`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 December 31, 2005

                                       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 of                           (I.R.S. Employer
     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  by check |X|  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      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 DECEMBER 31, 2005
            -----                               --------------------------------
Common Stock, $.001 par value                           15,408,708 shares



                                   NUCO2 INC.

                                      INDEX

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

            Balance Sheets as of December 31, 2005 and                         3
               June 30, 2005

            Statements of Operations for the Three Months Ended                4
               December 31, 2005 and December 31, 2004

            Statements of Operations for the Six Months Ended                  5
               December 31, 2005 and December 31, 2004

            Statement of Shareholders' Equity for the Six                      6
               Months Ended December 31, 2005

            Statements of Cash Flows for the Six Months                        7
               Ended December 31, 2005 and December 31, 2004

            Notes to Financial Statements                                      9

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF                           20
               FINANCIAL CONDITION AND RESULTS OF
               OPERATIONS

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES                          32
               ABOUT MARKET RISK

ITEM 4.     CONTROLS AND PROCEDURES                                           33

PART II.    OTHER INFORMATION

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               33

ITEM 6.     EXHIBITS                                                          33

SIGNATURES                                                                    34


                                       2


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                   NUCO2 INC.
                                 BALANCE SHEETS
                      (In thousands, except share amounts)
                                     ASSETS

                                                             DECEMBER 31, 2005       JUNE 30, 2005*
                                                             -----------------       --------------
                                                                (UNAUDITED)
Current assets:
   Cash and cash equivalents                                   $        183           $        968
   Trade accounts receivable; net of allowance for doubtful
      accounts of $1,988 and $1,850, respectively                    12,335                  8,568
   Inventories                                                          287                    259
   Prepaid insurance expense and deposits                             1,719                  1,281
   Prepaid expenses and other current assets                          2,729                    854
   Deferred tax assets - current portion                              7,648                  7,596
                                                               ------------           ------------
      Total current assets                                           24,901                 19,526
                                                               ------------           ------------

Property and equipment, net                                         112,572                104,787
                                                               ------------           ------------

Other assets:
   Goodwill, net                                                     24,174                 22,094
   Deferred financing costs, net                                        376                    402
   Customer lists, net                                                6,479                  5,760
   Non-competition agreements, net                                    1,410                    836
   Deferred lease acquisition costs, net                              4,808                  4,429
   Deferred tax assets, net                                          11,930                 15,123
   Other assets                                                         181                    175
                                                               ------------           ------------
                                                                     49,358                 48,819
                                                               ------------           ------------
      Total assets                                             $    186,831           $    173,132
                                                               ============           ============

                                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                            $      7,709           $      5,178
   Accrued expenses                                                   2,344                    608
   Accrued insurance                                                    704                    596
   Accrued interest                                                     186                    112
   Accrued payroll                                                      591                  1,464
   Other current liabilities                                            573                    366
                                                               ------------           ------------
      Total current liabilities                                      12,107                  8,324

Long-term debt                                                       34,250                 32,000
Other long-term liabilities                                             274                     --
Customer deposits                                                     3,820                  3,624
                                                               ------------           ------------
      Total liabilities                                              50,451                 43,948
                                                               ------------           ------------

Commitments and contingencies
Shareholders' equity:
   Common stock; par value $.001 per share; 30,000,000 shares authorized;
      issued and outstanding 15,408,708 shares at December 31, 2005
      and 15,300,905 at June 30, 2005                                    15                     15
   Additional paid-in capital                                       160,867                159,040
   Accumulated deficit                                              (24,519)               (30,113)
   Accumulated other comprehensive income                                17                    242
                                                               ------------           ------------
      Total shareholders' equity                                    136,380                129,184
                                                               ------------           ------------
        Total liabilities and shareholders' equity             $    186,831           $    173,132
                                                               ============           ============

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


                                       3


                                   NUCO2 INC.
                            STATEMENTS OF OPERATIONS
                      (In thousands, except share amounts)
                                   (UNAUDITED)

                                                                  THREE MONTHS ENDED DECEMBER 31
                                                               ------------------------------------
                                                                   2005                    2004*
                                                               ------------           -------------
Revenues:
   Product sales                                               $     18,895           $      15,512
   Equipment rentals                                                  9,858                   9,168
                                                               ------------           -------------

Total revenues                                                       28,753                  24,680
                                                               ------------           -------------

Costs and expenses:
   Cost of products sold, excluding depreciation and                 12,074                  10,043
   Cost of equipment rentals, excluding depreciation
      amortization and amortization                                     807                     588
   Selling, general and administrative expenses                       6,172                   4,639
   Depreciation and amortization                                      4,556                   4,197
   Loss on asset disposal                                               398                     496
                                                               ------------           -------------
                                                                     24,007                  19,963
                                                               ------------           -------------

Operating income                                                      4,746                   4,717
Interest expense                                                        543                   2,228
                                                               ------------           -------------

Income before provision for income taxes                              4,203                   2,489
Provision for income taxes                                            1,564                      52
                                                               ------------           -------------

Net income                                                     $      2,639           $       2,437
                                                               ============           =============

Weighted average outstanding shares of common stock:
   Basic                                                             15,365                  11,998
                                                               ============           =============
   Diluted                                                           15,892                  13,578
                                                               ============           =============

Net income per basic share                                     $       0.17           $        0.20
                                                               ============           =============
Net income per diluted share                                   $       0.17           $        0.18
                                                               ============           =============

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


                                       4


                                   NUCO2 INC.
                            STATEMENTS OF OPERATIONS
                      (In thousands, except share amounts)
                                   (UNAUDITED)

                                                                         SIX MONTHS ENDED DECEMBER 31
                                                                     ------------------------------------
                                                                         2005                   2004*
                                                                     ------------           -------------
Revenues:
   Product sales                                                     $     36,933           $      28,983
   Equipment rentals                                                       19,685                  17,578
                                                                     ------------           -------------

Total revenues                                                             56,618                  46,561
                                                                     ------------           -------------

Costs and expenses:
   Cost of products sold, excluding depreciation and amortization          24,061                  19,457
   Cost of equipment rentals, excluding depreciation
      and amortization                                                      1,483                   1,134
   Selling, general and administrative expenses                            11,255                   8,711
   Depreciation and amortization                                            8,860                   7,937
   Loss on asset disposal                                                   1,205                     657
                                                                     ------------           -------------
                                                                           46,864                  37,896
                                                                     ------------           -------------

Operating income                                                            9,754                   8,665
Gain on financial instrument                                                 (177)                     --
Interest expense                                                              908                   4,268
                                                                     ------------           -------------

Income before provision for income taxes                                    9,023                   4,397
Provision for income taxes                                                  3,429                     106
                                                                     ------------           -------------

Net income                                                           $      5,594           $       4,291
                                                                     ============           =============

Weighted average outstanding shares of common stock:
   Basic                                                                   15,337                  11,599
                                                                     ============           =============
   Diluted                                                                 15,846                  13,171
                                                                     ============           =============

Net income per basic share                                           $       0.36           $        0.35
                                                                     ============           =============
Net income per diluted share                                         $       0.35           $        0.31
                                                                     ============           =============

See accompanying notes to financial statements.
*Reclassified 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            INCOME          EQUITY
                                        ----------    --------       ----------     ---------        -----------      ----------
Balance, June 30, 2005                  15,300,905    $     15       $  159,040     $ (30,113)       $       242      $  129,184
Comprehensive income:
  Net income                                    --          --               --         5,594                 --           5,594
  Other comprehensive income:
    Interest rate swap transaction              --          --               --            --               (225)           (225)
                                                                                                                      ----------
Total comprehensive income                                                                                                 5,369
Stock option compensation                       --          --            1,085            --                 --           1,085
Issuance of 107,803 shares of common
   stock - exercise of options             107,803          --              935            --                 --             935
Additional costs related to prior year
   stock issuance                               --          --             (193)           --                 --            (193)
                                        ----------    --------       ----------     ---------        -----------      ----------
Balance, December 31, 2005              15,408,708    $     15       $  160,867   $   (24,519)       $        17      $  136,380
                                        ==========    ========       ==========   ===========        ===========      ==========

See accompanying notes to financial statements.


                                       6


                                   NUCO2 INC.
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (UNAUDITED)

                                                                  SIX MONTHS ENDED DECEMBER 31,
                                                                  -----------------------------
                                                                       2005         2004*
                                                                     --------     --------
Cash flows from operating activities:
Net income                                                           $  5,594     $  4,291
  Adjustments to reconcile net income to net cash
     provided by operating activities:
        Depreciation and amortization of property and equipment         7,434        6,682
        Amortization of other assets                                    1,426        1,254
        Amortization of original issue discount                            --          212
        Paid-in-kind interest                                              --          672
        Loss on asset disposal                                          1,205          657
        Change in net deferred tax asset                                3,141           --
        Stock option compensation                                       1,085           --
        Gain on financial instrument                                     (177)          --
        Changes in operating assets and liabilities:
           Decrease (increase) in:
             Trade accounts receivable                                 (3,767)      (2,812)
             Inventories                                                  (28)         (32)
             Prepaid insurance expense and deposits                      (439)         474
             Prepaid expenses and other current assets                   (959)      (1,636)
           Increase (decrease) in:
             Accounts payable                                           2,531          905
             Accrued expenses                                             427          274
             Accrued insurance                                            108         (119)
             Accrued payroll                                             (873)      (1,211)
             Accrued interest                                              74           61
             Other current liabilities                                    206           69
             Customer deposits                                            196          187
                                                                     --------     --------

           Net cash provided by operating activities                   17,184        9,928
                                                                     --------     --------

Cash flows from investing activities:
  Purchase of property and equipment                                  (15,130)      (8,064)
  Increase in deferred lease acquisition costs                         (1,134)        (925)
  Acquisition of businesses                                            (4,673)     (15,722)
  Increase in other assets                                                 (7)           9
                                                                     --------     --------

           Net cash used in investing activities                     $(20,944)    $(24,702)
                                                                     --------     --------

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


                                       7


                                   NUCO2 INC.
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (CONTINUED)

                                                       SIX MONTHS ENDED DECEMBER 31,
                                                       -----------------------------
                                                            2005         2004*
                                                          --------     --------
Cash flows from financing activities:
  Net proceeds from issuance of long-term debt            $  9,750     $ 22,750
  Repayment of long-term debt                               (7,500)      (9,005)
  Issuance costs - common stock                               (193)          --
  Increase in deferred financing costs                         (18)        (820)
  Exercise of options and warrants                             936        1,392
                                                          --------     --------

           Net cash provided by financing activities         2,975       14,317
                                                          --------     --------

Decrease in cash and cash equivalents                         (785)        (457)
Cash and cash equivalents, beginning of period                 968          505
                                                          --------     --------

Cash and cash equivalents, end of period                  $    183     $     48
                                                          ========     ========

Supplemental disclosure of cash flow information:
  Cash paid during the period for:

           Interest                                       $    834     $  3,324
                                                          ========     ========

           Income taxes                                   $     24     $     96
                                                          ========     ========

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


                                       8


                                   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 audited  financial  statements for the
fiscal year ended June 30, 2005 of NuCO2 Inc. (the  "Company")  included in Form
10-K filed with the Securities and Exchange Commission,  except as noted in Note
2.

      All adjustments (consisting of normal recurring 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,
2005.  The results of operations for the periods  presented are not  necessarily
indicative  of the results to be expected for the full fiscal year.  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
fiscal quarter and lowest in the third fiscal quarter.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

      In  December  2004,  the  FASB  revised  SFAS  No.  123,  "ACCOUNTING  FOR
STOCK-BASED  COMPENSATION"  through  the  issuance  of SFAS  123-R  "SHARE-BASED
PAYMENTS". SFAS 123-R supersedes APB 25 and its related implementation guidance.
SFAS 123-R requires all share-based  payments to employees,  including grants of
employee stock options, to be recognized in the statement of operations based on
their fair value and vesting schedule.  However,  SFAS 123-R does not change the
accounting guidance for share-based payment transactions with parties other than
employees  provided in SFAS 123 as  originally  issued and EITF Issue No. 96-18,
"ACCOUNTING FOR EQUITY  INSTRUMENTS  THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR
ACQUIRING,  OR IN  CONJUNCTION  WITH SELLING,  GOODS OR  SERVICES."  The Company
adopted SFAS 123-R effective with the fiscal quarter beginning July 1, 2005 on a
"modified  prospective  basis," and  accordingly,  pro forma  disclosure  of net
income and earnings per share, is no longer an alternative to recognition in the
statement of operations.  As described in greater detail in Note 7d, the Company
recognized $0.8 million and $1.1 million in stock option compensation during the
three and six months ended December 31, 2005, respectively,  for which there was
no  corresponding  expense in the three and six months ended  December 31, 2004.
Had the Company  recognized stock option  compensation prior to July 1, 2005, it
would had recorded  stock option  compensation  expense of $0.3 million and $0.7
million in its results of operations for the three and six months ended December
31, 2004, respectively.

