquisitions was not deemed significant on either an individual or aggregate basis to the consolidated financial statements for the years ended December 31, 2008, 2007 and 2006.

8. Goodwill and Intangibles

The recoverability of goodwill and
indefinite life intangibles is evaluated at least annually and when events or changes in circumstances indicate that the carrying amount of goodwill and indefinite life intangibles may not be recoverable. The identification and measurement of
impairment involves the estimation of the fair value of the reporting unit and indefinite life intangibles and contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair
value. The estimate of fair value of the reporting unit is based on the best information available as of the date of the assessment and incorporates managements assumptions about expected future cash flows and contemplates other valuation
techniques. Future cash flows can be affected by changes in the industry, the continuing declining economic environment or market conditions.

On
January 1, 2009, the annual impairment test was performed and it was determined there was no impairment. No factors have developed since the last impairment test that would indicate that the carrying value of goodwill and indefinite life
intangibles may not be recoverable. The carrying amount of goodwill and intangibles at December 31, 2008 was $230,468. Although no impairment has been recorded to date, there can be no assurances that future impairments will not occur. An
adjustment to the carrying value of goodwill and intangibles could materially impact the consolidated results of operations.

The changes in the carrying
amount of goodwill are as follows:



|                                |  |   |        
|------------------------------- |  | - | -------
|Balance at December 31, 2006    |  | $ | 157,558
|Acquired goodwill               |  |   | 59,571 
|                                |  |   |        
|Balance at December 31, 2007    |  |   | 217,129
|Purchase price adjustments, net |  |   | 2,681  
|                                |  |   |        
|Balance at December 31, 2008    |  | $ | 219,810
|                                |  |   |        

Intangible assets, net, included in other assets in the consolidated balance sheets consist of:



|                                   |  |      |        |   |      |   |        |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|December 31,                       |  | 2008 |        |   | 2007 |  
|Unamortizable intangible assets:   |  |      |        |   |      |   |        |  
|Trade names and trademarks         |  | $    | 5,683  |   |      | $ | 5,683  |  
|Amortizable intangible assets:     |  |      |        |   |      |   |        |  
|Customer relationships             |  |      | 5,420  |   |      |   | 5,420  |  
|Non-compete agreements             |  |      | 369    |   |      |   | 369    |  
|Less: accumulated amortization     |  |      | (814   | ) |      |   | (355   | )
|                                   |  |      |        |   |      |   |        |  
|Amortizable intangible assets, net |  |      | 4,975  |   |      |   | 5,434  |  
|                                   |  |      |        |   |      |   |        |  
|                                   |  | $    | 10,658 |   |      | $ | 11,117 |  
|                                   |  |      |        |   |      |   |        |  

9. Shareholders Equity

Common stock and Class B common stock share equally in earnings and are identical in most other respects except (i) Common stock is entitled to one vote on most matters and each share of Class B common stock is
entitled to ten votes; (ii) shareholders of Common stock are entitled to elect 25% of the Board of Directors (rounded up to the nearest whole number) and Class B shareholders are



---

entitled to elect the balance of the Board of Directors; (iii) cash dividends may be paid on Common stock without paying a cash dividend on Class B
common stock and no cash dividend may be paid on Class B common stock unless at least an equal cash dividend is paid on Common stock and (iv) Class B common stock is convertible at any time into Common stock on a one-for-one basis at the option
of the shareholder.

Our Board of Directors has authorized the repurchase, at managements discretion, of 7,500,000 shares in the open market or via
private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders equity. During 2008, 2007 and 2006, 105,600, 231,100 and 243,600 Common shares were repurchased at a
cost of $4,820, $9,386 and $15,328, respectively. In aggregate since the inception of the repurchase plan in 1999, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock were repurchased at a cost of $114,425. The remaining
1,129,087 shares authorized for repurchase are subject to certain restrictions included in our debt agreement.

10. Financial Instruments

Recorded Financial Instruments

Recorded financial
instruments consist of cash and cash equivalents, accounts receivable, accounts payable, the current portion of long-term obligations, borrowings under our revolving credit agreement and debt instruments included in other long-term obligations. At
December 31, 2008 and 2007, the fair values of cash and cash equivalents, accounts receivable, accounts payable and the current portion of long-term obligations approximated their carrying values due to the short-term nature of these
instruments.

