`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                   -----------


                                    FORM 10-Q

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

For the quarterly period ended March 31, 2004

                                       OR

/ /    TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
       EXCHANGE ACT OF 1934.

For the transition period from                       to
                               ---------------------    ------------------

                         Commission file number 0-27378

                                   NUCO2 INC.
             (Exact Name of Registrant as Specified in Its Charter)


          Florida                                               65-0180800
(State or Other Jurisdiction                                 (I.R.S. Employer
of Incorporation or Organization)                           Identification No.)

   2800 SE Market Place, Stuart, FL                               34997
(Address of Principal Executive Offices)                        (Zip Code)


                                 (772) 221-1754
              (Registrant's Telephone Number, Including Area Code)


                                       N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


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

            Indicate by check /X/ whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /

            Indicate  the number of shares  outstanding  of each of the issuer's
classes of Common Stock, as of the latest practicable date:

              Class                           Outstanding at March 31, 2004
              -----                           -----------------------------
    Common Stock, $.001 par value                   10,706,691 shares






                                   NUCO2 INC.

                                      Index

PART I.      FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

             Balance Sheets as of March 31, 2004 and                       3
                June 30, 2003

             Statements of Operations for the Three Months Ended           4
                March 31, 2004 and March 31, 2003

             Statement of Operations for the Nine Months Ended             5
                March 31, 2004 and March 31, 2003

             Statement of Shareholders' Equity for the Nine                6
                Months Ended March 31, 2004

             Statements of Cash Flows for the Nine Months                  7
                Ended March 31, 2004 and March 31, 2003

             Notes to Financial Statements                                 8

ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF                      17
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES                     29
                ABOUT MARKET RISK

ITEM 4.      CONTROLS AND PROCEDURES                                      29

PART II.     OTHER INFORMATION

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K                             29

SIGNATURES                                                                30

                                       2





PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                                   NUCO2 INC.

                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS
                                     ------

                                                                             March 31, 2004   June 30, 2003
                                                                             --------------   -------------
                                                                              (unaudited)
Current assets:
    Cash and cash equivalents                                                  $     292      $     455
    Trade accounts receivable, net of allowance for doubtful
        accounts of $2,179 and $2,299, respectively                                5,832          6,217
    Inventories                                                                      228            210
    Prepaid expenses and other current assets                                      3,258          1,605
                                                                               ---------      ---------
        Total current assets                                                       9,610          8,487
                                                                               ---------      ---------

Property and equipment, net                                                       91,984         92,448
                                                                               ---------      ---------

Other assets:
    Goodwill, net                                                                 19,222         19,222
    Deferred financing costs, net                                                  2,344          1,593
    Customer lists, net                                                               18             25
    Non-competition agreements, net                                                  773            985
    Deferred lease acquisition costs, net                                          3,304          2,892
    Other assets                                                                     191            194
                                                                               ---------      ---------
                                                                                  25,852         24,911
                                                                               ---------      ---------
           Total assets                                                        $ 127,446      $ 125,846
                                                                               =========      =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
    Current maturities of long-term debt                                       $   4,897      $   2,294
    Accounts payable                                                               4,424          4,095
    Accrued expenses                                                               1,326          1,315
    Accrued interest                                                                 603            981
    Accrued payroll                                                                  684          1,212
    Other current liabilities                                                        380            329
                                                                               ---------      ---------
        Total current liabilities                                                 12,314         10,226

Senior debt facilities, excluding current maturities                              35,624         28,659
Long-term subordinated debt                                                       28,726         39,576
Customer deposits                                                                  3,241          3,191
                                                                               ---------      ---------
        Total liabilities                                                         79,905         81,652
                                                                               ---------      ---------

Commitments and contingencies
Redeemable preferred stock                                                         9,824          9,258
                                                                               ---------      ---------

Shareholders' equity:
    Preferred stock; no par value; 5,000,000 shares authorized;
        7,500 shares issued and outstanding                                         --             --
    Common stock; par value $.001 per share; 30,000,000 shares authorized;
        issued and outstanding 10,706,691 shares at March 31, 2004
        and 10,633,405 shares at June 30, 2003                                        11             11
    Additional paid-in capital                                                    95,163         92,938
    Accumulated deficit                                                          (57,457)       (57,884)
    Accumulated other comprehensive loss                                            --             (129)
                                                                               ---------      ---------
        Total shareholders' equity                                                37,717         34,936
                                                                               ---------      ---------
           Total liabilities and shareholders' equity                          $ 127,446      $ 125,846
                                                                               =========      =========

See accompanying notes to financial statements

                                       3





                                   NUCO2 INC.

                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)




                                                                              Three Months Ended March 31,
                                                                              ----------------------------
                                                                                   2004        2003*
                                                                                   ----        -----

Product sales                                                                   $ 12,361     $ 11,132
Equipment rentals                                                                  7,711        7,208
                                                                                --------      -------

Total revenues                                                                    20,072       18,340
                                                                                --------      -------

Costs and expenses:
    Cost of products sold, excluding depreciation and amortization                 8,361        7,957
    Cost of equipment rentals, excluding depreciation
        and amortization                                                             627          793
    Selling, general and administrative expenses                                   3,748        3,832
    Depreciation and amortization                                                  3,776        4,355
    Loss on asset disposals                                                          331          357
                                                                                --------      -------
                                                                                  16,843       17,294
                                                                                --------      -------

Operating income                                                                   3,229        1,046
Unrealized loss on financial instrument (Note 4)                                     177         --
Interest expense                                                                   1,980        1,823
                                                                                --------      -------

Income (loss) before income taxes                                                  1,072         (777)
Provision for income taxes                                                          --           --
                                                                                --------      -------

Net income (loss)                                                               $  1,072     $   (777)
                                                                                ========      =======

Weighted average outstanding shares of common stock:
    Basic                                                                         10,683       10,633
                                                                                ========      =======
    Diluted                                                                       11,964       10,633
                                                                                ========      =======

Net income (loss) per basic share                                               $   0.08      $ (0.09)
                                                                                ========      =======
Net income (loss) per diluted share                                             $   0.07      $ (0.09)
                                                                                ========      =======



Pro forma amounts assuming adoption of EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" is applied
retroactively (Note 2):

Net income (loss)                                                               $  1,072     $ (1,075)
                                                                                ========     ========
Net income (loss) per basic share                                               $   0.08     $  (0.12)
                                                                                ========     ========
Net income (loss) per diluted share                                             $   0.07     $  (0.12)
                                                                                ========     ========


See accompanying notes to financial statements.
*Restated to conform to current year presentation.

                                       4





                                   NUCO2 INC.

                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


                                                                      Nine Months Ended March 31,
                                                                      ---------------------------
                                                                         2004           2003*
                                                                         ----           -----

Product sales                                                          $ 36,576      $ 33,991
Equipment rentals                                                        23,188        21,128
                                                                       --------      --------

Total revenues                                                           59,764        55,119
                                                                       --------      --------

Costs and expenses:
    Cost of products sold, excluding depreciation and amortization       25,364        23,688
    Cost of equipment rentals, excluding depreciation
        and amortization                                                  1,844         2,915
    Selling, general and administrative expenses                         11,530        13,591
    Depreciation and amortization                                        11,481        13,171
    Loss on asset disposals                                               1,050         1,210
                                                                       --------      --------
                                                                         51,269        54,575
                                                                       --------      --------

Operating income                                                          8,495           544

Loss on early extinguishment of debt (Notes 4 and 5)                      1,964          --
Unrealized loss on financial instrument (Note 4)                            177          --
Interest expense                                                          5,927         5,745
                                                                       --------      --------

Income (loss) before  income  taxes                                         427        (5,201)
Provision for income taxes                                                 --            --
                                                                       --------      --------

Net income (loss)                                                      $    427      $ (5,201)
                                                                       ========      ========


Weighted average number of common and common
    equivalent shares outstanding, basic and diluted                     10,656        10,320
                                                                       ========      ========

Basic and diluted (loss) per share                                     $  (0.01)        (0.55)
                                                                       ========      ========

Pro forma amounts assuming adoption of EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" is applied
retroactively (Note 2):

Net income (loss)                                                      $    427      $ (5,256)
                                                                       ========      ========
Basic and diluted (loss) per share                                     $  (0.01)     $  (0.56)
                                                                       ========      ========


See accompanying notes to financial statements.
*Restated to conform to current year presentation.

                                       5





                                   NUCO2 INC.

                        STATEMENT OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

                                                                                                      Accumulated
                                                       Common Stock        Additional                     Other          Total
                                                 ------------------------    Paid-In     Accumulated  Comprehensive   Shareholders'
                                                   Shares          Amount    Capital       Deficit       Loss            Equity
                                                   ------          ------    -------       -------       ----            ------
Balance, June 30, 2003                           10,633,405      $    11     $92,938     $  (57,884) $      (129)     $    34,936
Comprehensive income (loss):
  Net income (loss)                                    --           --          --              427         --                427
  Other comprehensive income:
    Interest rate swap transaction                     --           --          --               --          129              129
                                                                                                                         --------
Total comprehensive income (loss)                                                                                             556

Issuance and extension of warrants (Note 5)            --           --         2,333             --           --            2,333
Issuance of 25,644 shares of common stock -
    exercise of warrants                             25,644         --            15             --           --               15
Issuance of 47,642 shares of common stock -
    exercise of options                              47,642         --           443             --           --              443
Redeemable preferred stock dividend                    --           --          (566)            --           --             (566)
                                                -----------      -------     -------      ---------    -----------      ---------
Balance, March 31, 2004                          10,706,691      $    11     $95,163      $ (57,457)   $      --        $  37,717
                                                ===========      =======     =======      =========    ===========      =========

See accompanying notes to financial statements.

                                       6





                                   NUCO2 INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (UNAUDITED)

                                                                          Nine Months Ended March 31,
                                                                          ---------------------------
                                                                              2004           2003*
                                                                              ----           -----
Cash flows from operating activities:

    Net income (loss)                                                      $    427      $ (5,201)

    Adjustments to reconcile net income (loss) to net cash provided by
        operating activities:
              Depreciation and amortization of property and equipment         9,983        10,490
              Amortization of other assets                                    1,498         2,681
              Amortization of original issue discount                           300           160
              Paid-in-kind interest                                             776          --
              Loss on disposals                                               1,050         1,210
              Loss on early extinguishment of debt                            1,964          --
              Unrealized loss on financial instrument                           177          --
              Changes in operating assets and liabilities:
                   Decrease (increase) in:
                       Trade accounts receivable                                385           577
                       Inventories                                              (18)           39
                       Prepaid expenses and other current assets             (1,653)         (511)
                   Increase (decrease) in:
                       Accounts payable                                         329          (324)
                       Accrued expenses                                          11           679
                       Accrued payroll                                         (528)         (174)
                       Accrued interest                                        (513)        1,097
                       Other current liabilities                                 51           (56)
                       Customer deposits                                         50           430
                                                                           --------      --------

              Net cash provided by operating activities                      14,289        11,097
                                                                           --------      --------

Cash flows from investing activities:
    Purchase of property and equipment                                      (10,528)       (9,781)
    Increase in deferred lease acquisition costs                             (1,208)         (810)
    Decrease (increase) in other assets                                           3           (21)
                                                                           --------      --------
           Net cash used in investing activities                            (11,733)      (10,612)
                                                                           --------      --------

Cash flows from financing activities:
    Repayment of long-term debt                                             (74,582)      (15,830)
    Proceeds from issuance of common stock                                     --          16,222
    Issuance cost - common stock                                               --          (1,168)
    Proceeds from issuance of long-term debt                                 74,150          --
    Exercise of warrants                                                         15          --
    Exercise of stock options                                                   443             6
    Increase in deferred financing costs                                     (2,745)         (760)
                                                                           --------      --------
        Net cash used in financing activities                                (2,719)       (1,530)
                                                                           --------      --------

Decrease in cash and cash equivalents                                          (163)       (1,045)
Cash and cash equivalents at the beginning of period                            455         1,562
                                                                           --------      --------
Cash and cash equivalents at the end of period                             $    292      $    517
                                                                           ========      ========

Supplemental disclosure of cash flow information:
  Cash paid during the period
    for:
        Interest                                                           $  5,277      $  4,489
                                                                           ========      ========
        Income taxes                                                       $   --        $   --
                                                                           ========      ========


See accompanying notes to financial statements.
*Restated to conform to current year presentation.

                                       7





                                   NUCO2 INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1.     BASIS OF PRESENTATION

            The accompanying  unaudited financial  statements have been prepared
in accordance  with the  instructions  to Form 10-Q used for  quarterly  reports
under  Section  13 or 15  (d) of  the  Securities  Exchange  Act  of  1934,  and
therefore,  do not include all  information  and footnotes  necessary for a fair
presentation  of financial  position,  results of  operations  and cash flows in
conformity with generally accepted accounting principles.

            The financial  information included in this report has been prepared
in  conformity  with the  accounting  principles  and methods of applying  those
accounting principles, reflected in the financial statements for the fiscal year
ended June 30, 2003 included in Form 10-K filed with the Securities and Exchange
Commission,  except as stated  below  regarding  the  adoption of EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").