NOTE 3. ACQUISITIONS

      On  October  1,  2004,  the  Company   purchased  the  bulk  CO2  beverage
carbonation business of privately owned Pain Enterprises,  Inc., of Bloomington,
Indiana  ("Pain"),  for total cash  consideration of $15.7 million.  The Company
acquired  approximately  9,000 net customer  accounts,  including 6,300 tanks in
service,  vehicles,  parts,  and supplies.  The  acquisition  of Pain's bulk CO2
beverage carbonation business,  which operated in 12 Midwestern and Southeastern
states: Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Missouri,
Minnesota,  Ohio,  Tennessee and Wisconsin,  provides  further  penetration  and
increased operating efficiencies in markets in which the Company operates.

      The purchase  price was  allocated  between  tangible  assets,  intangible
assets, and goodwill as follows:  $6.7 million for tangible assets, $6.2 million
for intangible  assets and $2.8 million for goodwill.  Tangible assets are being
depreciated over a weighted average life of 10 years,  while intangible  assets,
excluding  goodwill,  are being amortized over a weighted  average life of eight
years.

      Goodwill was recorded as the purchase  price of the  acquisition  exceeded
the fair market value of the tangible and  intangible  assets  acquired and is a
direct result of synergies arising from the transaction. Both the purchase price
allocation and the useful lives of purchased tangible and intangible assets were
derived with the  assistance of an  independent  valuation  consultant and other
independent sources as appropriate.


                                       9


      On June 30,  2005,  the  Company  acquired  approximately  1,200  customer
accounts and 1,000 bulk CO2 tanks, most of which were in service, from Coca-Cola
Enterprises, Inc. ("CCE") for approximately $1.4 million. The purchase price was
allocated  between tangible and intangible  assets as follows:  $1.0 million for
tangible  assets,  and $0.4 million for intangible  assets.  Tangible assets are
being  depreciated  over a weighted  average life of 12 years,  while intangible
assets are being amortized over a weighted average life of 8.5 years.

      On September  30, 2005,  the Company  purchased  the beverage  carbonation
business of privately  owned Bay Area  Equipment  Co., Inc.  ("BAE"),  for total
consideration of $5.2 million, of which $4.7 million was paid at closing and the
remaining $0.5 million is payable over the next two years.  The Company acquired
approximately  2,500  customer  accounts,  including  1,000  tanks  in  service,
vehicles,  parts,  and supplies.  The acquisition of BAE's beverage  carbonation
business,  which operated in northern  California,  provides further penetration
and increased operating efficiencies in that market.

      The purchase  price was  allocated  between  tangible  assets,  intangible
assets, and goodwill as follows:  $1.5 million for tangible assets, $1.9 million
for intangible  assets and $1.8 million for goodwill.  Tangible assets are being
depreciated over a weighted average life of 8.3 years,  while intangible assets,
excluding  goodwill,  are being  amortized  over a weighted  average life of 4.9
years.

      Goodwill was recorded as the purchase  price of the  acquisition  exceeded
the fair market value of the tangible and  intangible  assets  acquired and is a
direct result of synergies arising from the transaction. Both the purchase price
allocation and the useful lives of purchased tangible and intangible assets were
derived with the  assistance of an  independent  valuation  consultant and other
independent sources as appropriate.

      The results of operations for the Pain and CCE  acquisitions  are included
in the statement of operations  for the three and six months ended  December 31,
2005. However, as BAE was acquired on September 30, 2005, none of its results of
operations  have been included in the Company's  statement of operations for the
three months then ended. The following unaudited pro forma results of operations
(in  thousands,  except  per share  amounts)  have been  prepared  assuming  the
acquisitions  described  above had  occurred as of the  beginning of the periods
presented in the Company's financial  statements,  including  adjustments to the
financial   statements  for   additional   depreciation   of  tangible   assets,
amortization  of  intangible  assets,  and  increased  interest on borrowings to
finance the  acquisitions.  The  unaudited pro forma  operating  results are not
necessarily  indicative of operating  results that would have occurred had these
acquisitions been consummated as of the beginning of the periods  presented,  or
of future operating results. In certain cases, the operating results for periods
prior to the acquisitions are based on (a) unaudited  financial data provided by
the seller or (b) an estimate of  revenues,  cost of  revenues  and/or  selling,
general and administrative  expenses based on information provided by the seller
or otherwise available to the Company. Inasmuch as the Company acquired customer
accounts,  tanks at  customer  sites and other  assets  related to the  beverage
carbonation  businesses of Pain, CCE and BAE,  certain  operational  and support
costs  provided for by the sellers are not  applicable to the Company's  cost of
servicing these customers and were therefore  eliminated;  however,  the Company
incurred   approximately   $0.5  million  in  non-recurring   costs  during  the
integration phase of the Pain acquisition that are included in the unaudited pro
forma  results for the three and six months ended  December 31, 2004,  presented
below. Integration costs associated with CCE and BAE were minimal.

Unaudited Pro Forma:
                                 Three Months Ended December 31,           Six Months Ended December 31,
                                 -------------------------------           -----------------------------
                                    2005                2004                 2005                2004
                                  --------            --------             --------            --------
Total revenues                    $ 28,753            $ 27,881             $ 57,213            $ 53,204
Operating income                     4,746               5,677                9,878              10,398

Income before provision
   for income taxes                  4,203               3,139                9,072               5,494
Provision for income taxes           1,564                  75                3,448                 145
                                  --------            --------             --------            --------
Net income                           2,639               3,064                5,624               5,349
Preferred stock dividends               --                 (47)                  --                (182)
                                  --------            --------             --------            --------
Net income available to
   common shareholders            $  2,639            $  3,017             $  5,624            $  5,167
                                  ========            ========             ========            ========

Basic income per share            $   0.17            $   0.25             $   0.37            $   0.45
                                  ========            ========             ========            ========
Diluted income per share          $   0.17            $   0.22             $   0.35            $   0.39
                                  ========            ========             ========            ========


                                       10


NOTE 4. EARNINGS PER 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  per  share  were
calculated as follows (in thousands):

                                                  Three Months Ended December 31,  Six Months Ended December 31,
                                                  -------------------------------  -----------------------------
                                                        2005            2004            2005            2004
                                                       ------          ------          ------          ------

Weighted average shares outstanding - basic            15,365          11,998          15,337          11,599

Outstanding options and warrants to purchase
  shares of common stock - remaining shares
  after assuming repurchase with proceeds
  from exercise                                           527           1,580             509           1,572
                                                       ------          ------          ------          ------

Weighted average shares outstanding - diluted          15,892          13,578          15,846          13,171
                                                       ======          ======          ======          ======

      In August 2004, 5,000 shares of the Company's  redeemable  preferred stock
were converted into 754,982 shares of common stock.  The remaining  2,500 shares
of redeemable preferred stock were converted into 247,420 shares of common stock
in December 2004. Prior to the conversion of the redeemable preferred stock into
shares of common stock,  the Company  excluded the effects of the  conversion of
its outstanding  redeemable  preferred stock using the "if converted"  method in
accordance with SFAS 128, as the effect would be  anti-dilutive  for that period
(See Note 6).

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

                                                 Three Months Ended December 31,          Six Months Ended December 31,
                                                 -------------------------------          -----------------------------
                                                    2005                2004                 2005                2004
                                                  --------            --------             --------            --------

Net income                                        $  2,639            $  2,437             $  5,594            $  4,291
Redeemable preferred stock dividends                    --                 (47)                  --                (182)
                                                  --------            --------             --------            --------
Net income -
    available to common shareholders              $  2,639            $  2,390             $  5,594            $  4,109
                                                  ========            ========             ========            ========

Weighted average outstanding shares of
    common stock:

Basic                                               15,365              11,998               15,337              11,599
Diluted                                             15,892              13,578               15,846              13,171

Basic income (loss) per share                     $   0.17            $   0.20             $   0.36            $   0.35
                                                  ========            ========             ========            ========
Diluted income (loss) per share                   $   0.17            $   0.18             $   0.35            $   0.31
                                                  ========            ========             ========            ========

NOTE 5. LONG-TERM DEBT

      (A) CURRENT FACILITY

      On May 27, 2005,  the Company  terminated  its Senior Credit  Facility (as
hereinafter  defined) and entered into a $60.0 million revolving credit facility
with Bank of America, N.A. (the "2005 Credit Facility"),  maturing May 27, 2010.
The  Company  is  entitled  to select  either  Base Rate Loans (as  defined)  or
Eurodollar  Rate Loans (as  defined),  plus  applicable  margin,  for  principal
borrowings under the 2005 Credit Facility.  Applicable margin is determined by a
pricing grid based on the Company's  Consolidated Leverage Ratio (as defined) as
follows:


                                       11


          ----------------------------------------------------------------------
          Pricing    Consolidated Leverage        Eurodollar Rate    Base Rate
          Level      Ratio                        Loans              Loans
          ----------------------------------------------------------------------
          I          Greater than or equal to     2.250%             0.750%
                     2.50x
          ----------------------------------------------------------------------
          II         Less than 2.50x but greater  2.000%             0.500%
                     than or equal to 2.00x
          ----------------------------------------------------------------------
          III        Less than 2.00x but greater  1.750%             0.250%
                     than or equal to 1.50x
          ----------------------------------------------------------------------
          IV         Less than 1.50x but greater  1.500%             0.000%
                     than or equal to 0.50x
          ----------------------------------------------------------------------
          V          Less than 0.50x              1.250%             0.000%
          ----------------------------------------------------------------------

      Interest  is payable  periodically  on  borrowings  under the 2005  Credit
Facility. The 2005 Credit Facility is uncollateralized.  The Company is required
to meet certain affirmative and negative covenants,  including,  but not limited
to, financial  covenants.  The Company is required to assess compliance with the
financial  covenants under the 2005 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 2005
Credit Facility to immediately  become due and payable.  As of June 30, 2005 and
through  December 31, 2005,  the Company was in  compliance  with all  covenants
under the 2005 Credit Facility.

      The Company  recorded $0.4 million in financing costs  associated with the
2005 Credit  Facility.  Such costs are being amortized over the life of the 2005
Credit Facility.

      As of December 31, 2005, a total of $34.2 million was outstanding pursuant
to the 2005 Credit  Facility,  with a weighted average interest rate of 5.9% per
annum.

      (B) PREVIOUS FACILITIES

      As of December 31, 2004 the Company maintained a $50 million senior credit
facility with a syndicate of banks (the "Senior  Credit  Facility") and was also
obligated under subordinated  promissory notes (the "New Notes"), with aggregate
balances   outstanding  of  $50.6  million  and  $31.8  million,   respectively.
Borrowings  under the Senior Credit  Facility and New Notes at December 31, 2004
bore interest at weighted  average  interest  rates of 6.3% and 18.0% per annum,
respectively.  On April 4,  2005,  the  Company  used  $34.3  million of the net
proceeds  from  the  sale  of  2,041,713  shares  of  its  common  stock  in  an
underwritten  public  offering  in March 2005 to redeem the New Notes at 106% of
the original principal amount plus accrued interest and prepayment penalties.

      The  Company  was  required  to  meet  certain  affirmative  and  negative
covenants,  including,  but not limited to  financial  covenants  under both the
Senior Credit Facility and the New Notes. The Company was in compliance with all
covenants as of December 31, 2004 and through the quarter ended March 31, 2005.

      During  fiscal 2004,  warrants to purchase  75,000 shares of the Company's
common stock issued in connection with the New Notes were exercised for proceeds
of $0.7 million, recorded as additional paid-in-capital on the Company's balance
sheet as of June 30,  2004.  During  fiscal 2005,  warrants to purchase  893,956
shares of the  Company's  common stock issued in  connection  with  subordinated
promissory  notes  issued in 1997 and 1999 (the "1997 and 1999  Notes")  and New
Notes were  exercised for proceeds of $0.7 million.  In connection  with certain
cashless exercises,  warrants to purchase 389,528 shares of the Company's common
stock were canceled.  As of December 31, 2005, no warrants  issued in connection
with the 1997 and 1999 Notes or New Notes were outstanding.

