`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 September 30, 2006

                                       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.
 Incorporation or Organization)                     Employer 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 a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large Accelerated Filer       Accelerated Filer  X   Non-Accelerated Filer
                        ----                    ---                         ---

         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 September 30, 2006
                -----                     ---------------------------------
    Common Stock, $.001 par value                 15,730,089 shares




                                   NUCO2 INC.

                                      Index
                                      -----

PART I.      FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

             Balance Sheets as of September 30, 2006 (unaudited) and           3
                 June 30, 2006

             Statements of Operations for the Three Months Ended
                 September 30, 2006 (unaudited) and September 30, 2005         4
                 (unaudited)

             Statement of Shareholders' Equity for the Three Months            5
                 Ended September 30, 2006 (unaudited)

             Statements of Cash Flows for the Three Months
                 Ended September 30, 2006 (unaudited) and September 30,
                 2005  (unaudited)                                             7

             Notes to Financial Statements                                     9

ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF                           13
                 OPERATIONS

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES
                 ABOUT MARKET RISK                                            20

ITEM 4.      CONTROLS AND PROCEDURES                                          20

PART II.     OTHER INFORMATION

ITEM 6.      EXHIBITS                                                         21

SIGNATURES                                                                    22


                                       2


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
                                                 NUCO2 INC.
                                               BALANCE SHEETS
                                    (in thousands, except share amounts)
                                                   ASSETS
                                                   ------
                                                                             September 30, 2006   June 30, 2006
                                                                             ------------------   -------------
                                                                                (UNAUDITED)
Current assets:
   Cash and cash equivalents                                                    $     472         $     341
   Trade accounts receivable; net of allowance for doubtful
      accounts of $2,900 and $2,538, respectively                                  15,241            12,955
   Inventories                                                                        317               302
   Prepaid insurance expense and deposits                                           3,670             5,846
   Prepaid expenses and other current assets                                        1,527             1,465
   Deferred tax assets - current portion                                            8,324             8,598
                                                                                ---------         ---------
      Total current assets                                                         29,551            29,507
                                                                                ---------         ---------

Property and equipment, net                                                       122,860           119,603
                                                                                ---------         ---------

Other assets:
   Goodwill, net                                                                   25,836            25,794
   Deferred financing costs, net                                                      311               333
   Customer lists, net                                                              8,062             8,372
   Non-competition agreements, net                                                  1,009             1,181
   Deferred lease acquisition costs, net                                            5,435             5,225
   Deferred tax assets, net                                                         7,016             8,807
   Other                                                                              190               185
                                                                                ---------         ---------
                                                                                   47,859            49,897
                                                                                ---------         ---------
      Total assets                                                              $ 200,270         $ 199,007
                                                                                =========         =========

                                    LIABILITIES AND SHAREHOLDERS' EQUITY
                                    ------------------------------------
Current liabilities:
   Accounts payable                                                             $   7,186         $   6,883
   Accrued expenses                                                                 1,281             1,208
   Accrued insurance                                                                  860             3,543
   Accrued interest                                                                   142               165
   Accrued payroll                                                                  1,265               652
   Other current liabilities                                                          610               377
                                                                                ---------         ---------
      Total current liabilities                                                    11,344            12,828

Long-term debt                                                                     33,750            35,450
Customer deposits                                                                   3,916             3,805
                                                                                ---------         ---------
      Total liabilities                                                            49,010            52,083
                                                                                ---------         ---------

Commitments and contingencies
Shareholders' equity:
   Common stock; par value $.001 per share; 30,000,000 shares authorized;
      issued 15,738,589 shares at September 30, 2006
      and 15,654,042 shares at June 30, 2006                                           16                16
   Additional paid-in capital                                                     168,615           166,617
   Less treasury stock at cost; 8,500 shares at September 30, 2006
      and June 30, 2006                                                              (235)             (235)
   Accumulated deficit                                                            (17,246)          (19,765)
   Accumulated other comprehensive income                                             110               291
                                                                                ---------         ---------
      Total shareholders' equity                                                  151,260           146,924
                                                                                ---------         ---------
        Total liabilities and shareholders' equity                              $ 200,270         $ 199,007
                                                                                =========         =========

See accompanying notes to financial statements.