The fair values of variable rate borrowings under the revolving credit agreement and debt instruments included in long-term obligations also
approximate their carrying value based upon interest rates available for similar instruments with consistent terms and remaining maturities.

Derivative
Financial Instruments

Periodically, we enter into interest rate swap agreements to reduce our exposure to market risks from changing interest rates under
our revolving credit agreement. Under the terms of the swap agreements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to the notional principal amount. Any
differences paid or received on our interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. Financial instruments are not
held or issued for trading purposes. In order to obtain hedge accounting treatment, any derivatives used for hedging purposes must be designated as, and effective as, a hedge of an identified risk exposure at the inception of the contract. Changes
in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Accordingly, we record all derivative instruments
as either assets or liabilities on the consolidated balance sheets at their respective fair values. We record the change in the fair value of a derivative instrument designated as a cash flow hedge in other comprehensive income to the extent the
derivative is effective, and recognize the change in the statement of operations when the hedged item affects earnings. All of our interest rate hedges are designated as cash flow hedges.

At December 31, 2008 and 2007, two interest rate swap agreements were in effect with notional values of $10,000 each, maturing in October 2009 and October 2011. The
swap agreement maturing in October 2009 exchanges the variable rate of 30-day LIBOR to a fixed interest rate of 5.04%. The swap agreement maturing in October 2011 exchanges the variable rate of 30-day LIBOR to a fixed interest rate of 5.07%. During
the years ended December 31, 2008 and 2007, both hedging relationships were determined to be highly effective in achieving offsetting changes in cash flows.

We were party to an interest rate swap agreement with a notional amount of $30,000, which matured on October 9, 2007, that was designated as a cash flow hedge and effectively exchanged the variable rate of 90-day LIBOR to a fixed
interest rate of 6.25%. During 2007 and 2006, the hedging relationship was determined to be highly effective in achieving offsetting changes in cash flows.

The negative fair value of the derivative financial instruments was $1,287 and $628 at December 31, 2008 and 2007, respectively, and is included, net of accrued interest, in deferred income taxes and other liabilities in the
consolidated balance sheets. At December 31, 2008, 2007 and 2006, $778, net of deferred tax benefits of $467, $366, net of deferred tax benefits of $219 and $136, net of deferred tax benefits of $82 was included in accumulated OCL associated
with cash flow hedges.



---

The net change in OCL during 2008, 2007 and 2006, reflected the reclassification of $274, net of income tax benefit of
$164, $128, net of income tax benefit of $77 and $221, net of income tax benefit of $132, respectively, of unrealized losses from accumulated OCL to current period earnings (recorded in interest expense, net in the consolidated statements of
income). The net unrealized loss recorded in accumulated OCL will be reclassified to earnings on a monthly basis as interest payments occur. We estimate that approximately $800 in unrealized losses on the derivative instruments accumulated in OCL
are expected to be reclassified to earnings during 2009 using a current one month LIBOR-based average receive rate (1.17% at December 31, 2008).

Off-Balance Sheet Financial Instruments

At December 31, 2008 and 2007, we were contingently liable under standby letters of credit
aggregating $4,627 and $4,992, respectively that are primarily used as collateral to cover any contingency related to additional risk assessments pertaining to the self-insurance programs. We do not expect any material losses to result from the
issuance of the standby letters of credit because claims are not expected to exceed premiums paid. Accordingly, the estimated fair value of these instruments is zero.

Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist
principally of cash investments and accounts receivable. Temporary cash investments are placed with high credit quality financial institutions and we limit the amount of credit exposure to any one financial institution or investment. Concentrations
of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the customer base and their dispersion across many different geographical regions.