      (C) HEDGING ACTIVITIES

      Effective July 1, 2000, the Company  adopted SFAS No. 133  "ACCOUNTING FOR
DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES," as amended,  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


                                       12


fair value of the derivative are recorded as other comprehensive  income and are
recognized in the statement of operations when the hedged item affects earnings.
Ineffective  portions  of changes in the fair value of cash flow hedges (if any)
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 minimize the
risks using the most effective methods to eliminate or reduce the impact of this
exposure.  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 "Prior Swap") on October 2, 2003, in
the amount of $20.0 million (the "Prior Notional Amount") with an effective date
of March 15, 2004 and a maturity  date of September  15,  2005.  Pursuant to the
Prior  Swap,  the  Company  paid a fixed  interest  rate of 2.12%  per annum and
received a  Eurodollar-based  floating rate. The effect of the Prior Swap was to
neutralize any changes in Eurodollar rates on the Prior Notional Amount.  As the
Prior  Swap was not  effective  until  March  15,  2004 and no cash  flows  were
exchanged prior to that date, the Prior Swap did not meet the requirements to be
designated as a cash flow hedge. As such, an unrealized loss of $0.2 million was
recognized  in the Company's  statement of operations  for the fiscal year ended
June 30,  2004,  reflecting  the  change in fair  value of the  Prior  Swap from
inception to the effective  date.  As of March 15, 2004,  the Prior Swap met the
requirements  to be  designated  as a cash flow  hedge  and was  deemed a highly
effective   transaction.   Accordingly,   the  Company   recorded  $0.2  million
representing  the change in fair  value of the Prior  Swap from  March 15,  2004
through September 15, 2005, as other  comprehensive  income,  which was reversed
upon the  termination  of the Prior Swap in September  2005.  In addition,  upon
termination of the Prior Swap, the Company  reversed the unrealized loss of $0.2
million previously recognized in the Company's statement of operations.

      In order to reduce the  Company's  exposure  to  increases  in  Eurodollar
rates, and consequently to increases in interest  payments,  the Company entered
into a new interest rate swap  transaction  (the "2005 Swap"),  comprised of two
instruments  ("Swap A" and "Swap B"), on September  28, 2005,  with an effective
date of October 3, 2005. Swap A, in the amount of $15.0 million (the "A Notional
Amount"),  matures on October 3, 2008 and Swap B, in the amount of $5.0  million
(the "B Notional Amount"), matures on April 3, 2007. Pursuant to Swap A and Swap
B,  the  Company  pays a fixed  interest  rate of 4.69%  and  4.64%  per  annum,
respectively,  and receives a Eurodollar-based  floating rate. The effect of the
2005 Swap is to  neutralize  any changes in  Eurodollar  rates on the A Notional
Amount and the B Notional  Amount.  The 2005 Swap meets the  requirements  to be
designated  as a cash flow hedge and is deemed a highly  effective  transaction.
Accordingly,  changes  in the fair  value of Swap A and Swap B are  recorded  as
other  comprehensive  income (loss).  During the three months ended December 31,
2005, the Company recorded $17,000, representing the change in fair value of the
2005 Swap from  inception  through  December  31, 2005,  as other  comprehensive
income.

NOTE 6. REDEEMABLE PREFERRED STOCK

      During the three months ended  September  30, 2004,  redeemable  preferred
stock with a  liquidation  preference  of $7.0 million was  converted to 754,982
shares of common stock. In addition,  during December 2004, redeemable preferred
stock  outstanding at September 30, 2004, with a liquidation  preference of $3.2
million at the date of  conversion,  was  converted to 247,420  shares of common
stock.  There was no outstanding  redeemable  preferred stock as of December 31,
2004 and December 31, 2005.

      During the three and six months  ended  December  31,  2004,  the carrying
amount  (and  liquidation  preference)  of the  redeemable  preferred  stock was
increased by $47,000 and $182,000, respectively, for dividends accrued.

NOTE 7. SHAREHOLDERS' EQUITY

      (A) NON-PLAN DIRECTOR STOCK OPTIONS

      In January 2001, the Company granted to each non-employee director options
for 10,000 shares of common stock. An aggregate of 50,000 options was granted at
an exercise price of $7.82 per share. In March 2003, the Company granted to each
non-employee  director options for 6,000 shares of common stock, or an aggregate
of 36,000  options,  at an exercise price of $4.85 per share. In September 2003,
the  Company  granted to two of its  non-employee  directors  options for 22,000
shares of common stock, or an aggregate of 44,000 options,  at an exercise price
of $8.91  per  share.  In  addition,  in  March  2004,  the  Company  granted  a
non-employee  director  options for 6,000  shares of common stock at an exercise
price of $16.25 per  share.  The  exercise  price for all grants is equal to the
average  closing price of the common stock on the Nasdaq National Market for the
20 trading days prior to the grant date.  During the six months  ended  December
31,  2005,  an  additional  18,000  options  were  granted  to two  non-employee
directors at an exercise price of $23.14 per share, the fair market value of the
Company's  common  stock on the date of grant.  All options  vest in two to five
equal annual installments commencing upon issuance and have a ten-year term.


                                       13


      The following table summarizes  transactions pursuant to non-plan director
stock options:

                                                            Weighted Average
                                           Options         Exercise Price Per         Options
                                         Outstanding            Options             Exercisable
                                         -----------       ------------------       -----------
Outstanding at June 30, 2004                 136,000       $             7.76            78,667
       Exercised                             (21,000)                    6.69
                                         -----------
Outstanding at December 31, 2004             115,000       $             7.95            72,334
                                         ===========

Outstanding at June 30, 2005                  84,667       $             8.29            66,001
       Granted                                18,000                    23.14
                                         -----------
Outstanding at December 31, 2005             102,667       $            10.90            86,667
                                         ===========

      The  following  table sets forth  certain  information  as of December 31,
2005:

                                    Options Outstanding                                      Options Exercisable
                   -------------------------------------------------------  -------------------------------------------------------
                                  Weighted        Weighted       Aggregate                 Weighted        Weighted       Aggregate
Range of Exercise    Options       Average         Average       Intrinsic    Options       Average         Average       Intrinsic
     Prices        Outstanding  Remaining Life  Exercise Price  Value (000) Exercisable  Remaining Life  Exercise Price  Value (000)
-----------------  -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
$  4.85 - $10.00        78,667            6.74  $         7.69  $    1,405       78,667            6.74  $         7.69  $    1,405
$ 10.01 - $15.00            --              --              --          --           --              --              --          --
$ 15.01 - $20.00         6,000            8.25           16.25          56        2,000            8.25           16.25          19
$ 20.01 - $23.14        18,000            8.95           23.14          43        6,000            8.95           23.14          14
                   -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
                       102,667            7.21  $        10.90  $    1,504       86,667            6.93  $         8.96   $   1,438
                   ===========  ==============  ==============  ==========  ===========  ==============  ==============  ==========

      (B) EMPLOYEE STOCK OPTION PLANS

      In 1995,  the Board of  Directors  adopted the 1995 Stock Option Plan (the
"1995  Plan"),  which  terminated  in November  2005.  Under the 1995 Plan,  the
Company reserved  2,400,000 shares of common stock for employees of the Company.
Under the terms of the 1995 Plan,  options  granted were either  incentive stock
options or  non-qualified  stock options.  The exercise price of incentive stock
options was  required  to 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 was not to 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  was ten years,  with  outstanding  options  having a  weighted  average
remaining contractual life of 7.2 years as of December 31, 2005. Options granted
prior  to   termination  of  the  1995  Plan  generally  vest  in  equal  annual
installments  from three to five years,  though a limited  number of grants were
partially vested at the grant date. As of December 31, 2005, options to purchase
1,306,650  shares of the Company' common stock were  outstanding  under the 1995
Plan. In addition,  in September  2005, the Board of Directors  adopted the 2005
Employee Stock Option Plan (the "2005 Employee  Plan").  Under the 2005 Employee
Plan,  the Company has reserved  250,000 shares of common stock for employees of
the  Company.  As of December  31,  2005,  no options to purchase  shares of the
Company's common stock were outstanding under the 2005 Employee Plan.

      The  weighted-average  fair value per share of options  granted  under the
1995 Plan during the six months ended  December 31, 2005 and 2004, was $4.84 and
$5.70, respectively.

      The following table summarizes transactions pursuant to the 1995 Plan:


                                       14


                                                            Weighted Average
                                           Options         Exercise Price Per         Options
                                         Outstanding            Options             Exercisable
                                         -----------       ------------------       -----------
Outstanding at June 30, 2004               1,504,523       $            10.56           865,653
       Granted                                 1,000                    19.41
       Expired or canceled                    (2,001)                   12.16
       Exercised                             (42,329)                    9.57
                                         -----------
Outstanding at December 31, 2004           1,461,193       $            10.58           906,702
                                         ===========

Outstanding at June 30, 2005               1,419,902       $            14.31           921,002
       Granted                                 8,225                    25.52
       Expired or canceled                    (5,174)                   15.40
       Exercised                            (116,303)                   10.07
                                         -----------
Outstanding at December 31, 2005           1,306,650       $            14.75           871,387
                                         ===========

      The  following  table sets forth  certain  information  as of December 31,
2005:

                                    Options Outstanding                                      Options Exercisable
                   -------------------------------------------------------  -------------------------------------------------------
                                  Weighted        Weighted       Aggregate                 Weighted        Weighted       Aggregate
Range of Exercise    Options       Average         Average       Intrinsic    Options       Average         Average       Intrinsic
     Prices        Outstanding  Remaining Life  Exercise Price  Value (000) Exercisable  Remaining Life  Exercise Price  Value (000)
-----------------  -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
$  4.49 - $10.00       433,168            5.85  $         7.66  $    7,750      395,181            5.71  $         7.62  $    7,086
$ 10.01 - $15.00       407,466            6.26           12.61       5,273      323,953            5.96           12.31       4,289
$ 15.01 - $20.00       168,926            8.49           19.29       1,058       78,326            8.49           19.28         491
$ 20.01 - $25.00        40,000            9.44           24.01          62       10,000            9.44           24.01          15
$ 25.01 - $25.67       257,090            9.50           25.67          --       63,927            9.50           25.67          --
                   -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
                     1,306,650            7.15  $        14.75  $   14,141      871,387            6.37  $        11.92  $   11,881
                   ===========  ==============  ==============  ==========  ===========  ==============  ==============  ==========

      In  October  2005,  the  Board of  Directors  adopted  the 2005  Executive
Management  Stock  Option  Plan  (the  "2005  Executive  Plan").  Under the 2005
Executive  Plan, the Company has reserved  1,500,000  shares of common stock for
executives and key managers of the Company,  which may be either incentive stock
options or non-qualified  stock options.  The exercise price of stock options is
required to be at least equal to 100% of the fair market value of the  Company's
common stock at the date of the grant.  The maximum term for all options was ten
years, with outstanding options having a weighted average remaining  contractual
life of 9.5 years as of December  31,  2005.  In  addition,  executive  officers
granted  options under the initial grant in 2005 will not be eligible to receive
additional  options until fiscal 2008.  Options  granted as of December 31, 2005
are  expected  to  vest  over a  period  of  one to  three  years  based  on the
achievement of annual performance targets established by the Board of Directors.
However, all options granted will vest over a period of not less than two fiscal
years up to a maximum of five fiscal years, and any unvested options vest at the
end of the five years.

      In October  2005,  the  Company  granted  957,000  options  under the 2005
Executive Plan with an exercise price of $24.00 per share and a weighted-average
grant date fair value per share of $4.33.