                                                     3


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

                                                                        Three Months Ended September 30,
                                                                        --------------------------------
                                                                             2006                2005
                                                                             ----                ----
Revenues:
   Product sales                                                          $ 21,551            $ 18,038
   Equipment rentals                                                        10,805               9,827
                                                                          --------            --------

Total revenues                                                              32,356              27,865
                                                                          --------            --------

Costs and expenses:
   Cost of products sold, excluding depreciation and amortization           13,986              11,987
   Cost of equipment rentals, excluding depreciation
      and amortization                                                         791                 676
   Selling, general and administrative expenses                              6,557               5,083
   Depreciation and amortization                                             4,845               4,304
   Loss on asset disposal                                                      442                 807
                                                                          --------            --------
                                                                            26,621              22,857
                                                                          --------            --------

Operating income                                                             5,735               5,008
Gain on financial instrument                                                  --                  (177)
Interest expense                                                               576                 365
                                                                          --------            --------

Income before provision for income taxes                                     5,159               4,820
Provision for income taxes                                                   2,640               1,865
                                                                          --------            --------

Net income                                                                $  2,519            $  2,955
                                                                          ========            ========

Weighted average outstanding shares of common stock:
   Basic                                                                    15,675              15,309
                                                                          ========            ========
   Diluted                                                                  16,042              15,861
                                                                          ========            ========

Net income per basic share                                                $   0.16            $   0.19
                                                                          ========            ========
Net income per diluted share                                              $   0.16            $   0.19
                                                                          ========            ========

See accompanying notes to financial statements.

                                                   4


                                                          NUCO2 INC.
                                               STATEMENT OF SHAREHOLDERS' EQUITY
                                             (in thousands, except share amounts)
                                                          (UNAUDITED)


                                                                  Common Stock         Additional         Treasury Stock
                                                                  ------------           Paid-In          --------------
                                                             Shares         Amount       Capital         Shares      Amount
                                                             ------         ------       -------         ------      ------
Balance, June 30, 2006                                     15,654,042    $       16    $  166,617         8,500    $     (235)
Comprehensive income:
  Net income                                                     --            --            --            --            --
  Other comprehensive income:
    Interest rate swap transaction                               --            --            --            --            --
Total comprehensive income
Share-based compensation                                         --            --             699          --            --
Excess tax benefits from share-based arrangements                --            --             542          --            --
Issuance of 84,547 shares of common stock -
  exercise of options                                          84,547          --             756          --            --
                                                           ----------    ----------    ----------    ----------    ----------
Balance, September 30, 2006                                15,738,589    $       16    $  168,615         8,500    $     (235)
                                                           ==========    ==========    ==========    ==========    ==========

See accompanying notes to financial statements.


                                                              5


                                                 NUCO2 INC.
                                      STATEMENT OF SHAREHOLDERS' EQUITY
                                    (in thousands, except share amounts)
                                                 (UNAUDITED)

                                                                             Accumulated
                                                                                Other               Total
                                                        Accumulated         Comprehensive        Shareholders'
                                                          Deficit              Income               Equity
                                                          -------              ------               ------
Balance, June 30, 2006                                  $ (19,765)           $     291            $ 146,924
Comprehensive income:
  Net income                                                2,519                 --                  2,519
  Other comprehensive income:
    Interest rate swap transaction                           --                   (180)                (180)
                                                                                                  ---------
Total comprehensive income                                                                            2,339
Share-based compensation                                     --                   --                    699
Excess tax benefits from share-based arrangements            --                   --                    542
Issuance of 84,547 shares of common stock -
  exercise of options                                        --                   --                    756
                                                        ---------            ---------            ---------
Balance, September 30, 2006                             $ (17,246)           $     110            $ 151,260
                                                        =========            =========            =========

See accompanying notes to financial statements.


                                                     6


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

                                                                     Three Months Ended September 30,
                                                                     --------------------------------
                                                                        2006                  2005
                                                                        ----                  ----

Cash flows from operating activities:
Net income                                                            $  2,519              $  2,955
  Adjustments to reconcile net income to net cash
     provided by operating activities:
        Depreciation and amortization of property and equipment          4,044                 3,650
        Amortization of other assets                                       801                   654
        Loss on asset disposal                                             442                   807
        Change in net deferred tax asset                                 2,609                 1,710
        Share-based compensation                                           699                   298
        Excess tax benefits from share-based arrangements                 (542)                 --
        Gain on financial instrument                                      --                    (177)
        Changes in operating assets and liabilities:
           Decrease (increase) in:
             Trade accounts receivable                                  (2,286)               (2,192)
             Inventories                                                   (15)                    3
             Prepaid insurance expense and deposits                      2,176                  (271)
             Prepaid expenses and other current assets                    (243)                 (787)
           Increase (decrease) in:
             Accounts payable                                              302                   874
             Accrued expenses                                               92                   297
             Accrued insurance                                          (2,683)                   68
             Accrued payroll                                               612                  (439)
             Accrued interest                                              (23)                   58
             Other current liabilities                                     233                    48
             Customer deposits                                             112                    71
                                                                      --------              --------

           Net cash provided by operating activities                     8,849                 7,627
                                                                      --------              --------

Cash flows from investing activities:
  Purchase of property and equipment                                    (7,693)               (6,391)
  Increase in deferred lease acquisition costs                            (619)                 (587)
  Acquisition of businesses                                               --                  (4,653)
  Increase in other assets                                                  (4)                   (2)
                                                                      --------              --------

           Net cash used in investing activities                      $ (8,316)             $(11,633)
                                                                      --------              --------

See accompanying notes to financial statements.


