`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    --------

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)
|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
For the fiscal year ended June 30, 2003

                                       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 S.E Market Place, Stuart, Florida                           34997
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                       (Zip Code)

Registrant's telephone number, including area code:  (772) 221-1754

Securities registered pursuant to Section 12(b) of the Act:

                                      None.

Securities registered pursuant to Section 12(g) of the Act:

                          common stock, $.001 par value
                          -----------------------------
                                (Title of Class)

            Indicate  by check mark  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 mark if disclosure of delinquent  filers  pursuant
to  Item  405 of  Regulation  S-K is  not  contained  herein,  and  will  not be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

                                                           (continued next page)






            Indicate by check mark  whether  the  Registrant  is an  accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes |X| No [ ]

            The  aggregate  market  value at December  31, 2002 of shares of the
Registrant's  common  stock,  $.001 par value per share  (based upon the closing
price of $8.05 per share of such  stock on the  Nasdaq  National  Market on such
date), held by  non-affiliates of the Registrant was approximately  $77,593,000.
Solely for the  purposes  of this  calculation,  shares  held by  directors  and
executive  officers of the Registrant have been excluded.  Such exclusion should
not be  deemed a  determination  or an  admission  by the  Registrant  that such
individuals are, in fact, affiliates of the Registrant.

            At September 19, 2003, there were outstanding  10,633,405  shares of
the Registrant's common stock, $.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

            The information  required by Items 10, 11, 12, 13 and 14 of Part III
is incorporated by reference to the  Registrant's  definitive proxy statement to
be filed not later than October 28, 2003 pursuant to Regulation 14A.








                                   NUCO2 INC.


                                      Index
                                      -----
                                                                            Page
                                                                            ----

PART I.
Item 1.        Business.                                                      1
Item 2.        Properties.                                                   12
Item 3.        Legal Proceedings.                                            12
Item 4.        Submission of Matters to a Vote of Security Holders.          12

PART II.
Item 5.        Market For Registrant's Common Equity and
               Related Stockholder Matters.                                  12
Item 6.        Selected Financial Data.                                      14
Item 7.        Management's Discussion and Analysis of
               Financial Condition and Results of Operations.                15
Item 7A.       Quantitative and Qualitative Disclosures About Market Risk.   27
Item 8         Financial Statements and Supplementary Data.                  27
Item 9.        Changes in and Disagreements With Accountants
               on Accounting and Financial Disclosure.                       27
Item 9A.       Controls and Procedures.                                      27

PART III.
Item 10.       Directors and Executive Officers of the Registrant.           28
Item 11.       Executive Compensation.                                       28
Item 12.       Security Ownership of Certain Beneficial Owners
               and Management and Related Stockholder Matters.               28
Item 13.       Certain Relationships and Related Transactions.               28
Item 14.       Principal Accountant Fees and Services.                       28

PART IV.
Item 15.       Exhibits, Financial Statement Schedules,
               and Reports on Form 8-K.                                      28

Signatures                                                                   31
Index to Financial Statements                                               F-1








            THIS ANNUAL REPORT ON FORM 10-K, INCLUDING "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.  READERS ARE REFERRED TO THE RISKS AND UNCERTAINTIES
IDENTIFIED  BELOW,  UNDER  "RISK  FACTORS,"  AND  ELSEWHERE.   WE  UNDERTAKE  NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.

1.          BUSINESS.
            ---------

GENERAL

            NuCO2 Inc. is, we believe, the largest supplier in the United States
of bulk CO2 systems and bulk CO2 for carbonating fountain beverages based on the
number of bulk CO2 systems leased to customers. We believe that we are the first
and only  company in our  industry  to  operate a  national  network of bulk CO2
service  locations with over 99% of fountain  beverage users in the  continental
United States within our current  service  area.  Our website is  www.nuco2.com.
Through  a link  on our  Investor  Relations  section  of our  website,  we make
available the following filings as soon as reasonably practicable after they are
electronically  filed with or  furnished  to the U.S.  Securities  and  Exchange
Commission  ("SEC"):  our Annual Report on Form 10-K,  Quarterly Reports on Form
10-Q,  Current  Reports on Form 8-K and any amendments to those reports filed or
furnished  pursuant to Section 13(a) or 15(d) of the Securities  Exchange Act of
1934. All such filings are available free of charge.

            Bulk  CO2  involves  use  of  a  cryogenic  vessel  delivered  to  a
customer's  site,  which  preserves CO2 in its liquid form and then converts the
liquid   product  to  gaseous  CO2,  the  necessary   ingredient   for  beverage
carbonation. This is a relatively new technology with clear advantages over high
pressure CO2. Some of these advantages are:

            o   consistent and improved beverage quality,
            o   increased product yields,
            o   reduced employee handling and cylinder storage requirements,
            o   greater productivity,
            o   elimination  of downtime and product  waste during high pressure
                cylinder changeovers, and
            o   enhanced safety.