            All  adjustments  necessary for a fair  statement of the results for
the interim periods presented have been recorded.  This quarterly report on Form
10-Q  should  be  read in  conjunction  with  the  Company's  audited  financial
statements  for the fiscal year ended June 30, 2003.  The results of  operations
for the periods  presented are not  necessarily  indicative of the results to be
expected  for the full fiscal  year.  As a result of the adoption of EITF 00-21,
the Company  anticipates  that  reported  revenue will  fluctuate on a quarterly
basis due to seasonal variations.  Based on historical data and expected trends,
the Company anticipates that revenue from the delivery of CO2 will be highest in
the first quarter and lowest in the third quarter.

NOTE 2.     ACCOUNTING PRONOUNCEMENTS

            In April 2003,  the Financial  Accounting  Standards  Board ("FASB")
issued SFAS No. 149,  "AMENDMENT OF STATEMENT 133 ON DERIVATIVE  INSTRUMENTS AND
HEDGING  ACTIVITIES"  ("SFAS  149").  SFAS 149  amends and  clarifies  financial
accounting  and  reporting  for  derivative   instruments,   including   certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives)  and for  hedging  activities  under  SFAS  No.  133.  SFAS  149 is
effective  for  contracts  entered  into or modified  after June 30,  2003,  and
designated  hedges after June 30, 2003,  except for those provisions of SFAS 149
which relate to SFAS No. 133 implementation  issues that have been effective for
fiscal  quarters  that  began  prior to June 15,  2003.  For those  issues,  the
provisions  that are  currently  in effect  should  continue  to be  applied  in
accordance  with  their  respective   effective  dates.  In  addition,   certain
provisions  of  SFAS  149,  which  relate  to  forward  purchases  or  sales  of
when-issued  securities  or other  securities  that do not yet exist,  should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS 149 had no material impact on the Company's financial
position, results of operations or cash flows.

            In May 2003, the FASB issued SFAS No. 150,  "ACCOUNTING  FOR CERTAIN
FINANCIAL  INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES  AND EQUITY"
("SFAS 150").  SFAS 150 establishes  standards for how an issuer  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  SFAS 150 requires  that an issuer  classify a financial  instrument
that is within the scope of SFAS 150 as a liability.  SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is originally  effective for the first interim period  beginning  after June 15,
2003. The adoption of SFAS 150 had no material impact on the Company's financial
position, results of operations or cash flows.

            On  July 1,  2003,  the  Company  adopted  EITF  00-21.  EITF  00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which the vendor  will  perform  multiple  revenue  generating  activities.  The
Company's bulk CO2 budget plan agreements provide for a fixed monthly payment to
cover the use of a bulk CO2 system and a predetermined  maximum quantity of CO2.
As of March 31, 2004,  approximately  56,000 of the Company's customer locations
utilized this plan.  Prior to July 1, 2003, the Company,  as lessor,  recognized
revenue  from  leasing  CO2  systems  under  its  budget  plan  agreements  on a
straight-line basis over the life of the related leases. The Company developed a
methodology  for the purpose of separating the aggregate  revenue stream between
the rental of the  equipment  and the sale of the CO2.  Effective  July 1, 2003,
revenue attributable to the lease of equipment, including equipment leased under
the budget plan, is recorded on a straight-line basis over the term of the lease
and revenue  attributable  to the supply of CO2 and other gases,  including  CO2
provided under the budget plan, is recorded upon delivery to the customer.

                                       8





            The  Company has  elected to apply EITF 00-21  retroactively  to all
budget plan  agreements in existence as of July 1, 2003.  Based on the Company's
analysis,  the  aggregate  amount of CO2 actually  delivered  under budget plans
during the quarter  ended June 30,  2003 is not  materially  different  than the
corresponding portion of the fixed charges attributable to CO2. Accordingly, the
Company believes the cumulative  effect of the adoption of EITF 00-21 as of July
1, 2003 is not  significant.  However,  the effect of adopting EITF 00-21 in the
manner  described  above resulted in a decrease in revenue and net income during
the three and nine months ended March 31, 2004 of  approximately  $(322,000)  or
$(0.03) per share and $(37,000), or $(0.00) per share, respectively.  Solely for
comparative purposes,  the Company has separated equipment rentals and CO2 sales
in the  statements of  operations  for the three and nine months ended March 31,
2003;  however,  all  revenue  derived  from budget  plans for those  periods is
recognized on a  straight-line  basis as disclosed in the  Company's  summary of
significant  accounting  policies  included in its prior Annual  Reports on Form
10-K.

            Under the budget plan,  each  customer  has a maximum CO2  allowance
that is measured and reset on the contract anniversary date. At that date, it is
appropriate  to  record  revenue  for  contract  billings  in  excess  of actual
deliveries  of CO2.  Because of the large number of  customers  under the budget
plan and the fact that the anniversary dates for determining  maximum quantities
are spread throughout the year, the Company's  methodology  necessarily involves
the use of estimates and  assumptions  to separate the aggregate  revenue stream
derived from equipment rentals to budget plan customers, and also to approximate
the  recognition of revenue from CO2 sales to budget plan customers when earned.
The Company  believes that the adoption of EITF 00-21 has the most impact on the
recognition  of revenue on a quarterly  basis as CO2 usage  fluctuates  during a
fiscal year based on factors such as weather, and traditional summer and holiday
periods.  Over a twelve-month  period,  the Company  believes the effect is less
significant since seasonal  variations are largely eliminated and CO2 allowances
under budget plan agreements are measured and reset annually.

            If the guidance of EITF 00-21 had been applied retroactively,  prior
year results would have been different than  previously  reported as follows (in
thousands, except per share amounts):


                                                   Three Months Ended March 31,     Nine Months Ended March 31,
                                                   ---------------------------      ----------------------------
                                                           2004       2003              2004        2003
                                                           ----       ----              ----        ----
Revenues, as reported                                    $ 20,072   $ 18,340          $ 59,764    $ 55,119
Adoption of EITF 00-21                                       --         (298)             --           (55)
                                                         --------   --------          --------    --------
Revenues, as adjusted                                    $ 20,072   $ 18,042          $ 59,764    $ 55,064
                                                         ========   ========          ========    ========

Net income (loss), as reported                           $  1,072   $   (777)         $    427    $ (5,201)
Adoption of EITF 00-21                                       --         (298)             --           (55)
                                                         --------   --------          --------    --------
Net income (loss), as adjusted                           $  1,072   $ (1,075)         $    427    $ (5,256)
                                                         ========   ========          ========    ========

Basic income (loss) per share, as reported               $   0.08   $  (0.09)         $  (0.01)   $  (0.55)
Adoption of EITF 00-21                                       --        (0.03)             --         (0.01)
                                                         --------   --------          --------    --------
Basic income (loss) per share, as adjusted               $   0.08   $  (0.12)         $  (0.01)   $  (0.56)
                                                         ========   ========          ========    ========

Diluted income (loss) per share, as reported             $   0.07   $  (0.09)         $  (0.01)   $  (0.55)
Adoption of EITF 00-21                                       --        (0.03)             --         (0.01)
                                                         --------   --------          --------    --------
Diluted income (loss) per share, as adjusted             $   0.07   $  (0.12)         $  (0.01)   $  (0.56)
                                                         ========   ========          ========    ========


            In  December  2003,  the FASB  revised FASB  Interpretation  No. 46,
"CONSOLIDATION   OF   VARIABLE   INTEREST   ENTITIES."   Application   of   this
Interpretation is required in a company's financial  statements for interests in
variable  interest  entities that are  considered  special-purpose  entities for
reporting  periods ending after March 15, 2004. FASB  Interpretation  No. 46 did
not effect the Company's  financial  position,  results of  operations,  or cash
flows.

            In  December  2003,  the  FASB  revised  SFAS  No.  132,   "EMPLOYER
DISCLOSURES ABOUT PENSIONS AND OTHER  POSTRETIREMENT  BENEFITS" (SFAS 132). SFAS
132 requires  additional  disclosures  regarding the assets,  obligations,  cash
flows,  and net periodic benefit cost of defined benefit plans and other defined
benefit  postretirement  plans.  SFAS 132  requires  that  this  information  be
provided  separately for pension plans and other  postretirement  benefit plans.
The  adoption of the revised  SFAS No. 132,  effective  January 1, 2004,  had no
material impact on the Company's financial position,  results of operations,  or
cash flows.

NOTE 3.     EARNINGS (LOSS) PER COMMON SHARE

            The Company  calculates  earnings per share in  accordance  with the
requirements of SFAS No. 128,  "Earnings Per Share." The weighted average shares
outstanding  used to calculate basic and diluted  earnings (loss) per share were
calculated as follows (in thousands):

                                       9






                                                Three Months Ended March 31,     Nine Months Ended March 31,
                                                ----------------------------     ---------------------------
                                                        2004     2003                2004     2003
                                                        ----     ----                ----     ----

Weighted average shares outstanding - basic            10,683   10,633              10,656   10,320

Outanding options and warrants to purchase
  shares of common stock - remaining
  shares after assuming repurchase with proceeds
  from exercise                                         1,281     --                  --       --
                                                       ------   ------              ------   ------

Weighted average shares outstanding - diluted          11,964   10,633              10,656   10,320
                                                       ======   ======              ======   ======

            The Company  excluded the equivalent of 4,317 shares of common stock
for the three  months ended March 31,  2003,  and 931,143 and 280,500  shares of
common stock for the nine months ended March 31, 2004 and 2003, respectively, as
these options and warrants to purchase common stock were anti-dilutive for these
periods. In addition,  the Company excluded the effects of the conversion of its
outstanding  redeemable  preferred stock using the "if converted" method, as the
effect would be anti-dilutive (Note 6). The Company's redeemable preferred stock
was convertible into 954,024 shares of common stock as of March 31, 2004.

            The  following  table  presents  the  Company's  net  income  (loss)
available to common  shareholders and income (loss) per share, basic and diluted
(in thousands, except per share amounts):

                                                   Three Months Ended March 31,      Nine Months Ended March ber 31,
                                                   ----------------------------      -------------------------------
                                                          2004        2003                 2004         2003
                                                          ----        ----                 ----         ----

Net income (loss)                                      $  1,072    $   (777)              $    427    $ (5,201)
Redeemable preferred stock dividends                       (193)       (178)                  (566)       (524)
                                                       --------    --------               --------    --------
Net income (loss) -
    available to common shareholders                   $    879    $   (955)              $   (139)   $ (5,725)
                                                       ========    ========               ========    ========

Weighted average outstanding shares of
    common stock:

Basic                                                    10,683      10,633                 10,656      10,320
Diluted                                                  11,964      10,633                 10,656      10,320

Basic income (loss) per share                          $   0.08    $  (0.09)              $  (0.01)   $  (0.55)
                                                       ========    ========               ========    ========
Diluted income (loss) per share                        $   0.07    $  (0.09)              $  (0.01)   $  (0.55)
                                                       ========    ========               ========    ========

NOTE 4.     SENIOR DEBT FACILITIES

            In September  2001, the Company  entered into a $60.0 million second
amended  and  restated  revolving  credit  facility  with a  syndicate  of banks
("Amended  Credit  Facility").   This  facility  replaced  the  Company's  prior
facility,  which was due to expire in May 2002.  The  Company  was  required  to
assess compliance with its debt covenants under the Amended Credit Facility on a
quarterly basis.  These financial  covenants were based on a measure that is not
consistent with accounting principles generally accepted in the United States of
America. Such measure was EBITDA (as defined), which represented earnings (loss)
before interest,  taxes,  depreciation and amortization,  as modified by certain
defined  adjustments.  The failure to meet these  covenants,  absent a waiver or
amendment,  would  have  placed  the  Company  in  default  and  caused the debt
outstanding  under the Amended  Credit  Facility to become  immediately  due and
payable.  The  Amended  Credit  Facility  also  included  certain  cross-default
provisions to the Company's 12% Senior  Subordinated  Promissory Notes (see Note
5).

            Prior to June 30, 2002, the Amended  Credit  Facility was amended to
adjust  certain  financial  covenants  for the quarter  ended March 31, 2002 and
prospectively, and non-compliance with the minimum EBITDA covenant for the three
months ended March 31, 2002 was waived. As of June 30, 2002, the Company was not
in compliance  with certain of its financial  covenants.  On September 27, 2002,
the Amended Credit  Facility was amended to adjust certain  financial  covenants
for the quarter ended June 30, 2002, and prospectively,  and the maturity of the
Amended  Credit  Facility was extended to November 17, 2003. As of September 30,
2002, the Company was in compliance  with all of the financial  covenants  under
the Amended Credit  Facility.  On February 7, 2003, the Amended Credit  Facility

                                       10


was amended to adjust certain financial covenants for the quarter ended December
31, 2002 and prospectively,  non-compliance with the minimum EBITDA covenant for
the three months ended December 31, 2002 was waived, the maturity of the Amended
Credit  Facility was extended to April 29, 2004, and the Amended Credit Facility
was  reduced  to $45.0  million.  As of March 31,  2003 and June 30,  2003,  the
Company was in compliance with all of the financial  covenants under the Amended
Credit Facility.