                                                  7




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

                                                                Three Months Ended September 30,
                                                                --------------------------------
                                                                   2006                  2005
                                                                   ----                  ----
Cash flows from financing activities:
  Net proceeds from issuance of long-term debt                   $ 1,650               $ 6,500
  Repayment of long-term debt                                     (3,350)               (3,400)
  Issuance costs - common stock                                     --                    (161)
  Increase in deferred financing costs                              --                     (18)
  Exercise of options and warrants                                   756                   230
  Excess tax benefits from share-based arrangements                  542                  --
                                                                 -------               -------

       Net cash provided by (used in) financing activities          (402)                3,151
                                                                 -------               -------

Increase (decrease) in cash and cash equivalents                     131                  (855)
Cash and cash equivalents, beginning of period                       341                   968
                                                                 -------               -------

Cash and cash equivalents, end of period                         $   472               $   113
                                                                 =======               =======

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

       Interest                                                  $   599               $   307
                                                                 =======               =======

       Income taxes                                              $   138               $    14
                                                                 =======               =======

See accompanying notes to financial statements.


                                               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, 2006 of NuCO2 Inc. (the  "Company")  included in Form
10-K ("Form 10K"), filed with the Securities and Exchange Commission.

         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,
2006.  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  demand for the  delivery  of CO2 will be highest in the first
fiscal quarter and lowest in the third fiscal quarter.

NOTE 2.  RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

         In May 2005, the Financial  Accounting  Standards Board ("FASB") issued
SFAS No. 154,  "ACCOUNTING FOR CHANGES AND ERROR CORRECTIONS" ("SFAS 154"). SFAS
154 applies to accounting changes and corrections of errors made in fiscal years
beginning  after  December  15,  2005.  SFAS 154  replaces  APB  Opinion No. 20,
"ACCOUNTING  CHANGES," and SFAS No. 3, "REPORTING  ACCOUNTING CHANGES IN INTERIM
FINANCIAL  STATEMENTS,"  and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 applies to all voluntary
changes in accounting principle, as well as to changes required by an accounting
pronouncement  in the unusual instance that the  pronouncement  does not include
specific transition provisions. SFAS 154 provides guidance on the accounting for
and  reporting of  accounting  changes and error  corrections.  It  establishes,
unless  impracticable,  retrospective  application  as the  required  method for
reporting a change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. The adoption of
SFAS 154 will not have a material  impact on the Company's  financial  position,
results of operations, or cash flows.

         In June 2006, the FASB issued  Interpretation  No. 48,  "ACCOUNTING FOR
UNCERTAINTY  IN INCOME  TAXES - AN  INTERPRETATION  OF SFAS NO. 109" ("FIN 48"),
which is effective for fiscal years  beginning  after  December 15, 2006. FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements in accordance with SFAS No. 109, "ACCOUNTING
FOR INCOME TAXES" ("SFAS  109").  FIN 48 prescribes a recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax  position  taken or expected to be taken in a tax return.  The adoption of
FIN 48 will not have a  material  impact on the  Company's  financial  position,
results of operations, or cash flows.

         Property  and  equipment  are  stated  at cost.  The  Company  does not
depreciate bulk systems held for  installation  until the systems are in service
and leased to customers.  Upon  installation,  the systems,  component parts and
direct costs  associated  with the  installation  are  transferred to the leased
equipment account.  These direct costs are associated with successful placements
of such systems with customers under noncancelable contracts and which would not
be incurred by the Company but for a successful placement and are amortized over
the life of the original customer contract. Upon early service termination,  the
unamortized  portion  of  direct  costs  associated  with the  installation  are
recognized  as a period  expense.  Such  policy  is  analogous  to SFAS No.  91,
"ACCOUNTING FOR  NONREFUNDABLE  FEES AND COSTS  ASSOCIATED  WITH  ORIGINATING OR
ACQUIRING LOANS AND INITIAL DIRECT COSTS OF LEASES."

         Please see the Company's Form 10K for a discussion of other significant
accounting policies.

NOTE 3.  ACQUISITIONS

         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


                                       9


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.

         On June 30, 2006,  the Company  acquired  approximately  3,000 customer
accounts and 2,400 bulk CO2 tanks, most of which were in service, from Coca-Cola
Enterprises Inc. ("CCE") for approximately $5.0 million.  The purchase price was
allocated  between tangible and intangible  assets as follows:  $1.9 million for
tangible  assets,  $1.9  million  for  intangible  assets and $1.2  million  for
goodwill.  Tangible assets are being depreciated over a weighted average life of
11.0 years, while intangible  assets,  excluding  goodwill,  are being amortized
over a weighted average life of 10.0 years.