      The following  summarizes the transactions  pursuant to the 2005 Executive
Plan:

                                                            Weighted Average
                                           Options         Exercise Price Per         Options
                                         Outstanding            Options             Exercisable
                                         -----------       ------------------       -----------
Outstanding at June 30, 2005                      --       $               --                --
       Granted                               957,000                    24.00
       Exercised                                  --                       --
                                         -----------
Outstanding at December 31, 2005             957,000       $            24.00                --
                                         ===========


                                       15


      The  following  table sets forth  certain  information  as of December 31,
2005:

                                    Options Outstanding                                      Options Exercisable
                   -------------------------------------------------------  -------------------------------------------------------
                                  Weighted        Weighted       Aggregate                 Weighted        Weighted       Aggregate
Range of Exercise    Options       Average         Average       Intrinsic    Options       Average         Average       Intrinsic
     Prices        Outstanding  Remaining Life  Exercise Price  Value (000) Exercisable  Remaining Life  Exercise Price  Value (000)
-----------------  -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
     $24.00            957,000            9.50  $        24.00  $    1,484           --              --  $           --  $       --
                   ===========  ==============  ==============  ==========  ===========  ==============  ==============  ==========

      (C) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLANS

      In 1995, the Board of Directors  adopted the Directors'  Stock Option Plan
(the "1995 Directors'  Plan"),  which was terminated in May 2005. Under the 1995
Directors' Plan, each non-employee director received 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  of  Directors,  and on  each  three  year  anniversary  thereafter,  each
non-employee  director received an additional option to purchase 6,000 shares of
common  stock.  The exercise  price per share for all options  granted under the
1995  Directors'  Plan was 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. In May 2005, the Board
of  Directors  adopted the 2005  Non-Employee  Directors  Stock Option Plan (the
"2005 Directors Plan") in which each director receives options for 20,000 shares
of  common  stock  on the  date of his or her  first  election  to the  Board of
Directors.  In addition, each non-employee director, on each anniversary date of
his or her  appointment,  will receive an  additional  option to purchase  5,000
shares of common stock under the 2005 Directors  Plan. The exercise price of all
options  granted  under the 2005  Directors  Plan is required to be equal to the
fair  market  value of the common  stock on the date of grant.  The  Company has
reserved 200,000 shares of common stock under the 2005 Directors Plan.

      The maximum term for all options under both plans (the  "Directors  Plans)
is ten years,  with  outstanding  options  having a weighted  average  remaining
contractual life of 8.2 years as of December 31, 2005. The weighted-average fair
value per share of options  granted  under the  Directors  Plans  during the six
months ended December 31, 2005 and 2004, was $4.72 and $5.94, respectively.

      The  following  table  summarizes  transactions  pursuant to the Directors
Plans:

                                                            Weighted Average
                                           Options         Exercise Price Per         Options
                                         Outstanding            Options             Exercisable
                                         -----------       ------------------       -----------
Outstanding at June 30, 2004                  79,914       $            10.54            53,994
       Granted                                 6,000                    22.70
       Exercised                             (25,914)                    9.13
                                         -----------
Outstanding at December 31, 2004              60,000       $            12.38            43,992
                                         ===========

Outstanding at June 30, 2005                  33,000       $            15.53            19,000
       Granted                                45,000                    24.67
                                         -----------
Outstanding at December 31, 2005              78,000       $            20.81            33,500
                                         ===========

      The  following  table sets forth  certain  information  as of December 31,
2005:

                                    Options Outstanding                                      Options Exercisable
                   -------------------------------------------------------  -------------------------------------------------------
                                  Weighted        Weighted       Aggregate                 Weighted        Weighted       Aggregate
Range of Exercise    Options       Average         Average       Intrinsic    Options       Average         Average       Intrinsic
     Prices        Outstanding  Remaining Life  Exercise Price  Value (000) Exercisable  Remaining Life  Exercise Price  Value (000)
-----------------  -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
$ 10.01 - $15.00        15,000            4.10  $        12.50  $      195       15,000            4.10  $        12.50  $      195
$ 15.01 - $20.00        12,000            8.19           15.74         117        4,000            8.19           15.74          39
$ 20.01 - $25.00        26,000            9.29           23.04          64        7,000            9.27           23.01          17
$ 25.01 - $28.03        25,000            9.62           25.90          --        7,500            9.68           26.26          --
                   -----------  --------------  --------------  ----------  -----------  --------------  --------------  ----------
                        78,000            8.23  $        20.81  $      376       33,500            6.92  $        18.16  $      252
                   ===========  ==============  ==============  ==========  ===========  ==============  ==============  ==========

      (D) SHARE-BASED COMPENSATION

      Prior to July 1, 2005, the Company  followed the guidance of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED

                                       16


COMPENSATION" ("SFAS 123"), which allowed an entity to continue to measure stock
option  compensation  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.

      In December  2004,  the FASB revised SFAS 123 through the issuance of SFAS
123-R.  The  Company  adopted  SFAS  123-R  effective  with the  fiscal  quarter
beginning July 1, 2005 on a "modified  prospective basis," and accordingly,  pro
forma  disclosure  of net  income  and  earnings  per  share,  is no  longer  an
alternative to recognition in the statement of operations.

      As permitted by SFAS 123 and SFAS 123-R,  the fair value of each  employee
stock option is estimated  on the date of grant using the  Black-Scholes  option
pricing model with the  significant  assumptions  noted in the following  table.
Expected volatilities are based on historical volatility of the Company's common
stock, and other factors.  The Company uses both historical data and prospective
trends to  estimate  option  exercises  and  employee  terminations  within  the
valuation  model;  separate  groups of employees  that have  similar  historical
exercise behavior are considered separately for valuation purposes. The expected
term of options  granted  represents the period of time that options granted are
expected to be  outstanding;  the  information  given below results from certain
groups of  employees  exhibiting  different  behavior.  The  risk-free  rate for
periods  within  the  contractual  life  of the  option  is  based  on the  U.S.
Treasury's yield curve in effect at the time of grant.

Weighted average of grants          Three Months Ended December 31,       Six Months Ended December 31,
                                    ------------------------------        ------------------------------
  awarded during the:                   2005              2004               2005               2004
                                    ------------      ------------        -----------       ------------

Volatility                               25.0%             32.1%              25.0%             31.8%
Risk free interest rate                   4.3%              3.6%               4.3%              3.6%
Expected dividend yield                     0%                0%                 0%                0%
Expected term (in years)              2.3 years         3.0 years          2.3 years         3.1 years

      The Company  recognized  $0.8 million and $1.1 million  ($0.5  million and
$0.7 million net of income taxes) in stock option  compensation during the three
and six months ended December 31, 2005,  respectively.  The following  table (in
thousands,  except per share amounts)  illustrates  the effect on net income and
earnings  per share as if the Company  had  applied  the fair value  recognition
provisions  of SFAS 123 during the three and six months ended  December 31, 2004
to stock-based  compensation  prior to the adoption of SFAS 123-R effective July
1, 2005.  However,  no stock based  compensation was recognized in the financial
statements during that period pursuant to APB 25.

                                                 Three Months Ended December 31,           Six Months Ended December 31,
                                                 -------------------------------           -----------------------------
                                                    2005                2004                 2005                2004
                                                  --------            --------             --------            --------
Net income, as reported                           $  2,639            $  2,437             $  5,594            $  4,291
Less:
   Stock-based compensation - fair value
   measurement prior to adoption of SFAS 123-R          --                (335)                  --                (697)
                                                  --------            --------             --------            --------
Net income, pro forma                                2,639               2,102                5,594               3,594
Preferred stock dividends                               --                 (47)                  --                (182)
                                                  --------            --------             --------            --------
Net income available to
    common shareholders - pro forma               $  2,639            $  2,055             $  5,594            $  3,412
                                                  ========            ========             ========            ========

Basic income per share - reported                 $   0.17            $   0.20             $   0.36            $   0.35
                                                  ========            ========             ========            ========
Basic income per share - pro forma                $   0.17            $   0.17             $   0.36            $   0.29
                                                  ========            ========             ========            ========

Diluted income per share - reported               $   0.17            $   0.18             $   0.35            $   0.31
                                                  ========            ========             ========            ========
Diluted income per share - pro forma              $   0.17            $   0.15             $   0.35            $   0.26
                                                  ========            ========             ========            ========


                                       17


      A  summary  of  the   Company's   nonvested   shares   granted  under  the
aforementioned  plans as of December 31, 2005 and changes  during the six months
ended as of that date, is presented as follows:

                                                                Weighted Average
                                                                 Grant-Date Fair
                                                  Shares              Value
                                                ---------       ----------------
Nonvested as of June 30, 2005                     531,566       $           5.74
Granted                                         1,028,225                   4.27
Granted that vested during the period             (20,688)                  4.51
Exercised  that vested during the period          (81,168)                  3.06
Forfeited                                          (5,173)                  4.73
                                                ---------       ----------------
Nonvested as of December 31, 2005               1,452,763       $           4.87
                                                =========       ================

      The aggregate  intrinsic value of options  exercised during the six months
ended   December  31,  2005  and  2004  was  $1.9  million  and  $1.2   million,
respectively.  As of  December  31,  2005,  there  was  $6.0  million  of  total
unrecognized  compensation  cost related to nonvested  share-based  compensation
arrangements  granted under the  aforementioned  plans, which will be recognized
over a weighted average life of 1.7 years.

NOTE 8. COMPREHENSIVE INCOME

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

                                                 Three Months Ended December 31,           Six Months Ended December 31,
                                                 -------------------------------           -----------------------------
                                                    2005                2004                 2005                2004
                                                  --------            --------             --------            --------
Net income                                        $  2,639            $  2,437             $ 5,594             $  4,291
Interest rate swap transaction (Note 5)                 17                  59                (225)                  23
                                                  --------            --------             -------             --------
Comprehensive income                              $  2,656            $  2,496             $ 5,369             $  4,314
                                                  ========            ========             =======             ========

NOTE 9. INCOME TAXES

      The  Company's  deferred tax assets  include the benefit of net  operating
loss  carryforwards  incurred by the Company  through the fiscal year ended June
30, 2005.  While the Company attained  profitability  during the year ended June
30, 2004, based on the consideration of all of the available evidence, including
the recent history of losses,  management concluded as of June 30, 2004, that it
was more likely than not that all of the net  deferred  tax assets  would not be
realized.  Accordingly,  the Company recorded a valuation allowance equal to the
net  deferred tax assets at that time.  Prior to the  reversal of the  valuation
allowance  as of June 30, 2005, a portion of the  Company's  taxable  income was
subject to the  alternative  minimum  tax  ("AMT"),  which is  reflected  in its
statements of operations  for three and six months ended December 31, 2004 along
with a provision for state income taxes.

      However,  as of  June  30,  2005,  after  consideration  of all  available
positive and negative  evidence,  it was  concluded  that the deferred tax asset
relating to the Company's net operating loss carryforwards will more likely than
not be realized in the future. As a result,  the entire valuation  allowance was
reversed and  reported as a component  of the fiscal 2005 income tax  provision.
Accordingly,  during the three and six  months  ended  December  31,  2005,  the
Company  recognized  a  provision  for  income  taxes of $1.6  million  and $3.4
million,  respectively,  in its  statements  of operations  consistent  with its
effective  tax  rate.  However,  while the  Company  anticipates  continuing  to
recognize a full tax  provision in future  periods,  the Company  expects to pay
only AMT and  state/local  taxes  until  such time that its net  operating  loss
carryforwards are fully utilized.

      The Company's June 30, 2005 balance sheet reported noncurrent deferred tax
assets  of $39.3  million  and a  noncurrent  deferred  tax  liability  of $24.2
million;  however,  in  accordance  with SFAS No.  109,  "ACCOUNTING  FOR INCOME
TAXES," noncurrent  deferred tax assets and noncurrent  deferred tax liabilities
are to be netted. Accordingly, the June 30, 2005 balance sheet presented in this
Form 10-Q (also as  presented in the Form 10-Q for the quarter  ended  September
30, 2005) reflects a net  noncurrent  deferred tax asset of $15.1 million and no
noncurrent deferred tax liability.

      The Company will continue to evaluate  whether or not its net deferred tax
assets will be fully realized prior to expiration.  Should it become more likely
than  not that all or a  portion  of the net  deferred  tax  assets  will not be
realized, a valuation allowance will be recorded. In order to utilize all of its
deferred  tax  assets,  the  Company  will need to  generate  taxable  income of
approximately $110 million.

      As of December 31, 2005, the Company had net operating loss  carryforwards
for federal  income tax  purposes of  approximately  $110  million and for state
purposes in varying  amounts.  If an "ownership  change" for federal  income tax
purposes  were  to  occur  in the  future,  the  Company's  ability  to use  its
pre-ownership  change  federal and state net operating loss  carryforwards  (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under  certain  circumstances  may prevent the Company  from being able to
utilize a portion  of such loss  carryforwards  in future  tax  periods  and may
reduce its after-tax cash flow.