            On August 22, 2002, the Company  completed the private  placement of
1,663,846  shares of its common stock to 24  accredited  investors at a price of
$9.75 per share realizing net cash proceeds of approximately $15.1 million after
issuance  costs of $1.1  million.  Pursuant to the  requirements  of the Amended
Credit  Facility,  the Company  used $14.5  million of the  proceeds to pay down
outstanding debt under the Amended Credit Facility.

            On August 25,  2003,  the  Company  terminated  the  Amended  Credit
Facility  and  entered  into a  $50.0  million  senior  credit  facility  with a
syndicate of banks (the "Senior Credit  Facility").  The Senior Credit  Facility
consists of a $30.0 million A term loan  facility  (the "A Term Loan"),  a $10.0
million B term loan facility (the "B Term Loan"),  and a $10.0 million revolving
loan facility (the "Revolving Loan Facility"). The A Term Loan matures on August
25,  2007,  the B Term Loan  matures on August 25, 2008 and the  Revolving  Loan
Facility  matures on August 25, 2007. The B Term Loan is subordinate in right of
payment to the A Term Loan and borrowings under the Revolving Loan Facility. The
Company is entitled to select either  Eurodollar Loans (as defined) or Base Rate
Loans (as defined),  plus applicable margin, for principal  borrowings under the
Senior Credit Facility.  The applicable  Eurodollar Loan margin for A Term Loans
and borrowings pursuant to the Revolving Loan Facility ranges from 3.5% to 4.0%,
and the applicable Base Rate Loan margin ranges from 2.5% to 3.0%, provided that
until  delivery to the lenders of the  Company's  financial  statements  for the
quarter  ending June 30, 2004,  the margin on  Eurodollar  Loans is 4.0% and the
margin for Base Rate Loans is 3.0%.  The applicable  Eurodollar  Loan margin and
Base  Rate  Loan  margin  for B Term  Loans  is  7.5%  and  6.5%,  respectively.
Applicable  margin  is  determined  by a  pricing  grid  based on the  Company's
Consolidated Total Leverage Ratio (as defined). At closing, the Company borrowed
the A Term  Loan,  the B Term Loan and $3.0  million  under the  Revolving  Loan
Facility. Interest is payable periodically on borrowings under the Senior Credit
Facility.  In addition,  commencing  on December 31, 2003 and on the last day of
each quarter thereafter, the Company is required to make principal repayments on
the  A  Term  Loan  in  increasing  amounts.   The  Senior  Credit  Facility  is
collateralized  by all of the  Company's  assets.  Additionally,  the Company is
precluded from declaring or paying any cash dividends,  except it may accrue and
accumulate,  but not pay, cash dividends on its outstanding redeemable preferred
stock.

            The  Company  is also  required  to  meet  certain  affirmative  and
negative  covenants,  including  but not  limited to  financial  covenants.  The
Company is  required to assess its  compliance  with these  financial  covenants
under the Senior Credit Facility on a quarterly basis. These financial covenants
are  based  on a  measure  that is not  consistent  with  accounting  principles
generally  accepted in the United States of America.  Such measure is EBITDA (as
defined),  which represents  earnings before interest,  taxes,  depreciation and
amortization, as further modified by certain defined adjustments. The failure to
meet these covenants,  absent a waiver or amendment,  would place the Company in
default  and cause the debt  outstanding  under the Senior  Credit  Facility  to
immediately  become due and payable.  The Senior  Credit  Facility also includes
certain  cross-default  provisions  to the Company's  16.3% Senior  Subordinated
Notes due February 27, 2009 (see Note 5). As of September 30, 2003, December 31,
2003 and March 31, 2004, the Company was in compliance  with all covenants under
the Senior Credit Facility.

            In connection with the  termination of the Amended Credit  Facility,
during the first quarter of fiscal 2004, the Company  recognized a loss from the
write-off of $860,000 in unamortized financing costs associated with the Amended
Credit Facility and recorded  $2,162,000 in financing costs  associated with the
Senior Credit Facility. Such costs will be amortized over the life of the Senior
Credit Facility.

            As of March  31,  2004,  a total of $40.3  million  was  outstanding
pursuant to the Senior Credit Facility with a weighted  average interest rate of
6.1%.

            Effective July 1, 2000, the Company adopted SFAS No. 133 "ACCOUNTING
FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES," as amended by SFAS No. 149,
"AMENDMENT OF STATEMENT 133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES,"
which, among other things,  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.  For a  derivative  designated  as a cash flow  hedge,  the
effective  portions of changes in the fair value of the  derivative are recorded
in other  comprehensive  income 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.

            The  Company  uses  derivative  instruments  to manage  exposure  to
interest rate risks.  The Company's  objectives for holding  derivatives  are to

                                       11


minimize the risks using the most  effective  methods to eliminate or reduce the
impacts of this  exposure.  Prior to August 25, 2003, the Company was a party to
an interest rate swap  agreement  (the "Prior  Swap") with a notional  amount of
$12.5  million and a  termination  date of September  28, 2003.  Under the Prior
Swap,  the Company paid a fixed  interest rate of 5.23% per annum and received a
LIBOR-based floating rate. In conjunction with the termination of the Prior Swap
prior to maturity, the Company paid $86,000.

            The Prior  Swap,  which was  designated  as a cash flow  hedge,  was
deemed to be a highly  effective  transaction,  and  accordingly the loss on the
derivative instrument was reported as a component of other comprehensive income.
For the nine months ended March 31, 2004 and 2003, the Company recorded $129,000
and $174,000, respectively,  representing  the change in fair value of the Prior
Swap, as other comprehensive income.

            In order to reduce the Company's exposure to increases in Eurodollar
rates, and consequently to increases in interest  payments,  the Company entered
into an interest rate swap  transaction  (the "Swap") on October 2, 2003, in the
amount of $20.0 million ("Notional  Amount") with an effective date of March 15,
2004 and a maturity  date of  September  15,  2005.  Pursuant  to the Swap,  the
Company  pays  a  fixed  interest  rate  of  2.12%  per  annum  and  receives  a
Eurodollar-based  floating  rate.  The effect of the Swap is to  neutralize  any
changes  in  Eurodollar  rates  on the  Notional  Amount.  As the  Swap  was not
effective  until March 15, 2004 and no cash flows were  exchanged  prior to that
date,  the Swap did not meet the  requirements  to be  designated as a cash flow
hedge.  As such, an unrealized  loss of $177,000 was recognized in the Company's
results  of  operations  for the three and nine  months  ended  March 31,  2004,
reflecting  the change in fair value of the Swap from inception to the effective
date. As of March 31, 2004, the Swap met the  requirements to be designated as a
cash flow hedge and is deemed a highly effective transaction.

NOTE 5.     LONG-TERM SUBORDINATED DEBT

            In October 1997,  the Company issued $30.0 million of its 12% Senior
Subordinated  Promissory  Notes (the "1997  Notes") with  interest  only payable
semi-annually  on April 30 and October 31, due October 31, 2004.  The 1997 Notes
were sold with  detachable  seven year  warrants  to purchase  an  aggregate  of
655,738 shares of common stock at an exercise price of $16.40 per share.  At the
date of issuance,  in accordance with APB 14,  "ACCOUNTING FOR CONVERTIBLE  DEBT
AND DEBT ISSUED WITH PURCHASE WARRANTS," the Company allocated proceeds of $29.7
million to the debt and $0.3 million to warrants, with the resulting discount on
the debt referred to as the Original Issue  Discount.  Prior to August 25, 2003,
the Original  Issue  Discount was being  amortized as interest  expense over the
life of the debt,  resulting in an effective  interest rate on the 1997 Notes of
12.1% per annum. The amount allocated to the warrants was credited to Additional
Paid-In Capital. In conjunction with the issuance of the 1997 Notes, the Company
was required to meet certain  affirmative and negative  covenants.  In addition,
NationsBanc Montgomery Securities, Inc., the placement agent, received a warrant
to purchase an aggregate of 30,000  shares of common stock at an exercise  price
of $14.64 per share which expires on October 31, 2004.

            On May 4, 1999, the Company sold an additional  $10.0 million of its
12% Senior  Subordinated  Promissory Notes (the "1999 Notes").  Except for their
October 31, 2005 maturity date, the 1999 Notes were  substantially  identical to
the 1997 Notes described  above.  The 1999 Notes were sold with detachable 6-1/2
year  warrants to purchase an aggregate of 372,892  shares of common stock at an
exercise price of $6.65 per share.

            In return for modifying  certain financial  covenants  governing the
1997 Notes,  the exercise price of 612,053 of the warrants  issued in connection
with the 1997 Notes was reduced to $6.65 per share.  On May 4, 1999, the trading
range of the Company's common stock was $6.44 to $6.88 per share. To assist with
the  valuation of the newly  issued  warrants  and the  repriced  warrants,  the
Company hired an outside  consultant.  Utilizing the  Black-Scholes  Model,  the
warrants  issued  with the 1997 Notes were  valued at $1.26 per  warrant,  or an
aggregate  value of  $773,702,  and the  warrants  issued with the 1999 Notes at
$1.47 per warrant, or an aggregate value of $549,032. Both amounts are reflected
as Additional Paid-In Capital,  offset by the Original Issue Discount,  which is
netted against the outstanding  balance of the 1997 Notes and 1999 Notes.  After
giving effect to the amortization of the Original Issue Discount,  the effective
interest rate on the 1999 Notes was 13.57% per annum.

            During the fiscal year ended June 30,  2002,  65,574 of the warrants
issued in  connection  with the 1997 Notes were  exercised  and  converted  into
shares of the Company's  common stock.  On August 22, 2002, in conjunction  with
the private  placement of 1,663,846  shares of the  Company's  common stock (see
Note 4), the remaining  warrants  issued in conjunction  with the 1997 Notes and
the warrants issued in connection with the 1999 Notes were adjusted  pursuant to
anti-dilution  provisions  to provide for the purchase of an  additional  21,906
shares of the Company's common stock. In addition, in November 2003, warrants to
purchase  24,144 shares of the Company's  common stock issued in connection with
the 1997  Notes were  exercised  pursuant  to the  cashless  exercise  provision
contained in the warrants. In connection with the cashless exercise, warrants to
purchase 26,672 shares of the Company's common stock were canceled.

            As of December 31, 2002,  the Company was in compliance  with all of
the  financial  covenants  under the 1997 Notes and 1999  Notes.  On February 7,

                                       12




2003, the interest  coverage  ratio  governing the 1997 Notes and 1999 Notes was
amended for the quarter ending March 31, 2003 and prospectively. As of March 31,
2003 and June 30, 2003, the Company was in compliance  with all of the financial
covenants under the 1997 Notes and 1999 Notes.

            On August  25,  2003,  concurrently  with the  closing of the Senior
Credit  Facility,  the Company  prepaid the 1997 Notes and 1999 Notes and issued
$30.0 million of the Company's 16.3% Senior  Subordinated Notes Due February 27,
2009 (the "New  Notes")  with  interest  only  payable  quarterly  in arrears on
February 28, May 31, August 31 and November 30 of each year, commencing November
30,  2003.  Interest on the New Notes is 12% per annum  payable in cash and 4.3%
per annum  payable  "in  kind" by adding  the  amount  of such  interest  to the
principal  amount  of the New  Notes  then  outstanding.  Ten year  warrants  to
purchase an  aggregate  of 425,000  shares of the  Company's  common stock at an
exercise price of $8.79 per share were issued in connection  with the New Notes.
Utilizing the  Black-Scholes  Model,  the warrants issued in connection with the
New Notes were valued at $3.70 per warrant, or an aggregate value of $1,573,000.
In addition,  the maturity  date of 665,403  existing  warrants,  335,101 due to
expire in 2004 and 330,302 due to expire in 2005, was extended to February 2009,
resulting in additional value of $1.31 and $0.97 per warrant,  respectively,  or
an aggregate value of $760,090.  At the date of issuance, in accordance with APB
14,  "ACCOUNTING FOR CONVERTIBLE  DEBT AND DEBT ISSUED WITH PURCHASE  WARRANTS,"
the Company allocated  proceeds of $27.7 million to the debt and $2.3 million to
the  warrants,  with  the  resulting  discount  on the debt  referred  to as the
Original  Issue  Discount.  The Original  Issue  Discount is being  amortized as
interest  expense over the life of the debt. As with the Senior Credit Facility,
the Company is required to meet certain affirmative and negative covenants under
the New Notes, including but not limited to financial covenants. As of September
30, 2003,  December 31, 2003 and March 31, 2004,  the Company was in  compliance
with all of the covenants under the New Notes.

            In  connection  with the early  repayment of the 1997 Notes and 1999
Notes, during the first quarter of fiscal 2004, the Company recognized a loss of
$1,018,000  attributable to the  unamortized  financing costs and Original Issue
Discount associated with the 1997 Notes and 1999 Notes, and recorded $581,000 of
financing  costs  associated  with the New Notes.  Such fees are being amortized
over the life of the New Notes. The weighted average effective  interest rate of
the New Notes,  including  the  amortization  of  deferred  financing  costs and
Original Issue Discount, is 18.0%.