         Goodwill was recorded for the above  transactions as the purchase price
of  each  acquisition  exceeded  the  fair  market  value  of the  tangible  and
intangible  assets acquired and is a direct result of synergies arising from the
transaction.

         The results of the above  acquisitions  are  included in the  Company's
results of operations subsequent to the acquisition date.

NOTE 4.  EARNINGS PER SHARE AND OTHER COMPREHENSIVE INCOME

     (A) 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 September 30,
                                                --------------------------------
                                                      2006          2005
                                                      ----          ----

Weighted average shares outstanding - basic          15,675        15,309

Outstanding  options and warrants to purchase
  shares of common stock - remaining shares
  after assuming repurchase with proceeds
  from exercise                                         367           552
                                                     ------        ------

Weighted average shares outstanding - diluted        16,042        15,861
                                                     ======        ======

     (B) OTHER COMPREHENSIVE INCOME

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

                                                Three Months Ended September 30,
                                                --------------------------------
                                                       2006          2005
                                                       -----         ----
Net income                                           $ 2,519       $ 2,955
Interest rate swap transaction (Note 5)                 (180)         (242)
                                                     -------       -------

Comprehensive income                                 $ 2,339       $ 2,713
                                                     =======       =======


NOTE 5.  LONG-TERM DEBT

     (A) REVOLVING CREDIT FACILITY

         On May 27, 2005, the Company  terminated its previous  credit  facility
and entered into a $60.0 million revolving credit facility with Bank of America,
N.A.  (the "2005 Credit  Facility"),  maturing on 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


                                       10


Credit Facility.  Applicable  margin is determined by a pricing grid, as amended
in March 2006, based on the Company's  Consolidated  Leverage Ratio (as defined)
as follows:

         ---------- ---------------------------- ------------------ -----------
          Pricing      Consolidated Leverage      Eurodollar Rate   Base Rate
           Level               Ratio                   Loans          Loans
         ---------- ---------------------------- ------------------ -----------
             I      Greater than or equal to          2.000%          0.500%
                    2.50x
         ---------- ---------------------------- ------------------ -----------
            II      Less than 2.50x but greater       1.750%          0.250%
                    than or equal to 2.00x
         ---------- ---------------------------- ------------------ -----------
            III     Less    than    2.00x   but       1.500%          0.000%
                    greater
                    than or equal to 1.50x
         ---------- ---------------------------- ------------------ -----------
            IV      Less than 1.50x but greater       1.250%          0.000%
                    than or equal to 0.50x
         ---------- ---------------------------- ------------------ -----------
             V      Less than 0.50x                   1.000%          0.000%
         ---------- ---------------------------- ------------------ -----------

         Interest is payable  periodically  on borrowings  under the 2005 Credit
Facility. The 2005 Credit Facility is uncollateralized. The Company is required,
on a  quarterly  basis,  to assess and meet  certain  affirmative  and  negative
covenants, including financial 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),  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. The Company was in compliance with all covenants under the 2005
Credit  Facility  as of the first  assessment  date on June 30, 2005 and through
September 30, 2006.

         As of  September  30, 2006,  a total of $33.8  million was  outstanding
under the 2005 Credit Facility with a weighted average interest rate of 6.6% per
annum.

(B)      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 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 "Swap") on October 2, 2003, in the
amount of $20.0 million (the "Notional  Amount") with an effective date of March
15, 2004 and a maturity  date of September 15, 2005.  Pursuant to the Swap,  the
Company  paid  a  fixed  interest  rate  of  2.12%  per  annum  and  received  a
Eurodollar-based  floating  rate.  The effect of the Swap was to neutralize  any
changes  in  Eurodollar  rates  on the  Notional  Amount.  As the  Swap  was not
effective  until March 15, 2004 and no cash flows were  exchanged  prior to that
date,  the Swap did not meet the  requirements  to be  designated as a cash flow
hedge.  As such,  an  unrealized  loss of $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 Swap from inception to the effective
date. As of March 15, 2004, the 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 Swap
from March 15, 2004 through September 15, 2005, as other  comprehensive  income,
and  the  previously  recorded  loss of  $0.2  million  was  reversed  upon  the
termination  of the Swap in  September  2005  and  recognized  in the  Company's
statement of operations.


                                       11


         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.  During the three months ended September 30, 2006,
the Company recorded $0.2 million,  representing the change in fair value of the
2005 Swap from June 30, 2006 through September 30, 2006, as other  comprehensive
loss.