                                       18


NOTE 10. CONTINGENCIES

      The Company is continuing to evaluate the impact of Hurricane  Katrina,  a
major hurricane,  which directly or indirectly impacted the Company's operations
and assets in  northwest  Florida  and in portions  of  Alabama,  Louisiana  and
Mississippi.  Several  cities  along  the  coast  of the  Gulf  of  Mexico  were
devastated,  including  New Orleans,  Louisiana and Biloxi,  Mississippi.  Along
these coastal areas, the Company has approximately  500 customers,  representing
annualized revenues of $0.5 million,  directly impacted such that the operations
of those  customers  will be disrupted on a permanent  or  long-term  basis.  In
addition, the Company has tanks and other assets at customer sites and at depots
which may not be recoverable. Accordingly, during the three and six months ended
December 31, 2005,  the Company's  statements of operations  included  hurricane
related  expenses  of  $0.3  million  and  $0.8  million,  respectively,  in its
statement  of  operations,  including  a reserve at  December  31,  2005 of $0.3
million,  primarily  for  unrecoverable  or impaired  assets,  unamortized  tank
installation   and  placement  costs,   and  accounts   receivable   deemed  not
collectible.  However, as the Company continues to examine the recoverability of
assets and evaluate each impacted  customer,  actual losses  incurred may differ
from the recognized reserve.


                                       19


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  REGARDING  FUTURE
EVENTS AND OUR FUTURE RESULTS THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES,
FORECASTS,  AND  PROJECTIONS  ABOUT THE  INDUSTRY  IN WHICH WE  OPERATE  AND THE
BELIEFS  AND   ASSUMPTIONS   OF  OUR   MANAGEMENT.   WORDS  SUCH  AS  "EXPECTS,"
"ANTICIPATES,"  "TARGETS," "GOALS," "PROJECTS,"  "INTENDS," "PLANS," "BELIEVES,"
"SEEKS,"  "ESTIMATES,"  VARIATIONS  OF SUCH WORDS AND  SIMILAR  EXPRESSIONS  ARE
INTENDED  TO  IDENTIFY  SUCH  FORWARD-LOOKING   STATEMENTS.   IN  ADDITION,  ANY
STATEMENTS THAT REFER TO PROJECTIONS OF OUR FUTURE  FINANCIAL  PERFORMANCE,  OUR
ANTICIPATED GROWTH AND TRENDS IN OUR BUSINESS,  AND OTHER  CHARACTERIZATIONS  OF
FUTURE EVENTS OR  CIRCUMSTANCES,  ARE  FORWARD-LOOKING  STATEMENTS.  READERS ARE
CAUTIONED THAT THESE  FORWARD-LOOKING  STATEMENTS ARE ONLY  PREDICTIONS  AND ARE
SUBJECT TO RISKS, UNCERTAINTIES,  AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT.
THEREFORE,  ACTUAL  RESULTS  MAY  DIFFER  MATERIALLY  AND  ADVERSELY  FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS.

OVERVIEW

      We believe we are the  leading  supplier  of bulk CO2 systems and bulk CO2
for carbonating  fountain  beverages in the United States based on the number of
bulk CO2 systems  leased to  customers.  As of December 31, 2005,  we operated a
national  network  of 120  service  locations  servicing  approximately  106,000
customer  locations in 45 states.  Currently,  virtually  all fountain  beverage
users in the  continental  United States are within our present service area. On
October 1, 2004, we purchased the bulk CO2 beverage carbonation business of Pain
Enterprises,  Inc. The  transaction  involved the  acquisition of  approximately
9,000  customer  accounts,  including  approximately  6,300  tanks  in  service,
vehicles,  parts, and supplies.  The acquisition of Pain  Enterprises'  bulk CO2
beverage carbonation business in 12 Midwestern and Southeastern states: Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky, Michigan, Missouri, Minnesota, Ohio,
Tennessee and Wisconsin,  provides further  penetration into markets in which we
operate.  In  addition,  on  September  30,  2005,  we  purchased  the  beverage
carbonation  business of Bay Area Equipment Co., Inc. We acquired  approximately
2,500 customer accounts,  including 1,000 tanks in service, vehicles, parts, and
supplies. The acquisition of Bay Area Equipment's beverage carbonation business,
which operated in northern California provides further penetration and increased
operating efficiencies in that market.

      We market our bulk CO2 products and  services to large  customers  such as
restaurant and convenience store chains,  movie theater operators,  theme parks,
resorts and sports venues.  Our customers include many of the major national and
regional chains throughout the United States. Our success in reaching multi-unit
placement  agreements  is due  in  part  to our  national  delivery  system.  We
typically approach large chains on a corporate or regional level for approval to
become the  exclusive  supplier of bulk CO2  products and services on a national
basis or within a designated territory.  We then direct our sales efforts to the
managers  or  owners  of the  individual  or  franchised  operating  units.  Our
relationships  with chain customers in one geographic  market frequently help us
to  establish  service  with these same chains when we expand into new  markets.
After accessing the chain accounts in a new market,  we attempt to rapidly build
route  density  by  leasing  bulk  CO2  systems  to   independent   restaurants,
convenience stores and theaters.

      We have entered into 36 master service  agreements which include 33 of the
largest 100 restaurant and convenience  store chains  operating 51 concepts that
provide fountain  beverages.  These master service agreements  generally provide
for a  commitment  on the part of the operator  for all of its  currently  owned
locations  and  may  also  include  future   locations.   We  currently  service
approximately 39,000 chain and franchisee locations with chains that have signed
master service  agreements.  We are actively  working on expanding the number of
master service agreements with numerous restaurant chains.

      We  believe  that our future  revenue  growth,  gains in gross  margin and
profitability  will be  dependent  upon (1)  increases  in route  density in our
existing   markets  and  the  expansion  and  penetration  of  bulk  CO2  system
installations  in new market  regions,  both resulting from  successful  ongoing
marketing,  (2) improved  operating  efficiencies and (3) price  increases.  New
multi-unit placement agreements combined with single-unit  placements will drive
improvements  in achieving route density.  We maintain a highly  efficient route
structure and  establish  additional  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.


                                       20


      Generally,  our experience has been that as our service  locations  mature
their gross profit margins  improve as a result of business  volume growth 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.  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 support  our  infrastructure.  We  continue  to focus 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 bulk CO2 and high
pressure  cylinder  revenues.  Revenues  have grown from $67.6 million in fiscal
2001 to $97.3 million in fiscal 2005. 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.

      Cost of  products  sold is  comprised  of  purchased  CO2 and  vehicle and
service  location  costs  associated  with the storage  and  delivery of CO2. We
operate a fleet of specialized bulk CO2 delivery  vehicles and technical service
vehicles  that  logged  approximately  13 million  miles in fiscal  2005.  While
significant  increases in fuel prices impact our operating costs, such impact is
largely  offset by fuel  surcharges  billed to the  majority  of our  customers.
Consequently,  while the  impact on our gross  profit  and  operating  income is
substantially  mitigated,  rising fuel  prices do result in lower  gross  profit
margins.  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 employee  training.
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.  With respect to company-owned bulk
CO2 systems,  we capitalize  installation  costs based on a standard  amount per
installation that is associated with specific installations of such systems with
customers under non-cancelable contracts and which would not be incurred but for
a successful  placement.  All other service,  marketing and administrative costs
are expensed as incurred.

      Since 1990, we have devoted significant  resources to building a sales and
marketing  organization,   adding  administrative  personnel  and  developing  a
national  infrastructure  to  support  the  rapid  growth  in the  number of our
installed  base of bulk  CO2  systems.  The  costs  of  this  expansion  and the
significant  depreciation  expense  recognized  on our  installed  network  have
resulted in accumulated net losses of $24.5 million at December 31, 2005.

RESULTS OF OPERATIONS

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


                                       21


                                                 Three Months Ended December 31,          Six Months Ended December 31,
                                                 -------------------------------          -----------------------------
Income Statement Data:                              2005                2004*                2005                2004*
                                                  --------            --------             --------            --------

Product sales                                         65.7%               62.9%                65.2%               62.2%
Equipment rentals                                     34.3                37.1                 34.8                37.8
                                                  --------            --------             --------            --------
Total revenues                                       100.0               100.0                100.0               100.0

Cost of products sold, excluding
    depreciation and amortization                     42.0                40.7                 42.5                41.8
Cost of equipment rentals, excluding
    depreciation and amortization                      2.8                 2.4                  2.6                 2.4
Selling, general and administrative expenses          21.5                18.8                 19.9                18.7
Depreciation and amortization                         15.8                17.0                 15.6                17.0
Loss on asset disposal                                 1.4                 2.0                  2.2                 1.5
                                                  --------            --------             --------            --------
Operating income                                      16.5                19.1                 17.2                18.6
Gain on financial instrument                            --                  --                 (0.3)                 --
Interest expense                                       1.9                 9.0                  1.6                 9.2
                                                  --------            --------             --------            --------

Income before provision for income taxes              14.6                10.1                 15.9                 9.4
Provision for income taxes                             5.4                 0.2                  6.0                 0.2
                                                  --------            --------             --------            --------
Net income                                             9.2%                9.9%                 9.9%                9.2%
                                                  ========            ========             ========            ========

* Reclassified to conform to current year presentation.

THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2004

TOTAL REVENUES

      Total revenues increased by $4.1 million,  or 16.5%, from $24.7 million in
2004 to $28.8 million in 2005.  Revenues derived from our bulk CO2 service plans
increased  by $2.7  million,  primarily  due to an  increase  in the  number  of
customer locations.  During the year, the number of customer locations utilizing
our products and services  increased from 94,000  customers at December 31, 2004
to 106,000  customers  at December  31, 2005,  due  primarily to strong  organic
growth.  In addition,  revenues derived from the sale of high pressure  cylinder
products, fuel surcharges,  equipment sales and other revenues increased by $1.4
million. On October 1, 2004, we purchased approximately 9,000 customer locations
from Pain  Enterprises,  Inc.  whose  impact is included  fully in both 2005 and
2004.

      The following table sets forth, for the periods indicated,  the percentage
relationship which our service plans bear to total revenues:

                                                 Three Months Ended December 31,
                                                 -------------------------------
Service Plan                                         2005              2004
                                                 ------------      ------------
      Bulk budget plan(1)                                52.6%             55.5%
      Equipment lease/product purchase plan(2)           16.3              16.0
      Product purchase plan(3)                           10.2               9.9
      High pressure cylinder(4)                           5.1               6.1
      Other revenues(5)                                  15.8              12.5
                                                 ------------      ------------
                                                        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.

      PRODUCT  SALES - Revenues  derived from the product  sales  portion of our
service plans increased by $3.4 million, or 21.8%, from $15.5 million in 2004 to
$18.9  million in 2005.  The  increase in revenues is  primarily  due to a 11.2%
increase in the average number of customer  locations  serviced  combined with a
3.5% increase in the quantity of CO2 sold to the average customer.  The increase
in the quantity of CO2 sold to the average customer is due in part to the impact
of customer  locations under master service  agreements.  In addition,  sales of


                                       22


products and services other than bulk CO2 increased by $1.4 million due in large
part to an increase in revenues derived from cylinder products, fuel surcharges,
equipment sales and other revenues.

      EQUIPMENT RENTALS - Revenues derived from the lease portion of our service
plans  increased  by $0.7  million,  or 7.5%,  from $9.2 million in 2004 to $9.9
million in 2005,  primarily  due to a 11.5%  increase in the  average  number of
customer   locations  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 bulk budget plan and equipment
lease/product  purchase plans pursuant to master service agreements.  The number
of  customer  locations  renting  equipment  from us  increased  from  78,000 at
December  31, 2004 to 87,000 at  December  31,  2005,  due  primarily  to strong
organic growth.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost of products sold, excluding depreciation and amortization,  increased
from $10.0  million  in 2004 to $12.1  million in 2005,  while  decreasing  as a
percentage of product sales revenue from 64.7% to 63.9%.

      Product costs  increased by $1.0 million from $3.8 million in 2004 to $4.8
million in 2005.  The base price with our primary  supplier of CO2  increased by
the Producer  Price Index,  while the volume of CO2 sold by us increased  14.4%,
primarily  due to a 11.2%  increase  in our  average  customer  base  and a 3.5%
increase in CO2 sold to these  customers.  The  increase in the  quantity of CO2
sold to the  average  customer  is due in large  part to the  impact  of  master
service agreements.

