Experiments have been performed with a direct contact condensing heat exchanger for gas furnaces, in which a direct contact bubble distributor was used to heat and criculate water through a finned-tube heat exchanger which heats the return room air blown through. This paper presents the development of a computer model simulating the system, and the results of parametric studies. The heat transfer analysis of the system indicated possible further improvement of the system. A modified system was proposed and a model was also developed for the system. Comparisons of the heat transfer performance between the two models are given. The research activity concerning this work was supported by the Gas Research Institute (U.S.A.).