NOTE 6.  SHAREHOLDERS' EQUITY

         (A)  WARRANTS

         In May 1997, the Company  entered into a supply  agreement with The BOC
Group,  Inc.  ("BOC") by which BOC committed to provide the Company with 100% of
its CO2 requirements at competitive  prices.  In connection with this agreement,
the Company  granted BOC a warrant to  purchase  1,000,000  shares of its common
stock.  The warrant was  exercisable at $17 per share from May 1, 1999 to May 1,
2002 and  thereafter  at $20 per share until April 30,  2007.  In May 2000,  the
Company solicited BOC to purchase  1,111,111 shares of its common stock at $9.00
per share.  In connection  with this purchase of common stock,  the  outstanding
warrant was reduced to 400,000 shares,  with an exercise price of $17 per share.
On the date of issuance  of the common  stock,  the closing  price of the common
stock on the Nasdaq  National  Market was $8.00 per share.  During  March  2005,
warrants to purchase  59,329 shares of common stock were  exercised  pursuant to
the cashless exercise provisions  contained in the warrants.  In connection with
this cashless  exercise,  warrants to purchase  140,671  shares of the Company's
common stock were canceled. In addition,  during June 2006, warrants to purchase
66,458 shares of common stock were exercised  pursuant to the cashless  exercise
provision contained in the warrants.  In connection with this cashless exercise,
warrants to purchase 133,542 shares of the Company's common stock were canceled.
No warrants granted to BOC remain outstanding as of September 30, 2006.

         (B)  STOCK OPTION PLANS

         The Company  recognized $0.7 million and $0.3 million ($0.5 million and
$0.2 million, net of income taxes) in stock option compensation during the three
months ended September 30, 2006 and 2005,  respectively.  No significant grants,
exercises or forfeitures  occurred  during the three months ended  September 30,
2006 and 2005, respectively.

NOTE 7.  INCOME TAXES

         The Company  accounts for income taxes under SFAS No. 109,  "ACCOUNTING
FOR INCOME  TAXES"  ("SFAS  109").  Deferred  income  taxes  reflect the net tax
effects of net operating loss  carryforwards and temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax purposes.

         As of June 30, 2006, the Company had net operating  loss  carryforwards
for federal  income tax  purposes of  approximately  $102  million and for state
purposes in varying amounts, expiring through June 2025. During the three months
ended September 30, 2006, the Company  recognized  approximately $0.5 million in
income tax expense  associated  with a decrease in state and local net operating
loss  caryforwards.  The  Company's  effective  rate for the three  months ended
September 30, 2006 increased to 51.2% as a result of the  additional  income tax
expense related to the state and local net operating loss  carryforwards.  If an
"ownership  change" for federal income tax purposes were to occur in the future,
the Company's ability to use its  pre-ownership  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.

         During the quarter ended September 30, 2006, the Company  recorded $0.5
million as additional paid-in capital representing the excess of the tax benefit
associated  with the  disqualifying  disposition of incentive  stock options and
exercise of non-qualified stock options over the tax deduction from compensation
expense recognized for those options.

NOTE 8.  COMMITMENTS AND CONTINGENCIES

         During August 2006, the Company settled litigation in connection with a
fatality at a customer's premises on January 8, 2005 for $3.0 million, which was
covered under the Company's umbrella  insurance policy.  Such amount is recorded
in the  Company's  balance  sheet  as of June 30,  2006,  in  Prepaid  Insurance
Expenses  and  Deposits  with  an  offsetting   liability  recorded  in  Accrued
Insurance.

         The Company is a defendant in legal  actions  which arise in the normal
course of business.  In the opinion of management,  the outcome of these matters
will not have a material effect on the Company's  financial  position or results
of operations.

                                       12


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  and the only  company in our industry to
operate a national  network of bulk CO2 service  locations.  As of September 30,
2006,  we  operated  a  national  network  of 127  service  locations  servicing
approximately 114,000 customer locations in 45 states. Currently,  virtually all
fountain beverage users in the continental  United States are within our present
service  area.  On September  30, 2005,  we purchased  the beverage  carbonation
business in northern  California  of Bay Area  Equipment  Co.,  Inc. We acquired
approximately  2,500  customer  accounts,  including  1,000  tanks  in  service,
vehicles,  parts, and supplies.  In addition,  on June 30, 2006, we acquired the
bulk CO2  beverage  carbonation  business  in 18  states  in the  southwest  and
midwest,  as well as parts of the southeast,  of Coca-Cola  Enterprises  Inc. We
acquired  approximately 3,000 accounts,  including 2,400 tanks in service. These
acquisitions  provide further penetration and operating  efficiencies in markets
in which we operate.

         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  master  service  agreements  which  include  88
restaurant and convenience store 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  53,000  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.


                                       13


         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 $72.3 million in fiscal
2002 to $116.2  million in fiscal  2006.  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. As of
September  30, 2006,  we operated a total of 362  specialized  bulk CO2 delivery
vehicles and technical  service  vehicles that logged  approximately  14 million
miles over the last  twelve  months..  While  significant  fluctuations  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   direct
installation  costs associated with  installation 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.