NOTE 6.     REDEEMABLE PREFERRED STOCK

            In May 2000,  the  Company  sold  5,000  shares  of its  Series A 8%
Cumulative  Convertible  Preferred  Stock, no par value (the "Series A Preferred
Stock"), for $1,000 per share (the initial "Liquidation Preference"). Cumulative
dividends  are payable  quarterly  in arrears at the rate of 8% per annum on the
Liquidation  Preference,  and, to the extent not paid in cash,  are added to the
Liquidation Preference.  Shares of the Series A Preferred Stock may be converted
into shares of common stock at any time at a current  conversion  price of $9.28
per share.  In  connection  with the sale,  costs in the amount of $65,000  were
charged to paid-in capital.

            In November  2001,  the Company sold 2,500 shares of its Series B 8%
Cumulative  Preferred Stock, no par value (the "Series B Preferred  Stock"),  at
the initial Liquidation  Preference.  Cumulative dividends are payable quarterly
in arrears at the rate of 8% per annum on the  Liquidation  Preference,  and, to
the extent not paid in cash, are added to the Liquidation Preference.  Shares of
the Series B Preferred Stock may be converted into shares of common stock at any
time at a current conversion price of $12.92 per share.

            During the nine months  ended March 31, 2004 and 2003,  the carrying
amount (and Liquidation  Preferences) of the Series A Preferred Stock and Series
B Preferred  Stock  ("Preferred  Stock") was increased by $566,000 and $524,000,
respectively,  for dividends  accrued.  The Preferred Stock shall be mandatorily
redeemed by the Company within 30 days after a Change in Control (as defined) of
the Company (the date of such redemption being the "Mandatory  Redemption Date")
at an amount equal to the then effective Liquidation Preference plus accrued and
unpaid  dividends  thereon from the last dividend  payment date to the Mandatory
Redemption  Date,  plus if the Mandatory  Redemption  Date is on or prior to the
fourth  anniversary  of the issuance of the Preferred  Stock,  the amount of any
dividends  that would have accrued and been payable on the Preferred  Stock from
the Mandatory Redemption Date through the fourth anniversary date.

            In addition,  outstanding  shares of Preferred  Stock vote on an "as
converted  basis" with the holders of the common  stock as a single class on all
matters that the holders of the common stock are entitled to vote upon.

NOTE 7.  STOCK OPTION PLANS

            The Board of Directors  of the Company  adopted the 1995 Option Plan
(the "1995  Plan").  Under the 1995 Plan,  the  Company has  reserved  2,400,000
shares of common stock for employees of the Company. Under the terms of the 1995
Plan,  options granted may be either  incentive  stock options or  non-qualified

                                       13





stock options.  The exercise price of incentive  options shall be at least equal
to 100% of the fair market  value of the  Company's  common stock at the date of
the grant,  and the exercise  price of  non-qualified  stock  options  issued to
employees  may not be less than 75% of the fair  market  value of the  Company's
common  stock at the date of the grant.  The maximum term for all options is ten
years.  Options granted to date generally vest in equal annual installments from
one to five years,  though a limited number of grants were  partially  vested at
the grant date.  The  weighted-average  fair value per share of options  granted
during  the nine  months  ended  March 31,  2004 and 2003 was  $4.02 and  $2.38,
respectively.

            The following summarizes the transactions pursuant to the 1995 Plan:

                                                      Weighted Average
                                       Options       Exercise Price Per        Options
                                     Outstanding         Option              Exercisable
                                     -----------         ------              -----------
Outstanding at June 30, 2002          1,162,450      $   10.15                 503,072
         Granted                        326,350           6.87
         Expired or canceled           (199,780)         11.36
         Exercised                         (500)         11.25
                                      ---------
Outstanding at March 31, 2003         1,288,520      $    9.13                 498,559
                                      =========


Outstanding at June 30, 2003          1,288,520      $    9.13                 640,373
         Granted                        195,200          12.19
         Expired or canceled            (72,500)         12.35
         Exercised                      (47,642)          9.31
                                      ---------
Outstanding at March 31, 2004         1,363,578      $    9.39                 752,376
                                      =========

            The following  table sets forth certain  information as of March 31,
2004:

                                          Options Outstanding                           Options Exercisable
                     -----------------------------------------------------------   ----------------------------------------
Range of Exercise                            Weighted Average   Weighted Average                          Weighted Average
     Prices          Options Outstanding      Remaining Life     Exercise Price    Options Exercisable     Exercise Price
     ------          -------------------      --------------     --------------    -------------------     --------------
$ 0.00 - $ 5.00            150,113                8.01              $ 4.83                  95,361            $ 4.84
$ 5.01 - $10.00            604,215                7.05                7.56                 326,071              7.37
$10.01 - $15.00            609,250                7.48               12.32                 330,944             11.88
                         ---------               -----              ------                --------            ------
                         1,363,578                7.35              $ 9.39                 752,376            $ 9.04
                         ==========              =====              =======               ========            ======

            The Board of Directors of the Company  adopted the Directors'  Stock
Option  Plan  (the   "Directors'   Plan").   Under  the  Directors'  Plan,  each
non-employee  director will receive  options for 6,000 shares of common stock on
the date of his or her first election to the board of directors. In addition, on
the third  anniversary of each  director's  first election to the Board,  and on
each three year anniversary thereafter,  each non-employee director will receive
an  additional  option to purchase  6,000 shares of common  stock.  The exercise
price per share for all options  granted under the Directors' Plan will be equal
to the fair  market  value of the  common  stock  as of the date of  grant.  All
options  vest  in  three  equal  annual  installments  beginning  on  the  first
anniversary of the date of grant. The maximum term for all options is ten years.
The  weighted-average  fair value per share of options  granted  during the nine
months ended March 31, 2004 and 2003 was $4.08 and $2.66, respectively.

            The following summarizes the transactions pursuant to the Directors'
Plan:

                                       14




                                                             Weighted Average
                                           Options          Exercise Price Per       Options
                                         Outstanding              Option           Exercisable
                                         -----------              ------           -----------
Outstanding at June 30, 2002                 60,000               $ 9.15             34,000
         Granted                              6,000                 8.69
         Expired or canceled                     -                    -
         Exercised                               -                    -
                                           --------
Outstanding at March 31, 2003                66,000               $ 9.11             45,998
                                           ========

Outstanding at June 30, 2003                 66,000               $ 9.11             45,997
         Granted                             24,000                13.71
         Expired or canceled                     -                     -
         Exercised                               -                     -
                                           --------
Outstanding at March 31, 2004                90,000               $10.34             59,994
                                           ========

            The following  table sets forth certain  information as of March 31,
2004:

                                             Options Outstanding                          Options Exercisable
                      -------------------------------------------------------------  ---------------------------------------
Range of Exercise                             Weighted Average     Weighted Average                        Weighted Average
      Prices          Options Outstanding     Remaining Life       Exercise Price    Options Exercisable    Exercise Price
      ------          -------------------     --------------       --------------    -------------------    --------------
$  5.01 - $10.00             42,000               5.55                 $ 7.46              37,998               $ 7.34
$ 10.01 - $15.00             36,000               7.64                  11.89              18,000                12.27
$ 15.01 - $20.00             12,000               9.94                  15.74               3,996                15.74
                            -------              -----                 ------             -------               ------
                             90,000               6.97                 $10.34              59,994               $ 9.38
                            =======              =====                 =======            =======               ======

            Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED  COMPENSATION"  ("SFAS  123"),  defines a fair value based method of
accounting for stock  options.  SFAS 123 allows an entity to continue to measure
cost using the accounting method  prescribed by APB Opinion No. 25,  "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES"  ("APB 25") and to make pro forma  disclosures of
net  income  and  earnings  per  share  as if the fair  value  based  method  of
accounting had been applied. The fair value of each option grant is estimated on
the  date of  grant  using  the  Black-Scholes  option  pricing  model  with the
weighted-average  assumptions,  expected volatility and risk-free interest rate,
as listed in the table below.  The  following  table (in  thousands,  except per
share  amounts)  illustrates  the effect on net income and earnings per share if
the Company had applied  the fair value  recognition  provisions  of SFAS 123 to
stock-based compensation. However, no stock based compensation was recognized in
the financial statements pursuant to APB 25.

                                       15





                                                Three Months Ended       Nine Months Ended
                                                      March 31,               March 31,
                                                --------------------     --------------------
                                                  2004        2003         2004          2003
                                                  ----        ----         ----          ----
Net income (loss), as reported                  $ 1,072      $  (777)     $   427      $(5,201)
Less:
   Stock-based compensation
       - fair value measurement                    (419)        (353)        (891)        (812)
                                                -------      -------      -------      -------
Net income (loss), pro forma                        653       (1,130)        (464)      (6,013)
Preferred stock dividends                          (193)        (178)        (566)        (524)
                                                -------      -------      -------      -------
Net income (loss) available to
       common shareholders - pro forma          $   460      $(1,308)     $(1,030)     $(6,537)
                                                =======      =======      =======      =======

Basic income (loss) per share - reported        $  0.08      $ (0.09)     $ (0.01)     $ (0.55)
                                                =======      =======      =======      =======
Basic income (loss) per share - pro forma       $  0.04      $ (0.12)     $ (0.10)     $ (0.63)
                                                =======      =======      =======      =======

Diluted income (loss) per share - reported      $  0.07      $ (0.09)     $ (0.01)     $ (0.55)
                                                =======      =======      =======      =======
Diluted income (loss) per share - pro forma     $  0.04      $ (0.12)     $ (0.10)     $ (0.63)
                                                =======      =======      =======      =======

Expected volatility                            35% - 40%    37% - 40%    35% - 40%    37% - 40%
Risk free interest rate                       2.6% - 3.6%  2.6% - 2.8%  2.6% - 3.1%  2.6% - 3.2%
Expected dividend yield                          0%           0%           0%           0%
Expected lives                                 3-4 years      4 years    3-4 years    3-4 years


NOTE 8.  COMPREHENSIVE INCOME (LOSS)

         The components of comprehensive income (loss) are as follows for the periods presented:

                                            Three Months Ended March 31,     Nine Months Ended March 31,
                                              2004                2003         2004             2003
                                              ----                ----         ----             ----

Net income (loss)                           $ 1,072             $  (777)     $   427          $(5,201)
Interest rate swap transaction (Note 5)       --                    107          129              174
                                            -------             -------      -------          -------

Comprehensive income (loss)                 $ 1,072             $  (670)     $   556          $(5,027)
                                            =======             =======      =======          =======

                                       16





ITEM 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

            THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE  FORWARD-LOOKING  STATEMENTS.  FACTORS THAT MAY CAUSE SUCH  DIFFERENCES
INCLUDE,  BUT ARE NOT LIMITED TO, OUR EXPANSION  INTO NEW MARKETS,  COMPETITION,
TECHNOLOGICAL ADVANCES, RELIANCE ON KEY SUPPLIERS AND AVAILABILITY OF MANAGERIAL
PERSONNEL.  THE FORWARD-LOOKING  STATEMENTS ARE MADE AS OF THE DATE OF THIS FORM
10-Q AND WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING  STATEMENTS OR TO
UPDATE THE REASONS WHY ACTUAL  RESULTS COULD DIFFER FROM THOSE  PROJECTED IN THE
FORWARD-LOOKING STATEMENTS.

OVERVIEW

            We believe that we are the largest  supplier in the United States of
bulk CO2 systems and bulk CO2 for  carbonating  fountain  beverages based on the
number  of bulk CO2  systems  leased to  customers.  As of March  31,  2004,  we
operated a national  network of 103  service  locations  in 45 states  servicing
approximately  79,000  bulk  and  high  pressure  customers.  Currently,  99% of
fountain beverage users in the continental  United States are within our present
service  area.  Historically,  due  to a  combination  of  internal  growth  and
acquisitions,  we have  experienced  high levels of growth in terms of number of
customers  and net sales,  averaging 20% to 50% per year from 1995 through 2000.
Today,  virtually all of our growth is internal resulting from the conversion of
high pressure CO2 users to bulk CO2 systems and conversions of competitive  bulk
CO2 system users.

            We believe that our future revenue growth, gains in gross margin and
profitability  will be dependent upon (i) increases in route density in existing
markets and the expansion and  penetration of bulk CO2 system  installations  in
new market  regions,  both resulting from  successful  ongoing  marketing,  (ii)
improved  operating  efficiencies  and (iii)  price  increases.  New  multi-unit
placement   agreements   combined  with   single-unit   placements   will  drive
improvements in achieving route density. Our success in reaching multi-placement
agreements is due in part to our national  delivery  system.  We maintain a "hub
and spoke" route structure and establish additional  stationary bulk CO2 service
locations as service areas expand through geographic growth. Our entry into many
states was  accomplished  largely through the  acquisition of businesses  having
thinly  developed route networks.  We expect to benefit from route  efficiencies
and other  economies  of scale as we build  our  customer  base in these  states
through  intensive  regional and local  marketing  initiatives.  Greater density
should also lead to enhanced  utilization of vehicles and other fixed assets and
the ability to spread fixed  marketing and  administrative  costs over a broader
revenue base.