11. Fair Value Measurements

Effective January 1, 2008, we
adopted SFAS No. 157 for our financial assets and liabilities, which defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:



|        |  |                                                                                                                                                                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                           
|        | 
|Level 2 |  | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|        | 
|Level 3 |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted
cash flow methodologies and similar techniques that use significant unobservable inputs.                                      



---

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2008, segregated among the appropriate levels within the fair value hierarchy:



|                                 |  |                                |         |                                                   |         |     |         |   |       |  |  
|-------------------------------- |  | ------------------------------ | ------- | ------------------------------------------------- | ------- | --- | ------- | - | ----- |  | -
|                                 |  | Fair Value atDecember 31, 2008 |         | Fair Value Measurementsat December 31,
2008 Using
|Description                      |  |                                | Level 1 |                                                   | Level 2 |     | Level 3
|Assets:                          |  |                                |         |                                                   |         |     |         |   |       |  |  
|Available-for-sale securities    |  | $                              | 279     |                                                   | $       | 279 |         |   |      |  | 
|Liabilities:                     |  |                                |         |                                                   |         |     |         |   |       |  |  
|Derivative financial instruments |  | $                              | 1,287   |                                                   |         |    |         | $ | 1,287 |  | 

The following is a description of the valuation techniques used for these items, as well as the general
classification of such items pursuant to the fair value hierarchy of SFAS No. 157:

Available-for-sale securities  the investments are
exchange-traded equity securities. Fair values for these investments are based on quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy.

Derivative financial instruments  the derivatives are pay-variable, receive fixed interest rate swaps based on 30-day LIBOR. Fair value is based on model-derived valuations using the respective LIBOR
rate, which is observed at quoted intervals for the full term of the swaps. Therefore, the derivatives are classified within Level 2 of the fair value hierarchy. See Note 10 for further discussion on our derivative financial instruments.

12. Commitments and Contingencies

Litigation, Claims and
Assessments

In November 2007, one of our subsidiaries was named in a complaint filed in the Circuit Court of the Seventh Judicial Circuit, in and for,
Volusia County, Florida, brought by CODISCO, Inc. and CODISCO International, Inc. (CODISCO), an existing landlord of facilities leased by our subsidiary. CODISCO alleged that eleven former and existing leased premises were not properly
maintained and that our subsidiary failed to perform the necessary repairs breaching the lease agreements. During January 2009, an Order of Joint Stipulation for Voluntary Dismissal with Prejudice regarding this complaint was granted.

We are involved in other litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants
and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect us. Although the adequacy of existing insurance coverage or the outcome of any legal proceedings cannot
be predicted with certainty, based on the current information available, we do not believe the ultimate liability associated with any known claims or litigation will have a material impact to our financial condition or results of operations.

Self-Insurance

Self-insurance reserves are maintained for
company-wide casualty insurance programs and for one subsidiarys health benefit program. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the
self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management
reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be
required. The estimation process contains uncertainty since management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance
sheet date. Reserves in the amount of $3,875 and $4,593 at December 31, 2008 and 2007, respectively, were established related to such insurance programs and are included in accrued expenses and other current liabilities in our consolidated
balance sheets.



---

Variable Interest Entities

As of December 31, 2008, in conjunction with our casualty insurance programs, limited equity interests are held in a captive insurance entity. The programs permit us to self-insure a portion of losses, to gain access to a wide array of
safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit risk of loss in any particular year. The entities meet the definition of variable interest
entities (VIEs), however, based on the criteria set forth in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, there is not a
requirement to include these entities in the consolidated financial statements. The maximum exposure to loss related to our involvement with these entities is limited to approximately $5,200. See Note 12, Self-Insurance, for additional
discussion of commitments associated with the insurance programs and Note 10, Off-Balance Sheet Financial Instruments, for further information on standby letters of credit. As of December 31, 2008, there are no other entities that
met the definition of a VIE.

Minimum Royalty Payments

We are
obligated under a licensing agreement with Whirlpool Corporation to make minimum annual royalty payments of $1,000 through 2011.

Operating Leases

We are obligated under non-cancelable operating leases of real property, equipment, vehicles and a corporate aircraft used in our operations with varying
terms through 2017. Some of our leases contain renewal options, some of which involve rate increases. For leases with step rent provisions whereby the rental payments increase incrementally over the life of the lease, we recognize the total minimum
lease payments on a straight-line basis over the lease term. The corporate aircraft lease is subject to adjustment from changes in LIBOR-based interest rates.

As of December 31, 2008, future minimum lease payments under non-cancelable operating leases are as follows:



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 46,255 
|2010       |  |   | 36,744 
|2011       |  |   | 26,943 
|2012       |  |   | 18,724 
|2013       |  |   | 12,085 
|Thereafter |  |   | 14,698 
|           |  |   |        
|           |  | $ | 155,449
|           |  |   |        

Rental expense for the years ended December 31, 2008, 2007 and 2006 was $45,606, $42,739 and $36,333,
respectively.