      Operational  costs,  primarily  wages  and  benefits  related  to  cost of
products  sold,  increased  from $3.9  million in 2004 to $4.5  million in 2005,
primarily due to a $0.5 million  increase in route driver costs  associated with
an increased  customer  base.  As of December  31,  2005,  we had 351 drivers as
compared  to 321 at the same  point last year.  Operational  related  costs also
included  costs  directly  related  to the  two  major  hurricanes  to  hit  the
southeastern United States in the first quarter of fiscal 2005.

      Truck  delivery  expenses  increased  from  $1.5  million  in 2004 to $1.8
million in 2005 primarily due to the increased  customer base and fuel costs. We
have been able to continue 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.

      Occupancy and shop costs related to cost of products sold  increased  from
$0.8 million in 2004 to $0.9 million in 2005.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost  of  equipment  rentals,  excluding  depreciation  and  amortization,
increased from $0.6 million in 2004 to $0.8 million in 2005 while  increasing as
a percentage of equipment rentals revenue from 6.4% to 8.2%. The increase in the
cost of  equipment  rentals is  primarily  related to  additional  refurbishment
expense  associated with tanks acquired from Pain  Enterprises,  Inc. in October
2004, and the rental of bulk CO2 equipment  from third  parties.  Our ability to
refurbish  and repair bulk CO2 tanks  reduces  our need to purchase  replacement
equipment and consequently reduces our capital expenditures requirements.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and administrative  expenses ("SG&A expenses") increased
by $1.6  million  from  $4.6  million  in 2004 to $6.2  million  in 2005,  while
increasing  as a  percentage  of total  revenues  from 18.8% in 2004 to 21.5% in
2005.  Included  in 2005  SG&A  expenses  was  $0.8  million  for  stock  option
compensation  that  was  the  direct  result  of the  adoption  SFAS  No.  123-R
"SHARE-BASED  PAYMENTS"  (SFAS  123-R) on July 1, 2005  (see  Recent  Accounting
Pronouncements).  There was no comparable  stock option expense  recorded in our
statement of operations prior to the date of adoption.

      Selling related expenses  increased by $0.3 million,  from $0.9 million in
2004 to $1.2 million in 2005,  primarily the result of the planned conversion of
select  independent  sales  representatives  to salaried  employees and expenses
directed towards training, marketing and growth opportunities.

      General and administrative  expenses increased by $1.3 million,  or 34.2%,
from $3.7 million in 2004 to $5.0 million in 2005.  This increase was the result
of the addition of our new Chief Customer  Officer,  wage  increases,  hurricane
related expenses, public company related expenses, including expenses related to
the  Sarbanes-Oxley  Act of 2002,  an increase in the  expense  associated  with
uncollected  billings,  and the recognition of stock option compensation expense
during 2005 in accordance with SFAS 123-R.


                                       23


DEPRECIATION AND AMORTIZATION

      Depreciation and amortization  increased from $4.2 million in 2004 to $4.6
million  in  2005.  As  a  percentage  of  total  revenues,   depreciation   and
amortization expense decreased from 17.0% in 2004 to 15.8% in 2005.

      Depreciation  expense  increased from $3.4 million in 2004 to $3.8 million
in 2005.  The increase was due in large part to the purchase of the purchase and
installation of new equipment for organic customer growth.

      Amortization  expense  remained  steady at $0.8  million  in both 2004 and
2005. The decrease in the amortization of certain deferred charges was offset by
the increased  amortization  of  intangible  assets  related to our  acquisition
activities over the last year.

LOSS ON ASSET DISPOSAL

      Loss on asset disposal decreased from $0.5 million in 2004 to $0.4 million
in 2005, decreasing as a percentage of total revenues from 2.0% to 1.4%.

OPERATING INCOME

      For the reasons previously discussed,  operating income remained steady at
$4.7 million in both 2004 and 2005,  while  decreasing  as a percentage of total
revenues from 19.1% to 16.5%.

INTEREST EXPENSE

      Interest  expense  decreased  from $2.2 million in 2004 to $0.5 million in
2005,  while the effective  interest rate of our debt  decreased  from 10.1% per
annum  in 2004  to  6.1%  per  annum  in  2005.  This  reduction  was due to the
redemption of our 16.3% Senior  Subordinated  Promissory Notes in April 2005 and
the  refinancing  of our senior credit  facility in May 2005. See "Liquidity and
Capital Resources."

INCOME BEFORE PROVISION FOR INCOME TAXES

      For the reasons described above,  income before provision for income taxes
increased from $2.5 million in 2004 to $4.2 million in 2005.

PROVISION FOR INCOME TAXES

      Provision  for income  taxes  increased  from $0.1 million in 2004 to $1.6
million in 2005.  As of June 30,  2005,  after  consideration  of all  available
positive  and  negative  evidence,  we  concluded  that the  deferred  tax asset
relating to our net operating  loss  carryforwards  will more likely than not be
realized in the future. Thus, the entire valuation allowance previously recorded
was reversed.  Accordingly,  during the three months ended December 31, 2005, we
recognized a tax provision  consistent  with our  effective  tax rate.  However,
while we  anticipate  continuing  to  recognize a full tax  provision  in future
periods,  we expect to pay only AMT and  state/local  taxes until such time that
our net operating loss carryforwards are fully utilized.

      Deferred   income  taxes  reflect  the  benefits  of  net  operating  loss
carryforwards  and the net tax  effects of  temporary  differences  between  the
carrying amounts of assets and liabilities for financial  reporting purposes and
the amounts used for income tax  purposes.  Our deferred tax assets  include the
benefit of loss  carryforwards  incurred  through  fiscal 2005. In assessing the
realizability of deferred tax assets, we consider whether it is more likely than
not that some  portion or all of the  deferred  tax assets will not be realized.
Among other matters,  realization of the entire  deferred tax asset is dependent
on our ability to generate  sufficient taxable income prior to the expiration of
the  carryforwards.  In order to utilize the entire  deferred  tax asset will we
need to generate taxable income of approximately $110 million.  We will continue
to evaluate  whether or not our net deferred  tax assets will be fully  realized
prior to expiration. Should it become more likely than not that all or a portion
of the net deferred tax assets will not be realized a valuation  allowance  will
be recorded.

      As of December 31,  2005,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $110 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying  amounts  through  June 2025.  If an  "ownership  change" for
federal income tax purposes were to occur in the future,  our ability to use our
pre-ownership  change  federal and state net operating loss  carryforwards  (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under  certain  circumstances  may prevent us from being able to utilize a
portion  of such loss  carryforwards  in future tax  periods  and may reduce our
after-tax cash flow.


                                       24


NET INCOME

      For the reasons described above, net income increased from $2.4 million in
2004 to $2.6 million in 2005.

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 $0.4
million,  or 4.4%,  from $8.9  million in 2004 to $9.3  million  in 2005,  while
decreasing  as a percentage  of total  revenues  from 36.1% to 32.4%.  EBITDA in
2005,  along  with  Income  Before  Provision  for  Income  Taxes and Net Income
includes the impact of the adoption of SFAS 123-R in July 2005.

                                                 Three Months Ended December 31,
                                                 -------------------------------
                                                     2005               2004
                                                 -----------        -----------
Net income                                       $     2,639        $     2,437
Interest expense                                         543              2,228
Depreciation and amortization                          4,556              4,197
Provision for income taxes                             1,564                 52
                                                 -----------        -----------
EBITDA                                           $     9,302        $     8,914
                                                 ===========        ===========

Cash flows provided by (used in):
  Operating activities                           $     9,557        $     6,651
  Investing activities                           $    (9,311)       $   (20,261)
  Financing activities                           $      (176)       $    10,466

SIX MONTHS  ENDED  DECEMBER 31, 2005  COMPARED TO SIX MONTHS ENDED  DECEMBER 31,
2004

TOTAL REVENUES

      Total revenues increased by $10.0 million, or 21.6%, from $46.6 million in
2004 to $56.6 million in 2005.  Revenues derived from our bulk CO2 service plans
increased  by $7.4  million,  primarily  due to an  increase  in the  number  of
customer  locations,  while  revenues  derived  from the  sale of high  pressure
cylinder products, fuel surcharges, equipment sales and other revenues increased
by $2.6 million.  On October 1, 2004, we purchased  approximately 9,000 customer
locations from Pain Enterprises,  Inc. which generated  revenues of $2.5 million
in  the  three  months  ended   September  30,  2005  for  which  there  are  no
corresponding  revenues in the same period last year. In addition, the number of
customer  locations  utilizing our products and services  increased  from 94,000
customers  at December 31, 2004 to 106,000  customers at December 31, 2005,  due
primarily to strong organic growth

      The following table sets forth, for the periods indicated,  the percentage
relationship which our service plans bear to total revenues:


                                       25


                                                  Six Months Ended December 31,
                                                 -------------------------------
Service Plan                                         2005               2004
                                                 -----------        -----------
      Bulk budget plan(1)                               53.8%              58.3%
      Equipment lease/product purchase plan(2)          16.7               14.6
      Product purchase plan(3)                          10.3                9.4
      High pressure cylinder(4)                          5.0                5.8
      Other revenues(5)                                 14.2               11.9
                                                 -----------        -----------
                                                       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.

      PRODUCT  SALES - Revenues  derived from the product  sales  portion of our
service plans increased by $7.9 million, or 27.4%, from $29.0 million in 2004 to
$36.9  million in 2005.  The  increase in revenues is  primarily  due to a 16.2%
increase in the average number of customer  locations  serviced  combined with a
5.6%  increase in the quantity of CO2 sold to the average  customer due in large
part to the customers  acquired in the Pain  transaction  on October 1, 2004 and
the impact of customer locations under master service  agreements.  In addition,
the sales of products and services other than bulk CO2 increased by $2.6 million
due in large part to an increase in revenues  derived  from  cylinder  products,
fuel surcharges, equipment sales and other revenues.

      EQUIPMENT RENTALS - Revenues derived from the lease portion of our service
plans increased by $2.1 million,  or 12.0%,  from $17.6 million in 2004 to $19.7
million in 2005,  primarily  due to a 16.0%  increase in the  average  number of
customer   locations   leasing  equipment  from  us,  the  impact  of  the  Pain
transaction,  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
bulk budget plan and equipment  lease/product  purchase plans pursuant to master
service  agreements.  The number of customer locations renting equipment from us
increased  from 78,000 at December 31, 2004 to 87,000 at December 31, 2005,  due
primarily to strong organic growth.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost of products sold, excluding depreciation and amortization,  increased
from $19.5  million  in 2004 to $24.1  million in 2005,  while  decreasing  as a
percentage of product sales revenue from 67.1% to 65.1%.

      Product costs  increased by $2.2 million from $7.4 million in 2004 to $9.6
million in 2005.  The base price with our primary  supplier of CO2  increased by
the Producer  Price Index,  while the volume of CO2 sold by us increased  22.5%,
primarily  due to a 16.2%  increase  in our  average  customer  base  and a 5.6%
increase in CO2 sold to these  customers.  The  increase in the  quantity of CO2
sold to the  average  customer  is due in large  part to the  impact of the Pain
transaction on October 1, 2004 and master service agreements.

      Operational  costs,  primarily  wages  and  benefits  related  to  cost of
products  sold,  increased  from $7.5  million in 2004 to $9.0  million in 2005,
primarily due to a $1.3 million  increase in route driver costs  associated with
an increased  customer  base.  As of December  31,  2005,  we had 351 drivers as
compared to 321 at the same point last year and 270 at the  beginning  of fiscal
2004.  Operational related costs also included costs directly related to the two
major hurricanes to hit the  southeastern  United States in the first quarter of
fiscal 2005.

      Truck  delivery  expenses  increased  from  $3.0  million  in 2004 to $3.7
million in 2005 primarily due to the increased  customer base and fuel costs. We
have been able to continue 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.

      Occupancy and shop costs related to cost of products sold  increased  from
$1.6 million in 2004 to $1.7 million in 2005.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost  of  equipment  rentals,  excluding  depreciation  and  amortization,
increased from $1.1 million in 2004 to $1.5 million in 2005 while  increasing as
a percentage of equipment rentals revenue from 6.5% to 7.5%. The increase in the


                                       26


cost of  equipment  rentals is  primarily  related to  additional  refurbishment
expense  associated with tanks acquired from Pain  Enterprises,  Inc. in October
2004, and the rental of bulk CO2 equipment  from third  parties.  Our ability to
refurbish  and repair bulk CO2 tanks  reduces  our need to purchase  replacement
equipment and consequently reduces our capital expenditures requirements.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and administrative  expenses ("SG&A expenses") increased
by $2.5  million  from $8.7  million  in 2004 to $11.3  million  in 2005,  while
increasing  as a  percentage  of total  revenues  from 18.7% in 2004 to 19.9% in
2005.  Included  in 2005  SG&A  expenses  was  $1.1  million  for  stock  option
compensation  that  was  the  direct  result  of the  adoption  SFAS  No.  123-R
"SHARE-BASED  PAYMENTS"  (SFAS  123-R) on July 1, 2005  (see  Recent  Accounting
Pronouncements).  There was no comparable  stock option expense  recorded in our
statement of operations prior to the date of adoption.