            Generally,  our  experience  has been that as our service  locations
mature their gross profit  margins  improve as a result of their volume  growing
while fixed costs remain essentially unchanged.  New service locations typically
operate at low or negative  gross  margins in the early  stages and detract from
our highly profitable service locations in more mature markets.  During the last
two years, we have experienced a significant  improvement in gross margin due to
net new customer activations and operating improvements,  including efficiencies
in delivery  of product to our  customers,  such as  reductions  in  unscheduled
deliveries,  total miles driven,  miles driven between stops and improvements to
our safety record.  Accordingly, we believe that we are in position to build our
customer  base while  maintaining  and  improving  upon our  superior  levels of
customer service,  with minimal changes required to our support  infrastructure.
We  continue  to be focused on  improving  operating  effectiveness,  increasing
prices for our services and  strengthening  our workforce,  and anticipate  that
these initiatives will contribute positively to all areas of our company.

GENERAL

            Substantially  all of our revenues have been derived from the rental
of bulk CO2 systems  installed at  customers'  sites,  the sale of CO2, and high
pressure  cylinder  revenues.  Revenues  have grown from $47.1 million in fiscal
1999 to $74.4 million in fiscal 2003. We believe that our revenue base is stable
due to the existence of long-term  contracts with our customers  which generally
rollover with a limited number expiring without renewal in any one year. Revenue
growth  is  largely   dependent   on  (1)  the  rate  of  new  bulk  CO2  system
installations, (2) the growth in bulk CO2 sales and (3) price increases.

                                       17





            Consistent  with the capital  intensive  nature of our business,  we
incur significant  depreciation and amortization  expenses.  These stem from the
depreciation   of  our  bulk  CO2  systems  and  related   installation   costs,
amortization of deferred lease  acquisition  costs, and amortization of deferred
financing costs and other intangible assets.

            Cost of products sold is comprised of purchased  CO2,  vehicle,  and
service  location costs associated with the storage and delivery of CO2. Cost of
equipment  rentals is  comprised of costs  associated  with  customer  equipment
leases.  Selling,  general  and  administrative  expenses  consist  of wages and
benefits, dispatch and communications costs, as well as expenses associated with
marketing, administration, accounting and administrative employee training. With
respect to bulk CO2 systems,  we capitalize costs based on a standard amount per
installation  that are associated  with specific  installations  of such systems
with customers  under  non-cancelable  contracts and which would not be incurred
but for a successful placement.  Costs incurred in excess of the standard amount
per installation, if any, are expensed in the statement of operations. All other
service, marketing and administrative costs are expensed as incurred.

RESULTS OF OPERATIONS

            The  following  table sets  forth,  for the periods  indicated,  the
percentage relationship which the various items bear to total revenues:

                                             Three Months Ended March 31,    Nine Months Ended March 31,
                                             ----------------------------    ---------------------------
Income Statement Data:                              2004      2003                2004       2003
                                                    ----      ----                ----       ----

Product sales                                       61.6%     60.7%               61.2%      61.7%
Equipment rentals                                   38.4      39.3                38.8       38.3
                                                   -----     ------              ------     -----
Total revenues                                     100.0     100.0               100.0      100.0

Cost of products sold, excluding
    depreciation and amortization                   41.7      43.4                42.4       43.0
Cost of equipment rentals, excluding
    depreciation and amortization                    3.1       4.3                 3.1        5.3
Selling, general and administrative expenses        18.7      20.9                19.3       24.7
Depreciation and amortization                       18.8      23.8                19.2       23.8
Loss on asset disposals                              1.6       1.9                 1.8        2.2
                                                 -------    ------               -----      -----
Operating income (loss)                             16.1       5.7                14.2        1.0
Loss on early extinguishment of debt                  -         -                  3.3         -
Unrealized loss on financial instrument              0.9        -                  0.3         -
Interest expense                                     9.9       9.9                 9.9       10.4
                                                 -------    ------               -----      -----

Net income (loss) before income taxes                5.3      (4.2)                0.7       (9.4)
Provision for income taxes                            -         -                   -          -
                                                 -------    ------               -----      -----
Net income (loss)                                    5.3%     (4.2)%               0.7%      (9.4)%
                                                 =======    ======               =====      =====

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

TOTAL REVENUES

            Total  revenues  increased  by $1.7  million,  or 9.4%,  from  $18.3
million in 2003 to $20.1 million in 2004. Revenues derived from our bulk service
plans  increased by $1.8 million,  or 9.9%,  due to an increase in the number of
accounts  and the sale of gases  other  than  CO2,  partially  offset by the net
impact of a $0.1 million decrease in revenue derived from a decrease in CO2 sold
and a reduction  in pricing of CO2 to the average  customer  under our  variable
product purchase plans,  which includes our equipment lease and product purchase
plans, and the adoption of EITF 00-21 in July 2003.

            We adopted EITF 00-21  effective  in July 2003,  resulting in a $0.3
million  reduction in revenue in 2004. Had we adopted EITF 00-21 in 2003,  total
revenues  recognized  for the three  months  ended  March 31,  2003  would  have
decreased by $0.3 million to $18.0 million.  The following table sets forth, for
the periods indicated,  the percentage relationship which our service plans bear
to total revenues:

                                       18




                                          Three Months Ended March 31,
                                          ----------------------------
Service Plan                                   2004          2003
                                               ----          ----
Bulk budget plan(1)                            60.7%         66.0%
Equipment lease/product purchase plan(2)       12.3           8.9
Product purchase plan(3)                        9.0           8.2
High pressure cylinder(4)                       6.1           6.1
Other revenues(5)                              11.9          10.8
                                              -----         -----
                                              100.0%        100.0%
                                              ======        ======

        (1) Combined fee for bulk CO2 tank and bulk CO2.
        (2) Fee for bulk CO2 tank and, separately, bulk CO2 usage.
        (3) Bulk CO2 only.
        (4) High pressure CO2 cylinders and non-CO2 gases.
        (5) Surcharges and other charges.

            During  fiscal  2002,  we  adopted  a plan to phase  out  those
            customers that use only high pressure  cylinders and who do not
            utilize one of our bulk CO2  service  plans.  Revenues  derived
            from our stand-alone high pressure  cylinder  customers may not
            be fully eliminated from our ongoing  revenues  inasmuch as our
            goal is to convert these  customers to a bulk CO2 service plan.
            Accordingly,  the  expected  declining  revenues  derived  from
            stand-alone high pressure cylinder customers is not expected to
            have a material impact on our results of operations.

            PRODUCT  SALES - Revenues  derived from the product sales portion of
our service contracts increased by $1.3 million, or 11.0%, from $11.1 million in
2003 to $12.4  million  in  2004.  The  increase  in  revenues  is due to a 8.2%
increase in the number of customer  locations  serviced  and a 2.0%  increase in
bulk CO2 used by the average customer. In addition,  sales of gases and services
other than CO2, increased by 2.6% compared to last year.

            EQUIPMENT  RENTALS - Revenues  derived from the lease portion of our
service contracts  increased by $0.5 million, or 7.0%, from $7.2 million in 2003
to $7.7  million  in 2004,  primarily  due to a 7.6%  increase  in the number of
customers leasing equipment from us and price increases to a significant  number
of our customers,  consistent with the Consumer Price Index, offset by incentive
pricing provided to multiple  national  restaurant  organizations  utilizing our
equipment under the equipment lease/product purchase plan.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

            Cost of products  sold  increased  from $8.0 million in 2003 to $8.4
million in 2004, while decreasing as a percentage of product sales from 71.5% to
67.6%, due in large part to efficiencies realized in the cost of delivery, fleet
costs,  workers'  compensation  and safety,  discussed in further  detail below.
Product  costs  increased  by $0.43  million,  from $2.6 million in 2003 to $2.9
million in 2004.  The base price with our primary  supplier of CO2  increased by
the Producer Price Index, while the volume of CO2 sold by us increased by 10.7%.

            Operational  costs,  primarily wages and benefits related to cost of
product  sold,  increased  from $3.1  million  in 2003 to $3.4  million in 2004,
primarily due to an increase in route driver costs. As of March 31, 2004, we had
271 drivers as compared to 249 last year, primarily  representing the filling of
open positions. However, some of the headcount increase in drivers was offset by
a reduction in depot and regional management  headcount.  In addition,  while we
have  realized a  substantial  savings in worker's  compensation  costs due to a
reduction in claims and severity,  we continue to experience  higher health care
costs, generally due to market conditions.

            Truck delivery expenses  decreased from $1.5 million in 2003 to $1.3
million in 2004.  Increases in fuel costs were more than offset by a decrease in
insurance  and repair  costs.  In  addition,  we have been able to minimize  the
impact of increased  fuel costs and variable lease costs  associated  with truck
usage by  continuing  to  improve  efficiencies  in the  timing  and  routing of
deliveries.  Unscheduled  deliveries  so far this  year  improved  over the same
period of the prior year by 21% while  total  miles  driven  remained  flat on a
customer base that increased by 7.6%.  Improvements  in our safety record during
the nine months of this fiscal year have resulted in a significant  reduction in
the amount of workers' compensation and vehicle accident claims expense.

            Occupancy  and shop costs  related to cost of products sold remained
steady at $0.8 million in both 2003 and 2004.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

            Cost of equipment rentals,  excluding depreciation and amortization,
decreased  by $0.2  million  from $0.8  million in 2003 to $0.6 million in 2004,
while deceasing as a percentage of equipment  rental revenue from 11.0% to 8.1%.

                                       19





The  reduction  in cost of equipment  rentals  reflected in expense is primarily
attributable  to a greater  percentage of costs being  capitalized in connection
with  our  bulk  CO2  systems  due to  increased  efficiency  of  our  technical
installers and the number of new  activations.  In addition,  occupancy and shop
costs related to cost of equipment  rentals  decreased from $0.5 million in 2003
to  $0.4  million  in  2004,  as  we  continued  to  realize   savings  in  tank
refurbishment and repair costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling,  general  and  administrative  expenses  decreased  by $0.1
million from $3.8 million in 2003 to $3.7 million in 2004, while decreasing as a
percentage of total revenues from 20.9% in 2003 to 18.7% in 2004.

            Selling related expenses  remained  constant at $0.7 million in both
2003 and 2004.  Wages and related  benefits  decreased  by $0.1 million due to a
reduction in the headcount of our sales organization in February 2003, offset by
increased advertising costs.

            General and administrative  expenses  decreased by $0.1 million,  or
2.6%,  from $3.1 million in 2004 to $3.0  million in 2004.  An increase in wages
related  expenses,  primarily  due  to  increased  health  care  costs  and  the
recognition   of   incentive   wages  to  be  paid  based  on   achievement   of
pre-established  performance  targets,  were more than offset by a $0.2  million
reduction in consulting and recruiting  expenses and a $0.1 million reduction in
expenses related to uncollectible  accounts  receivable.  During fiscal 2003, we
initiated   numerous   procedures  to  improve  our  review  and  collection  of
outstanding  accounts  receivable.  Consulting fees decreased,  primarily due to
non-recurring fees incurred during the first seven months of 2003 for repairs of
certain  systems,  improvements  in our processes to track and collect  customer
receivables, and other process improvements.

DEPRECIATION AND AMORTIZATION

            Depreciation and amortization decreased from $4.4 million in 2003 to
$3.8  million in 2004.  As a  percentage  of total  revenues,  depreciation  and
amortization expense decreased from 23.8% in 2003 to 18.8% in 2004.

            Depreciation  expense  decreased  from $3.6  million in 2003 to $3.3
million in 2004.  As we  continue  with our plan to  replace  all 50 and 100 lb.
tanks over the next three years,  depreciation  expense from these tanks,  whose
expected  useful lives were  shortened to coincide  with the  replacement  plan,
resulted in depreciation expense of $0.2 million in 2004, down from $0.3 million
in 2003.

            Amortization  expense  decreased  from $0.8  million in 2003 to $0.5
million in 2004.  This  decrease is due to a reduction  in the  amortization  of
deferred charges from our current  financing  arrangements  effective August 25,
2003 as compared to the  amortization of fees related to our previous  financing
arrangements,  and to the  amortization  of customer  lists,  many of which were
fully amortized as of March 31, 2003.

LOSS ON ASSET DISPOSALS

            Loss on asset disposals  decreased from $0.4 million in 2003 to $0.3
million in 2004, while decreasing as a percentage of total revenues from 1.9% to
1.6%.

OPERATING INCOME

            For the reasons previously discussed,  operating income increased by
$2.2 million from $1.0 million in 2003 to $3.2 million in 2004.  As a percentage
of total revenues, operating income improved from 5.7% in 2003 to 16.1% in 2004.

UNREALIZED LOSS ON FINANCIAL INSTRUMENT

            In order to reduce our exposure to increases in Eurodollar  interest
rates, and consequently to increases in interest  payments,  on October 2, 2003,
we entered into an interest rate swap  transaction (the "Swap") in the amount of
$20.0 million (the "Notional  Amount") with an effective date of March 15, 2004.
Pursuant  to the  Swap,  we pay a fixed  interest  rate of 2.12%  per  annum and
receive  a  Eurodollar-based  floating  rate.  The  effect  of  the  Swap  is to
neutralize any changes in Eurodollar rates on the Notional  Amount.  As the Swap
was not effective until March 15, 2004 and no cash flows were exchanged prior to
that date,  the Swap did not meet the  requirements  to be  designated as a cash
flow hedge.  As such,  an  unrealized  loss of $177,000  was  recognized  in our
results of operations for the three months ended March 31, 2004,  reflecting the
change in fair value of the Swap from  inception to the  effective  date.  As of
March 31, 2004,  the Swap met the  requirements  to be designated as a cash flow
hedge and is deemed a highly effective transaction.