13. Discontinued Operations

During June
2007, our Board of Directors approved and we executed an agreement to sell the stock of our non-core staffing unit, Dunhill Staffing Systems, Inc. (Dunhill). The transaction closed on July 19, 2007. Dunhill represented our
other segment and consequently, the amounts related to this operation are presented as discontinued operations in our consolidated statements of income and our consolidated statements of cash flows for all periods presented. The
divestiture of Dunhill did not have a material impact on our financial condition or results of operations.



---

Included in discontinued operations as presented in our consolidated statements of income are the following:



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|Years Ended December 31,                       |  | 2007 |        |   | 2006 |  
|Revenues                                       |  | $    | 12,431 |   |      | $ | 29,545 |  
|(Loss) income from discontinued operations     |  |      | (3,060 | ) |      |   | 210    |  
|Income tax benefit (expense)                   |  |      | 1,148  |   |      |   | (79    | )
|Net (loss) income from discontinued operations |  |      | (1,786 | ) |      |   | 131    |  
|Loss on sale of discontinued operations        |  |      | (126   | ) |      |   |       |  

14. Related Party Transaction

A member of the Board of Directors is the President and Chief Executive Officer of Greenberg Traurig, LLP, which serves as our principal outside counsel and receives customary fees for legal services. During 2008,
2007 and 2006, this firm was paid $128, $78 and $295, respectively, for services performed.

15. Subsequent Event

In February 2009, our Board of Directors approved an increase in the quarterly cash dividend to $0.48 per share from $0.45 per share.



---

WATSCO, INC. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|------------------------------------------------------------------- |  | ---------- | ------- | ---------- | - | ---------- |  | ---------- | ------- | ----- | - | ------- |  | - | ---------
|(In thousands, except per share data)                               |  | 1stQuarter |         | 2ndQuarter |   | 3rdQuarter |  | 4thQuarter |         | Total
|Year Ended December 31, 2008                                        |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Revenues (1)                                                        |  | $          | 380,399 |            | $ | 509,822    |  | $          | 475,225 |       | $ | 334,791 |  | $ | 1,700,237
|Gross profit                                                        |  |            | 98,004  |            |   | 131,060    |  |            | 126,673 |       |   | 86,257  |  |   | 441,994  
|Net income                                                          |  | $          | 7,644   |            | $ | 26,050     |  | $          | 23,332  |       | $ | 3,343   |  | $ | 60,369   
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Earnings per share for Common and Class B common stock (2):         |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Basic                                                               |  | $          | 0.29    |            | $ | 0.98       |  | $          | 0.88    |       | $ | 0.13    |  | $ | 2.28     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Diluted                                                             |  | $          | 0.28    |            | $ | 0.94       |  | $          | 0.84    |       | $ | 0.12    |  | $ | 2.18     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|                                                                    |  |            |         |            |  
|Year Ended December 31, 2007                                        |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Revenues (1)                                                        |  | $          | 370,681 |            | $ | 471,110    |  | $          | 518,596 |       | $ | 397,635 |  | $ | 1,758,022
|Gross profit                                                        |  |            | 95,313  |            |   | 119,592    |  |            | 130,932 |       |   | 101,148 |  |   | 446,985  
|Net income from continuing operations                               |  |            | 10,978  |            |   | 24,448     |  |            | 25,364  |       |   | 6,699   |  |   | 67,489   
|Loss from discontinued operations, net of income taxes              |  |            | 164     |            |   | 1,598      |  |            | 116     |       |   | 34      |  |   | 1,912    
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Net income                                                          |  | $          | 10,814  |            | $ | 22,850     |  | $          | 25,248  |       | $ | 6,665   |  | $ | 65,577   
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Basic earnings per share for Common and Class B common stock (2):   |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Net income from continuing operations                               |  | $          | 0.42    |            | $ | 0.93       |  | $          | 0.96    |       | $ | 0.26    |  | $ | 2.57     
|Net loss from discontinued operations                               |  |            | 0.01    |            |   | 0.06       |  |            |        |       |   |        |  |   | 0.07     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Net income                                                          |  | $          | 0.41    |            | $ | 0.87       |  | $          | 0.96    |       | $ | 0.25    |  | $ | 2.49     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Diluted earnings per share for Common and Class B common stock (2): |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Net income from continuing operations                               |  | $          | 0.40    |            | $ | 0.88       |  | $          | 0.91    |       | $ | 0.24    |  | $ | 2.43     
|Net loss from discontinued operations                               |  |            | 0.01    |            |   | 0.06       |  |            |        |       |   |        |  |   | 0.07     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          
|Net income                                                          |  | $          | 0.39    |            | $ | 0.82       |  | $          | 0.90    |       | $ | 0.24    |  | $ | 2.36     
|                                                                    |  |            |         |            |   |            |  |            |         |       |   |         |  |   |          