      Selling related expenses  increased by $0.4 million,  from $1.8 million in
2004 to $2.2 million in 2005,  primarily the result of the planned conversion of
select  independent  sales  representatives  to salaried  employees and expenses
directed towards training, marketing and growth opportunities.

      General and administrative  expenses increased by $2.1 million,  or 30.5%,
from $6.9 million in 2004 to $9.0 million in 2005.  This increase was the result
of the addition of our new Chief Customer  Officer,  wage  increases,  hurricane
related expenses, public company related expenses, including expenses related to
the  Sarbanes-Oxley  Act of 2002,  an increase in the  expense  associated  with
uncollected  billings,  and the recognition of stock option compensation expense
during 2005 in accordance with SFAS 123-R.

DEPRECIATION AND AMORTIZATION

      Depreciation and amortization  increased from $7.9 million in 2004 to $8.9
million  in  2005.  As  a  percentage  of  total  revenues,   depreciation   and
amortization expense decreased from 17.0% in 2004 to 15.6% in 2005.

      Depreciation  expense  increased from $6.7 million in 2004 to $7.4 million
in 2005.  The  increase  was due in large part to the purchase of bulk CO2 tanks
and equipment from Pain Enterprises, Inc., and the purchase of new equipment for
organic customer growth.

      Amortization  expense  increased  from $1.3  million  2004 to $1.4 million
2005. The decrease in the amortization of certain deferred charges was offset by
the increased  amortization  of  intangible  assets  related to our  acquisition
activities over the last year.

LOSS ON ASSET DISPOSAL

      Loss on asset disposal increased from $0.7 million in 2004 to $1.2 million
in 2005, increasing as a percentage of total revenues from 1.5% to 2.2%.

      The loss on asset  disposal in 2005  includes a $0.3  million  reserve for
assets  partially or totally impaired as a result of Hurricane  Katrina.  We are
continuing to evaluate the impact of Hurricane Katrina, a major hurricane, which
directly or indirectly  impacted our operations and assets in northwest  Florida
and in portions of Alabama,  Louisiana and Mississippi.  Along the coastal areas
in these states, we have  approximately 500 customers,  representing  annualized
revenues of $0.5 million,  directly  impacted such that the  operations of those
customers will be disrupted on a permanent or long-term  basis. In addition,  we
have bulk CO2 tanks and other  assets at customer  sites and at our depots which
may not be recoverable.  As we continue to examine the  recoverability of assets
and evaluate each impacted customer,  actual losses incurred may differ from the
recognized reserve.

OPERATING INCOME

      For the reasons previously  discussed,  operating income increased by $1.1
million from $8.7 million in 2004 to $9.8  million in 2005.  As a percentage  of
total revenues, operating income decreased from 18.6% to 17.2%.

GAIN ON FINANCIAL INSTRUMENT

      We use derivative  instruments to manage  exposure to interest rate risks.
Our objectives for holding  derivatives are to minimize the risks using the most
effective  methods to eliminate or reduce the impact of this exposure.  In order
to reduce our exposure to increases in Eurodollar  rates,  and  consequently  to
increases  in  interest  payments,   we  entered  into  an  interest  rate  swap
transaction  (the  "Prior  Swap") on  October  2,  2003,  in the amount of $20.0


                                       27


million  with an  effective  date of  March  15,  2004  and a  maturity  date of
September 15, 2005. As the Prior Swap was not effective until March 15, 2004 and
no cash flows were exchanged prior to that date, the Prior Swap did not meet the
requirements  to be designated as a cash flow hedge. As such, an unrealized loss
of $0.2 million was  recognized in our  statement of  operations  for the fiscal
year ended June 30, 2004,  reflecting the change in fair value of the Prior Swap
from  inception to the effective  date. As of March 15, 2004, the Prior Swap met
the  requirements  to be designated as a cash flow hedge and was deemed a highly
effective transaction.  Accordingly, we recorded the change in fair value of the
Prior  Swap  from  March  15,  2004  through   September   15,  2005,  as  other
comprehensive  income, which was reversed upon the termination of the Prior Swap
in September 2005. In addition,  upon termination of the Prior Swap, we reversed
the unrealized  loss of $0.2 million  previously  recognized in our statement of
operations.

INTEREST EXPENSE

      Interest  expense  decreased  from $4.3 million in 2004 to $0.9 million in
2005,  while the effective  interest rate of our debt  decreased  from 10.8% per
annum  in 2004  to  5.4%  per  annum  in  2005.  This  reduction  was due to the
redemption of our 16.3% Senior  Subordinated  Promissory Notes in April 2005 and
the  refinancing  of our senior credit  facility in May 2005. See "Liquidity and
Capital Resources."

INCOME BEFORE PROVISION FOR INCOME TAXES

      For the reasons described above,  income before provision for income taxes
increased from $4.4 million in 2004 to $9.0 million in 2005.

PROVISION FOR INCOME TAXES

      Provision  for income  taxes  increased  from $0.1 million in 2004 to $3.4
million in 2005.  As of June 30,  2005,  after  consideration  of all  available
positive  and  negative  evidence,  we  concluded  that the  deferred  tax asset
relating to our net operating  loss  carryforwards  will more likely than not be
realized in the future. Thus, the entire valuation allowance previously recorded
was  reversed.  Accordingly,  during the six months ended  December 31, 2005, we
recognized a tax provision  consistent  with our  effective  tax rate.  However,
while we  anticipate  continuing  to  recognize a full tax  provision  in future
periods,  we expect to pay only AMT and  state/local  taxes until such time that
our net operating loss carryforwards are fully utilized.

      Deferred   income  taxes  reflect  the  benefits  of  net  operating  loss
carryforwards  and the net tax  effects of  temporary  differences  between  the
carrying amounts of assets and liabilities for financial  reporting purposes and
the amounts used for income tax  purposes.  Our deferred tax assets  include the
benefit of loss  carryforwards  incurred  through  fiscal 2005. In assessing the
realizability of deferred tax assets, we consider whether it is more likely than
not that some  portion or all of the  deferred  tax assets will not be realized.
Among other matters,  realization of the entire  deferred tax asset is dependent
on our ability to generate  sufficient taxable income prior to the expiration of
the  carryforwards.  In order to utilize the entire  deferred  tax asset will we
need to generate taxable income of approximately $110 million.  We will continue
to evaluate  whether or not our net deferred  tax assets will be fully  realized
prior to expiration. Should it become more likely than not that all or a portion
of the net deferred tax assets will not be realized a valuation  allowance  will
be recorded.

      As of December 31,  2005,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $110 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying  amounts  through  June 2025.  If an  "ownership  change" for
federal income tax purposes were to occur in the future,  our ability to use our
pre-ownership  change  federal and state net operating loss  carryforwards  (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under  certain  circumstances  may prevent us from being able to utilize a
portion  of such loss  carryforwards  in future tax  periods  and may reduce our
after-tax cash flow.

NET INCOME

      For the reasons  described  above,  net income increased from $4.3 million
2004 to $5.6 million in 2005.

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


                                       28


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 $2.0
million,  or 12.1%,  from $16.6 million in 2004 to $18.6 million in 2005,  while
decreasing as a percentage of total revenues from 35.7% to 32.9%. EBITDA in 2005
includes  the  impact  of the  adoption  of SFAS  123-R in July  2005.

                                                  Six Months Ended December 31,
                                                  -----------------------------
                                                     2005               2004
                                                 -----------        -----------
Net income                                       $     5,594        $     4,291
Interest expense                                         908              4,268
Depreciation and amortization                          8,860              7,937
Provision for income taxes                             3,429                106
Gain on financial instrument                            (177)                --
                                                 -----------        -----------
EBITDA                                           $    18,614        $    16,602
                                                 ===========        ===========

Cash flows provided by (used in):
  Operating activities                           $    17,184        $     9,928
  Investing activities                           $   (20,944)       $   (24,702)
  Financing activities                           $     2,975        $    14,317

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.  We anticipate  making cash
capital expenditures of approximately $30.0 million for internal growth over the
next  twelve  months,  primarily  for  purchases  of bulk  CO2  systems  for new
customers.

      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.  On October 1,
2004, we purchased the bulk CO2 beverage carbonation business of privately-owned
Pain Enterprises, Inc., of Bloomington, Indiana, for total cash consideration of
$15.7 million.  The transaction  involved the acquisition of approximately 9,000
customer accounts,  including  approximately  6,300 tanks in service,  vehicles,
parts, and supplies.  Pain Enterprises' bulk CO2 beverage  carbonation  business
operated in 12 Midwestern and Southeastern states: Florida,  Georgia,  Illinois,
Indiana,  Iowa, Kentucky,  Michigan,  Missouri,  Minnesota,  Ohio, Tennessee and
Wisconsin.  In addition,  on  September  30,  2005,  we  purchased  the beverage
carbonation business of Bay Area Equipment Co., Inc., for total consideration of
$5.2 million.  The transaction  involved the acquisition of approximately  2,500
customer  accounts,  including  1,000 tanks in  service,  vehicles,  parts,  and
supplies. The acquisition of Bay Area Equipment's beverage carbonation business,
which operated in northern California provides further penetration and increased
operating efficiencies in that market.

      On August 25, 2003, we terminated  our former 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 initially  consisted 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").  On October 1, 2004, in conjunction  with the
Pain Enterprises,  Inc. transaction,  the Senior Credit Facility was amended to,
among  other  things,  increase  the B Term Loan to $23.0  million and to modify
certain  financial  covenants.  The A Term Loan and Revolving Loan Facility were
due to  mature on August  25,  2007,  while the B Term Loan was due to mature on
August 25, 2008. We were 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. Applicable margin was determined by
a pricing grid based on our Consolidated Total Leverage Ratio (as defined).  The
Senior Credit Facility was collateralized by all of our assets. Additionally, we
were precluded from declaring or paying any cash dividends.


                                       29


      We were  required to meet  certain  affirmative  and  negative  covenants,
including but not limited to financial covenants. We were required to assess our
compliance  with the financial  covenants  under the Senior 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 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 have placed us in default and cause the debt outstanding under
the Senior Credit  Facility to  immediately  become due and payable.  We were in
compliance  with all covenants  under the Senior Credit Facility as of September
30, 2003 and all subsequent quarters up to and including March 31, 2005.

      On August 25,  2003,  concurrently  with the closing of the Senior  Credit
Facility, we prepaid our outstanding 12.0% Senior Subordinated  Promissory Notes
("1997  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 was 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.

      On May 27, 2005, we terminated the Senior Credit Facility and entered into
a $60.0 million revolving credit facility with Bank of America,  N.A. (the "2005
Credit Facility"),  maturing May 27, 2010. We are entitled to select either Base
Rate Loans (as defined) or Eurodollar  Rate Loans (as defined),  plus applicable
margin,  for principal  borrowings  under the 2005 Credit  Facility.  Applicable
margin is determined by a pricing grid based on our Consolidated  Leverage Ratio
(as defined) as follows:

      ----------------------------------------------------------------------
       Pricing      Consolidated Leverage      Eurodollar Rate   Base Rate
        Level               Ratio                   Loans          Loans
      ----------------------------------------------------------------------
          I      Greater than or equal to          2.250%          0.750%
                 2.50x
      ----------------------------------------------------------------------
         II      Less than 2.50x but greater       2.000%          0.500%
                 than or equal to 2.00x
      ----------------------------------------------------------------------
         III     Less than 2.00x but greater       1.750%          0.250%
                 than or equal to 1.50x
      ----------------------------------------------------------------------
         IV      Less than 1.50x but greater       1.500%          0.000%
                 than or equal to 0.50x
      ----------------------------------------------------------------------
          V      Less than 0.50x                   1.250%          0.000%
      ----------------------------------------------------------------------

      Interest  is payable  periodically  on  borrowings  under the 2005  Credit
Facility. The 2005 Credit Facility is uncollateralized.  We are required to meet
certain  affirmative  and  negative  covenants,  including  but not  limited to,
financial  covenants.  We are required to assess  compliance  with the financial
covenants under the 2005 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 2005 Credit
Facility to immediately  become due and payable.  We were in compliance with all
covenants  under  the  2005  Credit  Facility  as of June 30,  2005 and  through
December 31, 2005.