                                       20





INTEREST EXPENSE

            Interest expense increased from $1.8 million in 2003 to $2.0 million
in 2004,  while  remaining  constant at 9.9% of total  revenues in both 2003 and
2004.  The effective  interest rate of our debt  increased  from 10.0% to 11.3%,
primarily due to the terms of our refinancing in August 2003.

INCOME (LOSS) BEFORE TAXES

            See discussion of Net Income (Loss).

PROVISION FOR INCOME TAXES

            No provision  for income tax expense has been made due to historical
net losses.  At March 31, 2004,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $100 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying  amounts through June 2023.  However,  we may begin to incur
tax  expense  for the  alternative  minimum  tax ("AMT") as and when we generate
taxable income.

NET INCOME (LOSS)

            For the reasons  described  above,  net income (loss)  improved from
$(0.8) million in 2003 to $1.1 million in 2004.

EBITDA

            Earnings  before  interest,  taxes,  depreciation  and  amortization
("EBITDA")  is one of the principal  financial  measures by which we measure our
financial  performance.  EBITDA is a widely accepted financial indicator used by
many  investors,  lenders and  analysts to analyze and compare  companies on the
basis of  operating  performance,  and we believe  that EBITDA  provides  useful
information  regarding  our ability to service  our debt and other  obligations.
However,  EBITDA does not represent cash flow from  operations,  nor has it been
presented as a substitute to operating income or net income as indicators of our
operating  performance.  EBITDA excludes significant costs of doing business and
should not be  considered  in  isolation  or as a  substitute  for  measures  of
performance prepared in accordance with accounting principles generally accepted
in the United States of America.  In addition,  our calculation of EBITDA may be
different  from  the  calculation  used  by  our   competitors,   and  therefore
comparability  may be  affected.  In  addition,  our lenders  also use EBITDA to
assess our compliance with debt covenants.  These financial  covenants are based
on a  measure  that  is not  consistent  with  accounting  principles  generally
accepted in the United States of America. Such measure is EBITDA (as defined) as
modified by certain defined adjustments.

            EBITDA, as set forth in the table below (in thousands), increased by
$1.6  million,  or 29.7%,  from $5.4 million in 2003 to $7.0 million in 2004 and
increased as a percentage of total revenues from 29.4% to 34.9%.

                                       Three Months Ended March 31,
                                       ----------------------------
                                        2004                  2003
                                      -------               -------
Net income (loss)                     $ 1,072               $  (777)
Interest expense                        1,980                 1,823
Depreciation and amortization           3,776                 4,355
Unrealized loss on financial
    instrument                            177                   -
                                      -------               -------
EBITDA                                $ 7,005               $ 5,401
                                      =======               =======

Cash flows provided by (used in):
  Operating activities                $ 6,895               $ 7,601
  Investing activities                $(4,047)              $(3,460)
  Financing activities                $(2,758)              $(3,818)

NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003

TOTAL REVENUES

            Total  revenues  increased  by $4.7  million,  or 8.4%,  from  $55.1
million in 2003 to $59.8 million in 2004. Revenues derived from our bulk service
plans  increased by $5.6 million,  or 10.1%, of which $4.3 million was due to an
increase in the number of accounts  and $1.3  million to an increase in the sale

                                       21





of gases and services other than CO2. These  increases were partially  offset by
the net impact of a $1.0 million  decrease in revenue derived from a decrease in
CO2 sold and pricing of CO2 to the average  customer under our variable  product
purchase plans, which includes our equipment lease and product purchase plans.

            The net impact of the  adoption  of EITF 00-21 to 2004 was to reduce
revenue  under our bulk  budget  plans by $37,000.  While we adopted  EITF 00-21
effective in July 2003,  the net impact to 2003 would had been to reduce revenue
under the bulk budget plans by $55,000.  The following table sets forth, for the
periods indicated,  the percentage  relationship in which our service plans bear
to total revenues:

                                            Nine Months Ended March 31,
                                            ---------------------------
Service Plan                                    2004       2003
                                                ----       -----
Bulk budget plan(1)                             61.7%      66.5%
Equipment lease/product purchase plan(2)        11.9        8.0
Product purchase plan(3)                         8.8        8.5
High pressure cylinder(4)                        6.1        6.2
Other revenues(5)                               11.5       10.8
                                             -------    -------
                                               100.0%     100.0%
                                             =======    =======

        (1) Combined fee for bulk CO2 tank and bulk CO2.
        (2) Fee for bulk CO2 tank and, separately, bulk CO2 usage.
        (3) Bulk CO2 only.
        (4) High pressure CO2 cylinders and non-CO2 gases.
        (5) Surcharges and other charges.

            During  fiscal  2002,  we  adopted  a plan to phase  out  those
            customers that use only high pressure  cylinders and who do not
            utilize one of our bulk CO2  service  plans.  Revenues  derived
            from our stand-alone high pressure  cylinder  customers may not
            be fully eliminated from our ongoing  revenues  inasmuch as our
            goal is to convert these  customers to a bulk CO2 service plan.
            Accordingly,  the  expected  declining  revenues  derived  from
            stand-alone high pressure cylinder customers is not expected to
            have a material impact on our results of operations.

            PRODUCT  SALES - Revenues  derived from the product sales portion of
our service contracts  increased by $2.6 million, or 7.6%, from $34.0 million in
2003 to $36.6  million  in  2004.  The  increase  in  revenues  is due to a 8.0%
increase in the number of customer locations serviced and a 0.9% increase in CO2
used by the average  customer.  In addition,  sales of gases and services  other
than CO2,  increased by 2.3%  compared to last year.  All of this was  partially
offset by a 2.2% decrease in pricing of CO2. This decrease in pricing was due in
large  part to  incentive  pricing  provided  to  multiple  national  restaurant
organization  utilizing both our equipment  lease/product  purchase, and product
only purchase plans.

            EQUIPMENT  RENTALS - Revenues  derived from the lease portion of our
service contracts increased by $2.1 million, or 9.8%, from $21.1 million in 2003
to $23.2  million in 2004,  primarily  due to a 6.9%  increase  in the number of
customers leasing equipment from us and price increases to a significant  number
of our customers,  consistent with the Consumer Price Index, partially offset by
incentive  pricing  provided  to  multiple  national  restaurant   organizations
utilizing our equipment under the equipment lease/product purchase plan.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

            Cost of products sold  increased from $23.7 million in 2003 to $25.4
million in 2004, while decreasing as a percentage of product sales from 69.7% to
69.3%. Product costs increased by $1.1 million from $8.1 million in 2003 to $9.2
million in 2004.  The base price with our primary  supplier of CO2  increased by
the Producer Price Index, while the volume of CO2 sold by us increased by 10.1%,
primarily due to an 8.0% increase in our customer base.

            Operational  costs,  primarily wages and benefits related to cost of
products  sold,  increased  from $9.4 million in 2003 to $10.1  million in 2004,
primarily due to an increase in route driver costs. As of March 31, 2004, we had
271 drivers as compared to 249 last year, primarily  representing the filling of
open positions. However, some of the headcount increase in drivers was offset by
a reduction in depot and regional management  headcount.  In addition,  while we
have  realized a  substantial  savings in worker's  compensation  costs due to a
reduction in claims and severity,  we continue to experience  higher health care
costs, generally due to market conditions.

            Truck delivery expenses  decreased from $3.9 million in 2003 to $3.8
million in 2004. Increases in lease costs were more than offset by a decrease in
insurance  and repair  costs.  In  addition,  we have been able to minimize  the
impact of increased  fuel costs and variable lease costs  associated  with truck

                                       22





usage by  continuing  to  improve  efficiencies  in the  timing  and  routing of
deliveries.  Unscheduled  deliveries  so far this  year  improved  over the same
period of the prior year by 17% while  total  miles  driven  remained  flat on a
customer base that increased by 8.0%.  Improvements  in our safety record during
the nine months of this fiscal year have resulted in a significant  reduction in
the amount of workers' compensation and vehicle accident claims expense.

            Occupancy  and shop costs  related to cost of products sold remained
constant at $2.3 million in both 2003 and 2004.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

            Cost of equipment rentals,  excluding depreciation and amortization,
decreased  by $1.1  million  from $2.9  million in 2003 to $1.8 million in 2004,
while deceasing as a percentage of equipment  rental revenue from 13.8% to 8.0%.
The  reduction  in cost of equipment  rentals  reflected in expense is primarily
attributable  to a greater  percentage of costs being  capitalized in connection
with  our  bulk  CO2  systems  due to  increased  efficiency  of  our  technical
installers and the number of new  activations.  In addition,  occupancy and shop
costs related to cost of equipment  rentals  decreased from $0.9 million in 2003
to $0.6 million in 2004, as we continue to realize savings in tank refurbishment
and repair costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling,  general  and  administrative  expenses  decreased  by $2.1
million from $13.6 million in 2003 to $11.5 million in 2004, while decreasing as
a percentage of total revenues from 24.7% in 2003 to 19.3% in 2004.

            Selling  related  expenses  decreased  by $0.4  million,  from  $2.7
million in 2003 to $2.3 million in 2004,  primarily  the result of a decrease in
wages and related  benefits  due to a reduction  in the  headcount  of our sales
organization in February 2003.

            General and administrative  expenses  decreased by $1.7 million,  or
15.0%,  from $10.9 million in 2003 to $9.2 million in 2004. This  improvement is
due to a $0.5 million  reduction of  administrative  and executive wages, a $0.5
million reduction in expenses related to uncollectible  accounts  receivable,  a
$0.2 million reduction in outside contract labor and a $0.7 million reduction in
consulting and recruiting  expenses,  offset by a $0.2 million increase in other
general  expenses.  During  fiscal 2003,  we initiated  numerous  procedures  to
improve our review and collection of outstanding accounts receivable. Consulting
fees decreased,  primarily due to  non-recurring  fees incurred during the first
seven months of fiscal 2003 for repairs of certain systems,  improvements in our
processes  to  track  and  collect  customer  receivables,   and  other  process
improvements.

DEPRECIATION AND AMORTIZATION

            Depreciation and  amortization  decreased from $13.2 million in 2003
to $11.5 million in 2004. As a percentage of total  revenues,  depreciation  and
amortization expense decreased from 23.8% in 2003 to 19.2% in 2004.

            Depreciation  expense  decreased from $10.5 million in 2003 to $10.0
million in 2004.  As we  continue  with our plan to  replace  all 50 and 100 lb.
tanks over the next three years,  depreciation  expense from these tanks,  whose
expected  useful lives were  shortened to coincide  with the  replacement  plan,
resulted in depreciation expense of $0.7 million in 2004, down from $1.0 million
in 2003.

            Amortization  expense  decreased  from $2.7  million in 2003 to $1.5
million in 2004.  This  decrease is due to a reduction  in the  amortization  of
deferred charges from our current  financing  arrangements  effective August 25,
2003 as compared to the  amortization of fees related to our previous  financing
arrangements,  and to the  amortization  of customer  lists,  many of which were
fully amortized as of March 31, 2003.

LOSS ON ASSET DISPOSALS

            Loss on asset disposals  decreased from $1.2 million in 2003 to $1.0
million in 2004, while decreasing as a percentage of total revenues from 2.2% to
1.8%.

OPERATING INCOME

            For the reasons previously discussed,  operating income increased by
$8.0 million from $0.5 million in 2003 to $8.5 million in 2004.  As a percentage
of total revenues, operating income improved from 1.0% in 2003 to 14.2% in 2004.

                                       23





LOSS ON EARLY EXTINGUISHMENT OF DEBT

            In the first quarter of fiscal 2004, we accelerated  the recognition
of $1.5 million in deferred  financing costs  associated with the refinancing of
our  long-term  debt.  In  addition,  we  accelerated  the  recognition  of  the
unamortized  portion of the  Original  Issue  Discount  associated  with our 12%
Senior  Subordinated  Promissory Notes,  $0.4 million,  and paid $0.1 million in
conjunction with the early termination of an interest rate swap agreement.

UNREALIZED LOSS ON FINANCIAL INSTRUMENT

            In order to reduce our exposure to increases in Eurodollar  interest
rates, and consequently to increases in interest  payments,  on October 2, 2003,
we entered into an interest rate swap  transaction (the "Swap") in the amount of
$20.0 million (the "Notional  Amount") with an effective date of March 15, 2004.
Pursuant  to the  Swap,  we pay a fixed  interest  rate of 2.12%  per  annum and
receive  a  Eurodollar-based  floating  rate.  The  effect  of  the  Swap  is to
neutralize any changes in Eurodollar rates on the Notional  Amount.  As the Swap
was not effective until March 15, 2004 and no cash flows were exchanged prior to
that date,  the Swap did not meet the  requirements  to be  designated as a cash
flow hedge.  As such,  an  unrealized  loss of $177,000  was  recognized  in our
results of operations  for the nine months ended March 31, 2004,  reflecting the
change in fair value of the Swap from  inception to the  effective  date.  As of
March 31, 2004,  the Swap met the  requirements  to be designated as a cash flow
hedge and is deemed a highly effective transaction.