RESULTS OF OPERATIONS

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

Income Statement Data:                                  2006               2005
                                                        ----               ----

Product sales                                           66.6%              64.7%
Equipment rentals                                       33.4               35.3
                                                       -----              -----
Total revenues                                         100.0              100.0

Cost of products sold, excluding
    depreciation and amortization                       43.2               43.0
Cost of equipment rentals, excluding
    depreciation and amortization                        2.4                2.4
Selling, general and administrative expenses            20.3               18.2
Depreciation and amortization                           15.0               15.4
Loss on asset disposal                                   1.4                3.0
                                                       -----              -----
Operating income                                        17.7               18.0
Unrealized (gain) loss on financial instrument           --                (0.6)
Interest expense                                         1.8                1.3
                                                       -----              -----

Income before income taxes                              15.9               17.3
Provision for income taxes                               8.2                6.7
                                                       -----              -----
Net income                                               7.8%              10.6%
                                                       =====              =====


                                       14


THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005

TOTAL REVENUES

         Total revenues increased by $4.5 million,  or 16.1%, from $27.9 million
in 2005 to $32.4  million in 2006.  Revenues  derived  from our bulk CO2 service
plans  increased by $3.2 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 $1.3  million.  The number of customer  locations  utilizing our products and
services increased from approximately 103,000 customers at September 30, 2005 to
approximately  114,000 customers at September 30, 2006, due primarily to organic
growth and the  acquisition of  approximately  2,500 customer  accounts from Bay
Area Equipment on September 30, 2005 and 3,000 customer  accounts from Coca-Cola
Enterprises  Inc. (CCE) on June 30, 2006,  for which there was no  corresponding
revenue in 2005.

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

                                              Three Months Ended September 30,
                                              --------------------------------
Service Plan                                     2006                2005
                                                 ----                ----
     Bulk budget plan(1)                         52.0%               55.0%
     Equipment lease/product purchase plan(2)    18.3                17.1
     Product purchase plan(3)                    10.6                10.3
     High pressure cylinder(4)                    5.1                 5.0
     Other revenues(5)                           14.0                12.6
                                                -----               -----
                                                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 $3.6 million, or 19.5%, from $18.0 million in 2005 to
$21.6  million in 2006.  The  increase in revenues is  primarily  due to a 12.9%
increase in the average number of customer  locations  serviced  combined with a
2.0%  increase in the quantity of CO2 sold to the average  customer due in large
part  to the  customers  acquired  in the  Bay  Area  Equipment  transaction  on
September 30, 2005, the CCE  acquisition on June 30, 2006, and the impact of new
customer locations activated under master service agreements. In addition, sales
of products  and services  other than bulk CO2  increased by $1.3 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 $1.0 million,  or 10.0%, from $9.8 million in 2005 to
$10.8 million in 2006,  primarily due to an 11.0% increase in the average number
of  customer  locations  leasing  equipment  from us, the impact of the Bay Area
Equipment and CCE transactions,  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  approximately  86,000 at September  30, 2005
(inclusive  of the accounts from Bay Area  Equipment  acquired at the end of the
period) to approximately 94,000 at September 30, 2006.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost  of  products  sold,  excluding   depreciation  and  amortization,
increased from $12.0 million in 2005 to $14.0 million in 2006,  while decreasing
as a percentage of product sales revenue from 66.5% to 64.9%.

         Product  costs  increased  by $0.8 million from $4.8 million in 2005 to
$5.6 million in 2006. The base price with our primary  supplier of CO2 increased
by the Producer Price Index, while the volume of CO2 sold by us increased 13.6%,
primarily  due to the increase in our average  customer base and a 2.0% 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  changing  makeup of
our customer  base as we continue to capture an  increasing  number of prominent
chains under our master service agreements and to a lesser degree, the impact of
the Bay Area Equipment and CCE transactions.


                                       15


         Operational  costs,  primarily  wages and  benefits  related to cost of
products  sold,  increased  from $4.5  million in 2005 to $5.3  million in 2006,
primarily due to a $0.7 million  increase in route driver costs  associated with
an increased  customer  base.  As of September  30, 2006,  we had 370 drivers as
compared to 329 at the same point last year.

         Truck  delivery  expenses  increased  from $1.9 million in 2005 to $2.2
million in 2006 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 2005 to $0.9 million in 2006.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost of equipment  rentals,  excluding  depreciation and  amortization,
increased from $0.7 million in 2005 to $0.8 million in 2006 while  increasing as
a percentage of equipment rentals revenue from 6.9% to 7.3%. The increase in the
cost  of  equipment  rentals  is  primarily  related  to  additional  wages  and
transportation costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling,  general and administrative expenses increased by $1.5 million
from  $5.1  million  in 2005 to $6.6  million  in 2006,  while  increasing  as a
percentage of total revenues from 18.2% in 2005 to 20.3% in 2006.