      In connection with the termination of the Senior Credit  Facility,  during
the quarter  ended June 30, 2005,  we recognized a loss of $1.7 million from the
write-off of  unamortized  financing  costs  associated  with the Senior  Credit
Facility.  In addition,  we recorded $0.4 million in financing costs  associated
with the 2005 Credit  Facility.  Such costs are being amortized over the life of
the 2005 Credit Facility.

      As of December 31, 2005, a total of $34.2 million was outstanding pursuant
to the 2005 Credit  Facility with a weighted  average  interest rate of 5.9% per
annum.

      On March 30,  2005,  we sold  2,041,713  shares of our common  stock in an
underwritten  public offering.  Based on the public offering price of $24.17 per
share and after deducting underwriting  discounts and commissions,  net proceeds
were approximately $46.6 million. On April 4, 2005, we used $34.3 million of the
net proceeds from the public  offering in March 2005 to redeem the New Notes, at
106% of the original  principal  amount plus accrued  interest.  As part of this
transaction,  we recognized a loss on the early  termination of debt  associated
with the New Notes of approximately $4.1 million,  which included the prepayment
penalty,  unamortized  fees and the  amortized  portion  of the  original  issue
discount. In addition, we used $11.2 million to reduce the outstanding principal
amount of the Senior Credit Facility.


                                       30


      In May 2000,  we sold 5,000 shares of Series A 8%  Cumulative  Convertible
Preferred Stock, no par value (the "Series A Preferred  Stock"),  for $1,000 per
share.  Shares of the Series A Preferred Stock were  convertible  into shares of
common stock at any time at a conversion  price of $9.28 per share. In addition,
in November  2001,  we sold 2,500 shares of Series B 8%  Cumulative  Convertible
Preferred Stock, no par value (the "Series B Preferred  Stock"),  for $1,000 per
share.  Shares of the Series B Preferred Stock were  convertible  into shares of
common  stock at any time at a conversion  price of $12,92 per share.  Effective
August 18, 2004, the holder of the Series A Preferred Stock converted its shares
into 754,982 shares of our common stock.  Effective December 7, 2004, the holder
of the Series B Preferred  Stock converted its shares into 247,420 shares of our
common stock.

      During the six months  ended  December  31,  2005,  our capital  resources
included cash flows from operations and available  borrowing  capacity under the
2005 Credit  Facility.  We believe that cash flows from operations and available
borrowings  under the 2005 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):

                                           Less than 1
Contractual obligations            Total       Year        2-3 Years     4-5 Years     Thereafter
-----------------------      --------------------------------------------------------------------
2005 Credit Facility
   Principal                 $    34,250   $        --     $      --     $  34,250     $      --
   Interest                        9,402         2,089         4,179         3,134            --
                             -----------   -----------     ---------     ---------     ---------
Total 2005 Credit Facility        43,652         2,089         4,179        37,384            --
                             -----------   -----------     ---------     ---------     ---------

Employment agreements              2,908         1,219         1,529           160            --
Operating leases                  16,636         5,175         7,628         3,658           175
                             -----------   -----------     ---------     ---------     ---------
Total obligations            $    63,196   $     8,483     $  13,336     $  41,202     $     175
                             ===========   ===========     =========     =========     =========

      In  addition,  in  May  1997,  we  entered  into  an  exclusive  bulk  CO2
requirements contract with The BOC Group, Inc., which expires in May 2011.

      WORKING  CAPITAL.  At December 31, 2005 and June 30, 2005,  we had working
capital of $12.8 million and $11.2 million, respectively.

      CASH FLOWS FROM  OPERATING  ACTIVITIES.  Cash flows provided by operations
increased by $7.3  million  from $9.9 million in 2004 to $17.2  million in 2005.
The  improvement is primarily due to our  improvement  in net income  (excluding
non-cash  charges)  of $5.9  million,  while  cash used by the  working  capital
components of our balance sheet increased by $1.3 million from 2004 to 2005.

      CASH FLOWS FROM INVESTING ACTIVITIES.  During 2005 and 2004, net cash used
in  investing  activities  was $20.9  million and $24.7  million,  respectively.
Investing  activities in 2005 included $4.7 million paid for the  acquisition of
the beverage  carbonation  business Bay Area  Equipment Co., Inc.  ("BAE"),  and
related acquisition expenses on September 30, 2005. Investing activities in 2004
included  $15.7  million  paid for the  acquisition  of the  bulk  CO2  beverage
carbonation business of Pain Enterprises,  Inc. ("Pain") and related acquisition
expenses. Exclusive of acquisition purchases, investing activities are primarily
attributable to the acquisition, installation and direct placement costs of bulk
CO2 systems.

      CASH FLOWS FROM FINANCING ACTIVITIES.  During 2005, cash flows provided by
financing activities was $3.0 million, compared to $14.3 million in 2004. During
2005, we borrowed  approximately $4.7 million to fund the purchase of BAE and in
2004 we borrowed approximately $13.0 million to fund the Pain transaction.

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 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, whichever is less.


                                       31


      As of  December  31,  2005,  we operated a fleet of  specialized  bulk CO2
delivery  vehicles and technical  service vehicles that logged  approximately 13
million miles over the trailing twelve month period. While significant increases
in fuel prices impact our operating costs, such impact is largely offset by fuel
surcharges billed to the majority of our customers.

RECENT ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial  Accounting  Standards  Board revised SFAS
No. 123,  "ACCOUNTING  FOR  STOCK-BASED  COMPENSATION"  ("SFAS 123") through the
issuance  of SFAS  123-R  "SHARE-BASED  PAYMENTS"  ("SFAS  123-R").  SFAS  123-R
supersedes APB 25 and its related implementation  guidance.  SFAS 123-R requires
all  share-based  payments to  employees,  including  grants of  employee  stock
options,  to be recognized  in the  statement of operations  based on their fair
value and vesting schedule.  However,  SFAS 123-R does not change the accounting
guidance for share-based payment  transactions with parties other than employees
provided in SFAS 123 as originally issued and EITF Issue No. 96-18,  "ACCOUNTING
FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES." We adopted SFAS 123-R effective
with the  fiscal  quarter  beginning  July 1,  2005 on a  "modified  prospective
basis," and  accordingly,  pro forma  disclosure  of net income and earnings per
share is no longer an alternative to recognition in the statement of operations.

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 December 31, 2005, a total of $34.2  million was  outstanding  under the 2005
Credit Facility with a weighted average  interest rate of 5.9% per annum.  Based
upon the $34.2 million  outstanding  under the 2005 Credit  Facility at December
31, 2005, our annual interest cost under the 2005 Credit Facility would increase
by $0.3 million for each 1% increase in Eurodollar interest rates.

      In order to reduce our  exposure to  increases in  Eurodollar  rates,  and
consequently to increases in interest payments, we entered into an interest rate
swap  transaction  (the "Prior Swap") on October 2, 2003, in the amount of $20.0
million (the "Prior  Notional  Amount") with an effective date of March 15, 2004
and a maturity date of September 15, 2005. Pursuant to the Prior Swap, we paid a
fixed interest rate of 2.12% per annum and received a Eurodollar-based  floating
rate.  The effect of the Prior Swap was to neutralize  any changes in Eurodollar
rates on the Prior Notional  Amount.  As the Prior Swap was not effective  until
March 15, 2004 and no cash flows were  exchanged  prior to that date,  the Prior
Swap did not meet the  requirements  to be designated  as a cash flow hedge.  As
such,  an  unrealized  loss of $0.2 million was  recognized  in our statement of
operations  for the fiscal year ended June 30,  2004,  reflecting  the change in
fair value of the Prior Swap from  inception to the effective  date. As of March
15, 2004,  the Prior Swap met the  requirements  to be designated as a cash flow
hedge and was deemed a highly effective  transaction.  Accordingly,  we recorded
$0.2 million  representing the change in fair value of the Prior Swap from March
15, 2004 through September 15, 2005, as other  comprehensive  income,  which was
reversed upon the  termination of the Prior Swap in September 2005. In addition,
upon  termination  of the Prior Swap,  we reversed the  unrealized  loss of $0.2
million previously recognized in our statement of operations.

      In order to reduce our  exposure to  increases in  Eurodollar  rates,  and
consequently to increases in interest  payments,  we entered into a new interest
rate swap transaction  (the "2005 Swap") comprised of two instruments  ("Swap A"
and "Swap B") on September 28, 2005, with an effective date of October, 3, 2005.
Swap A, in the amount of $15.0  million  (the "A Notional  Amount"),  matures on
October  3, 2008 and Swap B, in the  amount  of $5.0  million  (the "B  Notional
Amount"),  matures  on April 3,  2007.  Pursuant  to Swap A and Swap B, we pay a
fixed  interest rate of 4.69% and 4.64% per annum,  respectively,  and receive a
Eurodollar-based floating rate. The effect of the 2005 Swap is to neutralize any
changes in Eurodollar  rates on the A Notional Amount and the B Notional Amount.
The 2005 Swap meets the  requirements  to be designated as a cash flow hedge and
is deemed a highly effective transaction. Accordingly, changes in the fair value
of Swap A or Swap B are recorded as other comprehensive income (loss).


                                       32


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 second  fiscal
quarter  of 2006  that has  materially  affected,  or is  reasonably  likely  to
materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   Our 2005 Annual Meeting of Shareholders was held on December 7, 2005.
(b)   Michael E. DeDomenico and Daniel Raynor were elected as Class II directors
      of the Company to serve until our 2008 Annual Meeting of Shareholders. The
      terms of J. Robert Vipond and  Christopher  White,  Class III directors of
      the Company, and Robert L. Frome and Steven J. Landwehr, Class I directors
      of the  Company,  continue  until  our 2006 and 2007  Annual  Meetings  of
      Shareholders, respectively.
(c)   (1) Election of Directors:

      NOMINEE                NUMBER OF VOTES FOR       NUMBER OF VOTES WITHHELD
      -------                -------------------       ------------------------

      Michael E. DeDomenico      10,151,276                    3,547,716
      Daniel Raynor              10,361,990                    3,337,002

      (2) Approval of 2005 Executive Management Stock Option Plan:

---------------------------------------------------------------------------------------------------------------
NUMBER OF VOTES FOR       NUMBER OF VOTES AGAINST     NUMBER OF VOTES ABSTAINING     NUMBER OF BROKER NON-VOTES
---------------------------------------------------------------------------------------------------------------
9,997,458                 1,715,348                   24,659                         1,961,527
---------------------------------------------------------------------------------------------------------------

      (3) Approval of 2005 Non-Employee Directors Stock Option Plan:

---------------------------------------------------------------------------------------------------------------
NUMBER OF VOTES FOR       NUMBER OF VOTES AGAINST     NUMBER OF VOTES ABSTAINING     NUMBER OF BROKER NON-VOTES
---------------------------------------------------------------------------------------------------------------
11,205,456                507,091                     24,918                         1,961,527
---------------------------------------------------------------------------------------------------------------

      (4) Approval of 2005 Employee Stock Option Plan:

---------------------------------------------------------------------------------------------------------------
NUMBER OF VOTES FOR       NUMBER OF VOTES AGAINST     NUMBER OF VOTES ABSTAINING     NUMBER OF BROKER NON-VOTES
---------------------------------------------------------------------------------------------------------------
11,252,867                460,264                     24,334                         1,961,527
---------------------------------------------------------------------------------------------------------------

      (5) Ratification of Grant of Stock Options to Certain Directors:

---------------------------------------------------------------------------------------------------------------
NUMBER OF VOTES FOR       NUMBER OF VOTES AGAINST     NUMBER OF VOTES ABSTAINING     NUMBER OF BROKER NON-VOTES
---------------------------------------------------------------------------------------------------------------
11,219,499                487,245                     30,721                         1,961,527
---------------------------------------------------------------------------------------------------------------

ITEM 6. EXHIBITS.

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.


                                       33


                                   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: February 9, 2006                              By: /S/ ROBERT R. GALVIN
                                                         -----------------------
                                                         Robert R. Galvin
                                                         Chief Financial Officer


                                       34`