INTEREST EXPENSE

            Interest expense increased from $5.7 million in 2003 to $5.9 million
in 2004,  while  decreasing as a percentage of total revenues from 10.4% in 2003
to 9.9% in 2004. The effective  interest rate of our debt increased from 9.8% to
11.1%, primarily due to the terms of our refinancing in August 2003.

INCOME (LOSS) BEFORE TAXES

            See discussion of Net Income (Loss).

PROVISION FOR INCOME TAXES

            No provision  for income tax expense has been made due to historical
net losses.  At March 31, 2004,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $100 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying amounts through June 2023. However, we may begin to incur tax
expense for the alternative  minimum tax ("AMT") as and when we generate taxable
income.

NET INCOME (LOSS)

            For the reasons  described  above,  net income (loss)  improved from
$(5.2) million in 2003 to $0.4 million in 2004.

EBITDA

            Earnings  before  interest,  taxes,  depreciation  and  amortization
("EBITDA")  is one of the principal  financial  measures by which we measure our
financial  performance.  EBITDA is a widely accepted financial indicator used by
many  investors,  lenders and  analysts to analyze and compare  companies on the
basis of  operating  performance,  and we believe  that EBITDA  provides  useful
information  regarding  our ability to service  our debt and other  obligations.
However,  EBITDA does not represent cash flow from  operations,  nor has it been
presented as a substitute to operating income or net income as indicators of our
operating  performance.  EBITDA excludes significant costs of doing business and
should not be  considered  in  isolation  or as a  substitute  for  measures  of
performance prepared in accordance with accounting principles generally accepted
in the United States of America.  In addition,  our calculation of EBITDA may be
different  from  the  calculation  used  by  our   competitors,   and  therefore
comparability  may be  affected.  In  addition,  our lenders  also use EBITDA to
assess our compliance with debt covenants.  These financial  covenants are based
on a  measure  that  is not  consistent  with  accounting  principles  generally
accepted in the United States of America. Such measure is EBITDA (as defined) as
modified by certain defined adjustments.

            EBITDA, as set forth in the table below (in thousands), increased by
$6.3 million,  or 45.7%, from $13.7 million in 2003 to $20.0 million in 2004 and
increased as a percentage of total revenues from 24.9% to 33.4%.

                                       24





                                        Nine Months Ended March 31,
                                        ---------------------------
                                           2004            2003
                                           ----            -----
Net (loss)                               $    427      $ (5,201)
Interest expense                            5,927         5,745
Depreciation and amortization              11,481        13,171
Unrealized loss on financial instrument       177          --
Loss on early extinguishment of debt        1,964          --
                                         --------      --------
EBITDA                                   $ 19,976      $ 13,715
                                         ========      ========

Cash flows provided by (used in):
  Operating activities                   $ 14,289      $ 11,097
  Investing activities                   $(11,733)     $(10,612)
  Financing activities                   $ (2,719)     $ (1,530)

LIQUIDITY AND CAPITAL RESOURCES

            Our  cash   requirements   consist   principally   of  (1)   capital
expenditures  associated  with  purchasing and placing new bulk CO2 systems into
service  at  customers'  sites;  (2)  payments  of  principal  and  interest  on
outstanding indebtedness; and (3) working capital. Whenever possible, we seek to
obtain the use of  vehicles,  land,  buildings,  and other  office  and  service
equipment under operating leases as a means of conserving  capital.  As of March
31, 2004, we anticipated making cash capital expenditures of approximately $18.0
million over the next twelve months, primarily for purchases of bulk CO2 systems
for new customers,  the  replacement  with larger bulk CO2 systems of 50 and 100
lb. bulk CO2 systems in service at existing  customers and replacement units for
our truck fleet.  In June 2002,  we adopted a plan to replace all 50 and 100 lb.
bulk CO2 systems in service at customers over a three to four year period. While
this decision may not increase  revenues  generated from these customers,  it is
expected to improve  operating  efficiencies,  gross margins and  profitability.
Once bulk CO2 systems are placed into service, we generally  experience positive
cash  flows  on a  per-unit  basis,  as there  are  minimal  additional  capital
expenditures   required  for  ordinary   operations.   In  addition  to  capital
expenditures related to internal growth, we review opportunities to acquire bulk
CO2 service  accounts,  and may require cash in an amount  dictated by the scale
and terms of any such transactions successfully concluded.

            On  September  24,  2001,  we entered  into a $60.0  million  second
amended  and  restated  revolving  credit  facility  with a  syndicate  of banks
("Amended  Credit  Facility").  This new facility  replaced our prior  facility,
which was due to expire in May 2002. We were  required to assess our  compliance
with our debt covenants under the Amended Credit Facility on a quarterly  basis.
These  financial  covenants were based on a measure that was not consistent with
accounting  principles generally accepted in the United States of America.  Such
measure was EBITDA (as defined),  which  represented  earnings before  interest,
taxes,  depreciation  and  amortization,  as further modified by certain defined
adjustments.  The failure to meet these covenants, absent a waiver or amendment,
would have  placed us in  default  and  caused  the debt  outstanding  under the
Amended Credit Facility to become immediately due and payable.

            Prior to June 30, 2002, the Amended  Credit  Facility was amended to
adjust  certain  financial  covenants  for the quarter  ended March 31, 2002 and
prospectively, and non-compliance with the minimum EBITDA covenant for the three
months  ended  March 31, 2002 was waived.  As of June 30,  2002,  we were not in
compliance with certain of the financial  covenants.  On September 27, 2002, the
Amended Credit  Facility was amended to adjust certain  financial  covenants for
the quarter  ended June 30,  2002,  and  prospectively,  and the maturity of the
Amended  Credit  Facility was extended to November 17, 2003. As of September 30,
2002,  we were in  compliance  with all of the  financial  covenants  under  the
Amended Credit  Facility.  On February 7, 2003, the Amended Credit  Facility was
amended to adjust certain financial covenants for the quarter ended December 31,
2002 and prospectively,  non-compliance with the minimum EBITDA covenant for the
three  months ended  December  31, 2002 was waived,  the maturity of the Amended
Credit  Facility was extended to April 29, 2004, and the Amended Credit Facility
was reduced to $45.0 million. As of March 31, 2003 and June 30, 2003, we were in
compliance  with  all  of the  financial  covenants  under  the  Amended  Credit
Facility.

            On August 22, 2002, we completed the private  placement of 1,663,846
shares of our Common  Stock to 24  accredited  investors at a price of $9.75 per
share  realizing  net cash  proceeds of  approximately  $15.1 million after $1.1
million of issuance  costs.  Pursuant to the  requirements of the Amended Credit
Facility,  we used $14.5  million of the proceeds to pay down  outstanding  debt
under the Amended Credit Facility.

            On August 25, 2003, we terminated  the Amended  Credit  Facility and
entered into a $50.0 million  senior  credit  facility with a syndicate of banks
(the "Senior Credit  Facility").  The Senior Credit Facility consists of a $30.0

                                       25


million A term loan  facility  (the "A Term Loan"),  a $10.0 million B term loan
facility (the "B Term Loan"),  and a $10.0 million  revolving loan facility (the
"Revolving  Loan  Facility").  The A Term Loan matures on August 25, 2007, the B
Term Loan matures on August 25, 2008 and the Revolving Loan Facility  matures on
August 25,  2007.  The B Term Loan is  subordinate  in right of payment to the A
Term Loan and  borrowings  under the  Revolving  Loan  Facility.  The Company is
entitled to select either  Eurodollar  Loans (as defined) or Base Rate Loans (as
defined),  plus applicable  margin,  for principal  borrowings  under the Senior
Credit  Facility.  The  applicable  Eurodollar  Loan margin for A Term Loans and
borrowings pursuant to the Revolving Loan Facility ranges from 3.5% to 4.0%, and
the  applicable  Base Rate Loan margin  ranges from 2.5% to 3.0%,  provided that
until delivery to the lenders of our financial statements for the quarter ending
June 30, 2004,  the margin on  Eurodollar  Loans is 4.0% and the margin for Base
Rate Loans is 3.0%.  The  applicable  Eurodollar  Loan margin and Base Rate Loan
margin for B Term  Loans is 7.5% and 6.5%,  respectively.  Applicable  margin is
determined by a pricing grid based on our Consolidated  Total Leverage Ratio (as
defined).  At  closing,  we borrowed  the A Term Loan,  the B Term Loan and $3.0
million under the Revolving Loan Facility.  Interest is payable  periodically on
borrowings under the Senior Credit Facility. In addition, commencing on December
31, 2003 and on the last day of each quarter thereafter, we are required to make
principal repayments of the A Term Loan in increasing amounts. The Senior Credit
Facility is collateralized by all of our assets. Additionally,  we are precluded
from  declaring  or  paying  any  cash  dividends,  except  we  may  accrue  and
accumulate,  but not pay, cash dividends on our outstanding redeemable preferred
stock.

            We are  also  required  to meet  certain  affirmative  and  negative
covenants,  including but not limited to financial covenants. We are required to
assess our compliance  with these  financial  covenants  under the Senior Credit
Facility on a quarterly basis. These financial  covenants are based on a measure
that is not consistent  with  accounting  principles  generally  accepted in the
United States of America. Such measure is EBITDA (as defined),  which represents
earnings before  interest,  taxes,  depreciation  and  amortization,  as further
modified by certain defined  adjustments.  The failure to meet these  covenants,
absent a waiver  or  amendment,  would  place us in  default  and cause the debt
outstanding  under the Senior  Credit  Facility  to  immediately  become due and
payable.  The  Senior  Credit  Facility  also  includes  certain   cross-default
provisions to our 16.3% Senior  Subordinated  Notes Due February 27, 2009. As of
September 30, 2003,  December 31, 2003 and March 31, 2004, we were in compliance
with all of the covenants under the Senior Credit Facility.

            In connection with the  termination of the Amended Credit  Facility,
during the first  quarter of fiscal 2004,  we  recognized a loss of $0.9 million
from the write-off of unamortized  financing  costs  associated with the Amended
Credit Facility and recorded $2.3 million in financing costs associated with the
Senior  Credit  Facility.  Such costs are being  amortized  over the life of the
Senior Credit Facility.

            As of March  31,  2004,  a total of $40.3  million  was  outstanding
pursuant to the Senior Credit Facility with a weighted  average interest rate of
6.1%.

            In  October  1997,  we  issued  $30.0  million  of  our  12%  Senior
Subordinated   Promissory  Notes  ("1997  Notes")  with  interest  only  payable
semi-annually  on April 30 and October 31, due October 31, 2004. On May 4, 1999,
we sold an additional  $10.0 million of our 12% Senior  Subordinated  Promissory
Notes ("1999 Notes").  Except for their October 31, 2005 maturity date, the 1999
Notes were substantially identical to the 1997 Notes. As of June 30, 2002 and at
various  dates in the past we have been unable to meet certain  covenants  under
the 1997 Notes and 1999 Notes and have had to obtain  waivers or  modifications.
On September 27, 2002,  concurrently  with the  amendment to the Amended  Credit
Facility,  certain  financial  covenants  of the 1997  Notes and 1999 Notes were
amended to adjust  certain  financial  covenants  for the quarter ended June 30,
2002,  and  prospectively.  On February 7, 2003,  the  interest  coverage  ratio
governing the 1997 Notes and 1999 Notes was amended for the quarter ending March
31, 2003 and  prospectively.  As of March 31, 2003 and June 30, 2003, we were in
compliance  with all of the  financial  covenants  under the 1997 Notes and 1999
Notes.

            On August  25,  2003,  concurrently  with the  closing of the Senior
Credit  Facility,  we prepaid  the 1997  Notes and 1999  Notes and issued  $30.0
million of our 16.3% Senior  Subordinated  Notes Due February 27, 2009 (the "New
Notes") with interest only payable  quarterly in arrears on February 28, May 31,
August 31 and November 30 of each year,  commencing  November 30, 2003. Interest
on the New Notes is 12% per annum payable in cash and 4.3% per annum payable "in
kind" by adding the amount of such interest to the  principal  amount of the New
Notes then  outstanding.  Ten year  warrants to purchase an aggregate of 425,000
shares of our common  stock at an exercise  price of $8.79 per share were issued
in  connection  with the New  Notes.  Utilizing  the  Black-Scholes  Model,  the
warrants  issued  in  connection  with the New  Notes  were  valued at $3.70 per
warrant, or an aggregate value of $1,573,000.  In addition, the maturity date of
665,403  existing  warrants,  335,101  due to expire in 2004 and  330,302 due to
expire in 2005, was extended to February 2009,  resulting in additional value of
$1.31 and $0.97 per warrant, respectively, or an aggregate value of $760,090. At
the date of issuance,  in accordance  with APB 14,  "ACCOUNTING  FOR CONVERTIBLE
DEBT AND DEBT ISSUED WITH  PURCHASE  WARRANTS,"  we allocated  proceeds of $27.7
million  to the  debt and  $2.3  million  to the  warrants,  with the  resulting
discount on the debt referred to as the Original  Issue  Discount.  The Original

                                       26


Issue Discount is being amortized as interest expense over the life of the debt.
As with the Senior Credit Facility,  we are required to meet certain affirmative
and  negative  covenants  under the New  Notes,  including  but not  limited  to
financial  covenants.  As of September 30, 2003, December 31, 2003 and March 31,
2004, we were in compliance with all of the covenants under the New Notes.