| | (1) | Sales of residential central air conditioners, heating equipment and related parts and supplies are seasonal. Demand related to the residential central air conditioning replacement
market is highest in the second and third quarters with demand for heating equipment usually highest in the fourth quarter. Demand related to the new construction sectors throughout most of the markets is fairly even during the year except for
dependence on housing completions and related weather and economic conditions.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Quarterly earnings per Common and Class B common share are calculated on an individual basis and, because of rounding and changes in the weighted-average shares outstanding during
the year, the summation of each quarter may not equal the amount calculated for the year as a whole.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

WATSCO, INC. AND SUBSIDIARIES

INFORMATION ON COMMON STOCK

Our Common stock is traded on the New York Stock Exchange under
the symbol WSO and our Class B common stock is traded on the American Stock Exchange under the symbol WSOB. The following table indicates the high and low prices of our Common stock and Class B common stock, as reported by the New York Stock
Exchange and American Stock Exchange, respectively, and dividends paid per share for each quarter during the years ended December 31, 2008 and 2007. At February 24, 2009, excluding shareholders with stock in street name, there were 325
Common stock shareholders of record and 131 Class B common stock shareholders of record.



|                              |  |        |       |         |   |               |  |     |       |        |   |         |  |   |     |  |   |    
|----------------------------- |  | ------ | ----- | ------- | - | ------------- |  | --- | ----- | ------ | - | ------- |  | - | --- |  | - | ---
|                              |  | Common |       | Class B |   | Cash Dividend
|                              |  | High   |       | Low     |   | High          |  | Low |       | Common |   | Class B
|Year Ended December 31, 2008: |  |        |       |         |   |               |  |     |       |        |   |         |  |   |     |  |   |    
|First quarter                 |  | $      | 43.80 |         | $ | 31.44         |  | $   | 44.50 |        | $ | 31.15   |  | $ | .40 |  | $ | .40
|Second quarter                |  |        | 47.47 |         |   | 40.27         |  |     | 47.82 |        |   | 40.30   |  |   | .45 |  |   | .45
|Third quarter                 |  |        | 58.49 |         |   | 40.86         |  |     | 55.55 |        |   | 41.42   |  |   | .45 |  |   | .45
|Fourth quarter                |  |        | 49.00 |         |   | 30.62         |  |     | 49.07 |        |   | 30.85   |  |   | .45 |  |   | .45
|                              |  |        |       |         |   |               |  |     |       |        |   |         |  |   |     |  |   |    
|                              |  |        |       |         |   |              
|Year Ended December 31, 2007: |  |        |       |         |   |               |  |     |       |        |   |         |  |   |     |  |   |    
|First quarter                 |  | $      | 54.15 |         | $ | 45.76         |  | $   | 53.50 |        | $ | 46.03   |  | $ | .25 |  | $ | .25
|Second quarter                |  |        | 63.50 |         |   | 48.97         |  |     | 63.39 |        |   | 48.71   |  |   | .33 |  |   | .33
|Third quarter                 |  |        | 58.26 |         |   | 45.50         |  |     | 58.33 |        |   | 46.42   |  |   | .33 |  |   | .33
|Fourth quarter                |  |        | 45.37 |         |   | 35.54         |  |     | 45.40 |        |   | 35.52   |  |   | .40 |  |   | .40
|                              |  |        |       |         |   |               |  |     |       |        |   |         |  |   |     |  |   |