         Selling related expenses  increased by $0.4 million,  from $1.0 million
in 2005 to $1.4 million in 2006,  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 $1.2  million,  or
28.4%,  from $4.0  million in 2005 to $5.2  million in 2006.  This  increase was
primarily  the result of  additional  headcount  and  salaries  associated  with
strengthening  our  infrastructure in core areas,  increased expense  associated
with outstanding customer receivable accounts,  primarily due to the integration
of the acquisitions and general economic  conditions,  and an increase in option
compensation  associated  with  grants  made to  officers,  key  employees,  and
directors over the past twelve months.

DEPRECIATION AND AMORTIZATION

         Depreciation  and  amortization  increased from $4.3 million in 2005 to
$4.8  million in 2006.  As a  percentage  of total  revenues,  depreciation  and
amortization expense decreased from 15.4% in 2005 to 15.0% in 2006.

         Depreciation  expense  increased  from  $3.7  million  in  2005 to $4.0
million  in  2006.  The  increase  was due in  large  part to the  purchase  and
placement of bulk CO2 tanks at customer sites and equipment from acquisitions.

         Amortization  expense  increased from $0.7 million 2005 to $0.8 million
2006 due to the  increased  amortization  of  intangible  assets  related to our
acquisition activities over the last year, and deferred lease acquisition costs.

LOSS ON ASSET DISPOSAL

         Loss on asset  disposal  decreased  from $0.8  million  in 2005 to $0.4
million in 2006, decreasing as a percentage of total revenues from 3.0% to 1.4%.
The decrease in expense is primarily related to 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 in 2005.

OPERATING INCOME

         For the reasons  previously  discussed,  operating  income increased by
$0.7 million from $5.0 million in 2005 to $5.7 million in 2006.  As a percentage
of total revenues, operating income decreased from 18.0% to 17.7%.


                                       16


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
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 increased from $0.4 million in 2005 to $0.6 million in
2006,  while the  effective  interest rate of our debt  increased  from 4.7% per
annum in 2005 to 6.5% per annum in 2006 due to rising  libor rates over the past
twelve months and the impact of the 2005 Swap. See "Quantitative and Qualitative
Disclosures About Market Risk."

INCOME BEFORE PROVISION FOR INCOME TAXES

         Primarily for the reasons described above,  income before provision for
income  taxes  increased  by 7.0%,  from $4.8 million in 2005 to $5.2 million in
2006.

PROVISION FOR INCOME TAXES

         During  the  three  months  ended  September  30,  2005  and  2006,  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.

         As of June  30,  2006,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $102 million and for state purposes
in varying amounts. The net operating loss carryforwards are available to offset
future taxable income, if any, through June 2025. In addition,  during the three
months ended  September 30, 2006, we  recognized  approximately  $0.5 million in
income tax expense  associated  with a decrease in state and local net operating
loss carryforwards.  Our effective rate for the three months ended September 30,
2006 was 51.2% as a result of the additional  income tax expense  related to the
state and local net operating loss  carryforwards.  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.

         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 $111 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.

NET INCOME

         For the reasons described above, net income decreased from $3.0 million
2005 to $2.5 million in 2006.


                                       17


NON-GAAP MEASURES EBITDA AND EBITDA EXCLUDING OPTION COMPENSATION

         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 lender  also uses 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.

                                                     Three Months Ended September 30,
                                                     --------------------------------
                                                            2006          2005
                                                            ----          ----
Net income                                               $  2,519      $  2,955
Interest expense                                              576           365
Depreciation and amortization                               4,845         4,304
Provision for income taxes                                  2,640         1,865
Gain on financial instrument                                 --            (177)
                                                         --------      --------
EBITDA                                                   $ 10,580      $  9,312
Noncash option compensation                                   699           298
                                                         --------      --------
EBITDA excluding the impact of option compensation       $ 11,279      $  9,610
                                                         ========      ========

Cash flows provided by (used in):
  Operating activities                                   $  8,849      $  7,627
  Investing activities                                   $ (8,316)     $(11,633)
  Financing activities                                   $   (402)     $  3,151

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
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. In addition, on June 30,
2006,  we acquired a portion of the beverage  carbonation  business of Coca-Cola
Enterprises  Inc.,  for total  consideration  of $5.0 million.  The  acquisition
involved approximately 3,000 accounts, including 2,400 tanks in service.

LONG TERM DEBT

         On May 27, 2005, we terminated our previous credit facility and entered
into a $60.0 million  revolving credit facility with Bank of America,  N.A. (the
"2005 Credit  Facility").  The 2005 Credit Facility  matures on 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, as
amended March 2006,  based on our  Consolidated  Leverage  Ratio (as defined) as
follows:


                                       18


         ---------- ---------------------------- ------------------ -----------
          Pricing      Consolidated Leverage      Eurodollar Rate   Base Rate
           Level               Ratio                   Loans          Loans
         ---------- ---------------------------- ------------------ -----------
             I      Greater than or equal to          2.000%          0.500%
                    2.50x
         ---------- ---------------------------- ------------------ -----------
            II      Less than 2.50x but greater       1.750%          0.250%
                    than or equal to 2.00x
         ---------- ---------------------------- ------------------ -----------
            III     Less    than    2.00x   but       1.500%          0.000%
                    greater
                    than or equal to 1.50x
         ---------- ---------------------------- ------------------ -----------
            IV      Less than 1.50x but greater       1.250%          0.000%
                    than or equal to 0.50x
         ---------- ---------------------------- ------------------ -----------
             V      Less than 0.50x                   1.000%          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 financial  covenants.  We
are required to assess our compliance with these  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 Agreement to immediately  become due and
payable. We were in compliance with all covenants under the 2005 Credit Facility
as of June 30, 2005 and all subsequent periods through September 30, 2006.