            In  connection  with the early  repayment of the 1997 Notes and 1999
Notes,  during the first  quarter of fiscal  2004 we  recognized  a loss of $1.1
million  attributable  to the  unamortized  financing  costs and Original  Issue
Discount  associated  with the 1997  Notes and 1999  Notes,  and  recorded  $0.5
million of  financing  costs and Original  Issue  Discount  associated  with New
Notes.  Such  fees are  being  amortized  over the  life of the New  Notes.  The
weighted  average  effective  interest  rate of the  New  Notes,  including  the
amortization of deferred financing costs and Original Issue Discount, is 18.0%.

            During the nine months ended March 31, 2004,  our capital  resources
included cash flows from operations and available  borrowing  capacity under the
Senior Credit Facility. We believe that cash flows from operations and available
borrowings  under the Senior Credit Facility will be sufficient to fund proposed
operations for at least the next twelve months.

            The  table  below  sets  forth  our   contractual   obligations  (in
thousands):

Contractual obligations                   Total          Less than 1 Year      2-3 Years         4-5 Years           Thereafter
-----------------------              --------------------------------------------------------------------------------------------
Senior credit facility & other debt      $ 40,521            $ 4,897           $19,732           $ 15,892             $      -
Long-term subordinated debt                30,000                  -                 -             30,000                    -
Employment agreements                       1,397                758               639                  -                    -
Operating leases                           19,590              4,587             7,784              5,034                2,185
                                         --------             ------            ------             ------            ---------
Total obligations                        $ 91,508            $10,242           $28,155           $ 50,926             $  2,185
                                         ========           ========          ========          =========            =========

            In addition,  in May 1997 we entered into a ten-year  exclusive bulk
CO2 requirements contract with The BOC Group, Inc.

            WORKING CAPITAL. At March 31, 2004 and June 30, 2003, we had working
capital of $(2.7) million and $(1.7) million, respectively.

            CASH  FLOWS  FROM  OPERATING  ACTIVITIES.  Cash  flows  provided  by
operations increased by $3.2 million from $11.1 million in 2003 to $14.3 million
in 2004.  The  improvement  is primarily  due to our  improvement  in net income
(excluding non-cash charges) of $6.8 million, partially offset by a $3.6 million
reduction in cash  resulting from changes in the working  capital  components of
our  balance  sheet,  $1.5  million  of which is due to the  timing of  interest
payments.

            CASH FLOWS FROM INVESTING ACTIVITIES. During 2004 and 2003, net cash
used in investing activities was $11.7 million and $10.6 million,  respectively.
These  investing  activities  were primarily  attributable  to the  acquisition,
installation and direct placement costs of bulk CO2 systems.

            CASH FLOWS FROM FINANCING  ACTIVITIES.  During 2004, cash flows used
in financing  activities were $2.7 million  compared to $1.5 million in 2003. In
2004, we refinanced  our debt, as previously  discussed,  receiving  proceeds of
$73.2  million,  paying fees  associated  with the  refinancing of $2.8 million,
while simultaneously paying off our previous financing facilities.

            In 2002, we completed the private  placement of 1,663,846  shares of
our  common  stock to 24  accredited  investors  at a price of $9.75  per  share
realizing net cash proceeds of approximately $15.1 million after $1.1 million of
issuance costs.  Pursuant to the requirements of the Amended Credit Facility, we
used  $14.5  million  of the  proceeds  to pay down  outstanding  debt under the
Amended Credit Facility.

INFLATION

            The modest  levels of  inflation  in the  general  economy  have not
affected  our  results  of  operations.  Additionally,  our  customer  contracts
generally  provide  for annual  increases  in the  monthly  rental rate based on
increases in the consumer price index. We believe that inflation will not have a
material adverse effect on our future results of operations.

            Our bulk CO2  exclusive  requirements  contract  with The BOC Group,
Inc. ("BOC") provides for annual  adjustments in the purchase price for bulk CO2

                                       27

based upon  increases or decreases in the Producer  Price Index for Chemical and
Allied Products or the average percentage  increase in the selling price of bulk
merchant  carbon  dioxide  purchased  by BOC's  large,  multi-location  beverage
customers in the United States.

RECENT ACCOUNTING PRONOUNCEMENTS

            In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES"  ("SFAS 149").  SFAS 149
amends  and  clarifies   financial   accounting  and  reporting  for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts  (collectively  referred to as derivatives) and for hedging activities
under SFAS No. 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and designated hedges after June 30, 2003, except for those
provisions of SFAS 149 which relate to SFAS No. 133  implementation  issues that
have been  effective for fiscal  quarters that began prior to June 15, 2003. For
those issues,  the provisions that are currently in effect should continue to be
applied in  accordance  with their  respective  effective  dates.  In  addition,
certain  provisions of SFAS 149,  which relate to forward  purchases or sales of
when-issued  securities  or other  securities  that do not yet exist,  should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS 149 had no material impact on our financial position,
results of operations or cash flows.

            In May 2003, the FASB issued SFAS No. 150,  "ACCOUNTING  FOR CERTAIN
FINANCIAL  INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES  AND EQUITY"
("SFAS 150").  SFAS 150 establishes  standards for how an issuer  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  SFAS 150 requires  that an issuer  classify a financial  instrument
that is within the scope of SFAS 150 as a liability.  SFAS 150 is effective  for
financial instruments entered into or modified after May 31, 2003, and otherwise
is originally  effective for the first interim period  beginning  after June 15,
2003. The adoption of SFAS 150 had no material impact on our financial position,
results of operations or cash flows.

            On  July  1,  2003,  we  adopted  EITF  Issue  No.  00-21,  "REVENUE
ARRANGEMENTS WITH MULTIPLE  DELIVERABLES"  ("EITF 00-21").  EITF 00-21 addresses
certain aspects of the accounting by a vendor for  arrangements  under which the
vendor will perform  multiple  revenue  generating  activities.  As of March 31,
2004,  approximately  56,000 of our customer locations utilized a plan agreement
that provides for a fixed monthly  payment to cover the use of a bulk CO2 system
and a predetermined  maximum quantity of CO2 ("budget  plan").  Prior to July 1,
2003, as lessor, we recognized revenue from leasing CO2 systems under our budget
plan agreements on a straight-line basis over the life of the related leases. We
have developed a methodology for the purpose of separating the aggregate revenue
stream  between the rental of the equipment  and the sale of the CO2.  Effective
July  1,  2003,  revenue  attributable  to the  lease  of  equipment,  including
equipment  leased under the budget plan,  is recorded on a  straight-line  basis
over the term of the lease and  revenue  attributable  to the  supply of CO2 and
other gases,  including  CO2 provided  under the budget plan,  is recorded  upon
delivery to the customer.

            We have elected to apply EITF 00-21 retroactively to all budget plan
agreements in existence as of July 1, 2003. Based on our analysis, the aggregate
amount of CO2 actually  delivered  under  budget plans during the quarter  ended
June 30, 2003 is not materially different than the corresponding  portion of the
fixed charges attributable to CO2. Accordingly, we believe the cumulative effect
of the  adoption of EITF 00-21 as of July 1, 2003 is not  significant.  However,
the effect of adopting EITF 00-21 in the manner  described  above  resulted in a
(decrease)  in revenue  and net income  during the three and nine  months  ended
March 31, 2004 of approximately  $(322,000),  or $(0.03) per share and $(37,000)
or $(0.00) per share,  respectively.  Solely for comparative  purposes,  we have
separated  equipment  rentals and CO2 sales in the  statements of operations for
the three and nine months ended March 31,  2003;  however,  all revenue  derived
from budget plans for those periods is recognized  on a  straight-line  basis as
disclosed  in the summary of  significant  accounting  policies  included in our
prior Annual Reports on Form 10-K.

            Under the budget plan,  each  customer  has a maximum CO2  allowance
that is measured and reset on the contract anniversary date. At that date, it is
appropriate  to  record  revenue  for  contract  billings  in  excess  of actual
deliveries  of CO2.  Because of the large number of  customers  under the budget
plan and the fact that the anniversary dates for determining  maximum quantities
are spread  throughout the year, our  methodology  involves the use of estimates
and assumptions to separate the aggregate  revenue stream derived from equipment
rentals to budget plan  customers,  and also to approximate  the  recognition of
revenue from CO2 sales to budget plan customers when earned. We believe that the
adoption  of EITF 00-21 has the most impact on the  recognition  of revenue on a
quarterly  basis as CO2 usage  fluctuates  during a fiscal year based on factors
such as weather, and traditional summer and holiday periods. Over a twelve-month
period, we believe that the effect is less significant since seasonal variations
are largely  eliminated  and CO2  allowances  under budget plan  agreements  are
measured and reset annually.

            In  December  2003,  the FASB  revised FASB  Interpretation  No. 46,
"CONSOLIDATION   OF   VARIABLE   INTEREST   ENTITIES."   Application   of   this
Interpretation is required in a company's financial  statements for interests in

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variable  interest  entities that are  considered  special-purpose  entities for
reporting  periods ending after March 15, 2004. FASB  Interpretation  No. 46 did
not effect our financial position, results of operations, or cash flows.

            In  December  2003,  the  FASB  revised  SFAS  No.  132,   "EMPLOYER
DISCLOSURES ABOUT PENSIONS AND OTHER  POSTRETIREMENT  BENEFITS" (SFAS 132). SFAS
132 requires  additional  disclosures  regarding the assets,  obligations,  cash
flows,  and net periodic benefit cost of defined benefit plans and other defined
benefit  postretirement  plans.  SFAS 132  requires  that  this  information  be
provided  separately for pension plans and other  postretirement  benefit plans.
The  adoption of the revised  SFAS No. 132,  effective  January 1, 2004,  had no
material impact on our financial position, results of operations, or cash flows.


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            As  discussed  under   "Management's   Discussion  and  Analysis  of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
above, as of March 31, 2004, a total of $40.3 million was outstanding  under the
Senior Credit Facility with a weighted average interest rate of 6.1%. Based upon
the $40.3  million  outstanding  under the Senior  Credit  Facility at March 31,
2004, our annual  interest cost under the Senior Credit  Facility would increase
by $0.4 million for each 1% increase in Eurodollar interest rates.

            In order to reduce our exposure to increases in Eurodollar  interest
rates, and consequently to increases in interest  payments,  on October 2, 2003,
we entered into an interest rate swap  transaction (the "Swap") in the amount of
$20.0 million (the "Notional  Amount") with an effective date of March 15, 2004.
Pursuant  to the  Swap,  we pay a fixed  interest  rate of 2.12%  per  annum and
receive  a  Eurodollar-based  floating  rate.  The  effect  of  the  Swap  is to
neutralize any changes in Eurodollar rates on the Notional Amount.  We do not on
a routine basis enter into speculative derivative transactions or leveraged swap
transactions, except as disclosed. As the Swap was not effective until March 15,
2004 and no cash flows were exchanged  prior to that date, the Swap did not meet
the  requirements  to be designated as a cash flow hedge. As such, an unrealized
loss of $177,000 was  recognized in our results of operations  for the three and
nine months  ended March 31,  2004,  reflecting  the change in fair value of the
Swap from  inception to the effective  date. As of March 31, 2004,  the Swap met
the  requirements  to be  designated as a cash flow hedge and is deemed a highly
effective transaction.

ITEM 4.     CONTROLS AND PROCEDURES

            EVALUATION  OF  DISCLOSURE  CONTROLS  AND  PROCEDURES.  Based on our
management's  evaluation  (with the  participation  of our  principal  executive
officer and principal financial officer), as of the end of the period covered by
this report,  our principal  executive  officer and principal  financial officer
have concluded that our disclosure  controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of 1934, as amended,
(the  "Exchange  Act") are effective to ensure that  information  required to be
disclosed  by us in reports  that we file or submit  under the  Exchange  Act is
recorded,  processed,  summarized and reported within the time periods specified
in SEC rules and forms.

            CHANGES IN INTERNAL CONTROL OVER FINANCIAL  REPORTING.  There was no
change in our internal control over financial  reporting during our third fiscal
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibit No.             Exhibit
          -----------             -------

          31.1         Section 302 Certification of Principal Executive Officer.
          31.2         Section 302 Certification of Principal Financial Officer.
          32.1         Section 906 Certification of Principal Executive Officer.
          32.2         Section 906 Certification of Principal Financial Officer.

      (b) Reports on Form 8-K
          -------------------

          (1)  The Company filed a Form 8-K dated March 30, 2004 reporting Items
               5 and 7.

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                                   SIGNATURES

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


                                                 NuCO2 Inc.


Dated:  May 14, 2004                       By:   /s/ Robert R. Galvin
                                                 ------------------------------
                                                 Robert R. Galvin
                                                 Chief Financial Officer


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