         As of  September  30, 2006,  a total of $33.8  million was  outstanding
pursuant to the 2005 Credit  Facility with a weighted  average  interest rate of
6.6% per annum.

OTHER

         During the three months ended September 30, 2006, 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.

         WORKING  CAPITAL.  As of September  30, 2006 and June 30, 2006,  we had
working capital of $18.2 million and $16.7 million, respectively.

         CASH FLOWS FROM  OPERATING  ACTIVITIES:  During 2005 and 2006, net cash
generated  by  operating   activities   was  $7.6  million  and  $8.8   million,
respectively.  Net income,  exclusive  of the addback of non-cash  items such as
depreciation  and  amortization,  increased  from $9.9 million to $10.6 million,
while  cash  used by our  working  capital  assets  improved  by  $0.5  million.
Typically  the first  fiscal  quarter of each fiscal year  results in the use of
cash  from  working  capital  assets  due to the  growth  in  customer  accounts
receivable associated with annual seasonality trends.

         CASH FLOWS FROM  INVESTING  ACTIVITIES.  During 2005 and 2006, net cash
used in investing  activities was $11.6 million and $8.3 million,  respectively.
Investing  activities in 2005 included $4.7 million paid for the  acquisition of
the beverage  carbonation  business of Bay Area Equipment Co., Inc. ("BAE"), and
related  acquisition  expenses on September 30, 2005.  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 $3.2  million,  compared to $0.4  million used in
financing  activities  in 2006.  During 2005,  we borrowed the funds to purchase
BAE, much of which has subsequently been repaid.

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.


                                       19


         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.

         As of September 30, 2006, we operated a total of 362  specialized  bulk
CO2 delivery vehicles and technical  service vehicles that logged  approximately
14 million miles over the last twelve  months.  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 May 2005, the FASB issued, SFAS No. 154, "Accounting for Changes and
Error  Corrections"  ("SFAS 154").  SFAS 154 applies to  accounting  changes and
corrections  of errors made in fiscal years  beginning  after December 15, 2005.
SFAS 154  replaces  APB Opinion No. 20,  "ACCOUNTING  CHANGES,"  and SFAS No. 3,
"REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL  STATEMENTS," and changes the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle. SFAS 154 applies to all voluntary changes in accounting principle, as
well as to  changes  required  by an  accounting  pronouncement  in the  unusual
instance that the pronouncement does not include specific transition provisions.
SFAS 154 provides  guidance on the  accounting  for and  reporting of accounting
changes  and  error   corrections.   It   establishes,   unless   impracticable,
retrospective  application  as the  required  method for  reporting  a change in
accounting principle in the absence of explicit transition requirements specific
to the newly  adopted  accounting  principle.  The adoption of SFAS 154 will not
have a material impact on our financial position, results of operations, or cash
flows.

         In June 2006, the FASB issued  Interpretation  No. 48,  "ACCOUNTING FOR
UNCERTAINTY  IN INCOME  TAXES - AN  INTERPRETATION  OF SFAS NO. 109" ("FIN 48"),
which is effective for fiscal years  beginning  after  December 15, 2006. FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements in accordance with SFAS No. 109, "ACCOUNTING
FOR INCOME TAXES" ("SFAS  109").  FIN 48 prescribes a recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax  position  taken or expected to be taken in a tax return.  The adoption of
FIN 48 will not have a material  impact on our  financial  position,  results of
operations, or cash flows.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         As discussed under  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" above, as
of September 30, 2006, a total of $33.8 million was  outstanding  under the 2005
Credit Facility with a weighted average  interest rate of 6.6% per annum.  Based
upon the $33.8 million  outstanding  under the 2005 Credit Facility at September
30, 2006, 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 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).

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.


                                       20


         CHANGES IN INTERNAL  CONTROL  OVER  FINANCIAL  REPORTING.  There was no
 change in our internal control over financial reporting during our first fiscal
 quarter of fiscal 2007 that has materially affected, or is reasonably likely to
 materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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.


                                       21


                                   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:  November 9, 2006                     By: /s/ Robert R. Galvin
                                             -----------------------------------
                                             Robert R. Galvin
                                             Chief Financial Officer`