            Presently,  CO2 is supplied in most  instances to fountain  beverage
users in the form of gas,  which is  transported  and  stored  in high  pressure
cylinders.   High  pressure  cylinders  have  been  the  predominant  method  of
carbonating fountain beverages for almost 100 years. High pressure cylinders may
be less expensive than bulk CO2 systems for low volume users of CO2.

            Among our  customers  are many of the major  national  and  regional
restaurant and convenience  store chains (based on U.S.  systemwide  foodservice
sales),  movie  theater  operators,  theme  parks,  resorts  and sports  venues,
including:

                                       1





          QUICK SERVE RESTAURANTS                                           CASUAL/DINNER HOUSES
Arby's                           McDonald's                    Applebee's                         Official All Star Cafe
Bumpers Drive-In                 Panera Bread Company          Bahama Breeze                      Outback Steakhouse
Burger King                      Papa Gino's                   Bertucci's                         Perkins Family Restaurants
Captain D's                      Pizza Hut                     Cheesecake Factory                 Pizzeria Uno
Carl's Jr.                       Quizno's Classic Subs         Chevy's                            Ponderosa Steak House
Checker's Drive-In               Rubios                        Chili's                            Red Lobster/Olive Garden
Chick-Fil-A                      Sbarro                        Cooker Bar & Grill             Rio Bravo Cantina
Chipotle Grill                   Schlotzsky's Deli             Don Pablo's                        Roadhouse Grill
Churchs Chicken                  Sonic Drive-In                Friendly's Restaurant              Ruby Tuesday
D'Angelo's Sandwich Shop         Steak'n Shake                 Hard Rock Cafe                     Ryan's Family Steak House
Dunkin' Donuts                   Taco Bell                     Landry's                           Shoney's
El Pollo Loco                    Wendy's                       Longhorn Steakhouse                Spaghetti Warehouse
Hardee's                         White Castle                  Macaroni Grill
KFC
Krystal

CONTRACT FEEDERS                 WHOLESALE CLUBS                          CONVENIENCE/PETROLEUM
ARAmark                          BJ's Wholesale                7-Eleven                           Golden Pantry
Compass Group                    Costco                        AM/PM                              Phillips 66
Host Marriott                    Sam's Club                    BP/Amoco                           Racetrac Petroleum
Sodexho                                                        Circle K                           Shell ETD
                                                               Coastal Mark                       Spectrum Stores
SPORTS VENUES                    THEME/AMUSEMENT               Conoco                             Sunshine Jr.
AMF Bowling Centers              Six Flags                     Exxon                              Tom Thumb
Brunswick Recreation Centers     Universal Studios Florida     E-Z Serve
Derby Lane                       Walt Disney World             Farm Stores
Georgia Dome                     Wet n Wild
Madison Square Garden            White Waters                                     MOVIE THEATRES
Pro Player Stadium                                             Litchfield Cinemas                 Regal Cinemas
Raymond James Stadium                                          Loew's Cineplex                    Wallace Theatres
Staples Center

            We are a  Florida  corporation,  incorporated  in  1990.  Through  a
combination of internal growth and over 30 asset acquisitions,  we have expanded
our service  area from one service  location  and 19 customers in Florida to 101
service locations and approximately  75,000 bulk and high pressure CO2 customers
in 45 states as of June 30, 2003.  Since our initial public offering in December
1995,  this growth has been  achieved,  in large part,  with the proceeds of our
initial  public  offering  of common  stock as well as a  secondary  offering of
common stock in June 1996,  borrowings under our senior credit  facilities,  the
issuance  in 1997 and 1999 of our 12%  senior  subordinated  notes  due 2004 and
2005, respectively, the sale of our Series A 8% Cumulative Convertible Preferred
Stock in May 2000 and  Series B 8%  Cumulative  Convertible  Preferred  Stock in
November  2001,  and the private  placement  of our common stock in August 2002.
Today,  the majority of our growth is driven by the  conversion of high pressure
CO2 users to bulk CO2  systems.  Our ability to grow is dependent on the success
of our marketing  efforts to acquire new customers and their  acceptance of bulk
CO2 systems as a replacement for high pressure cylinders.

                                       2





                                Service Locations

                                     [MAP]

            Our bulk CO2 customer  base is highest in Florida,  Texas,  Georgia,
New York and  California.  Substantially  all of our revenues  have been derived
from the rental of bulk CO2 systems  installed at customers'  sites, the sale of
CO2 and high pressure  cylinder  revenues.  Revenues have grown from $812,000 in
fiscal 1991 to $74.4 million in fiscal 2003.


                                   Net Sales
                                 (in millions)
                                    [GRAPH]



OPPORTUNITY FOR GROWTH

            CO2 is universally used for carbonating fountain beverages. Bulk CO2
systems are  permanently  installed at the customer's site and are filled by the
supplier from a specialized bulk CO2 truck, unlike high pressure cylinders which
are typically changed out when empty and transported to the supplier's depot for
refilling.  Advantages to users of bulk CO2 systems over high pressure cylinders
include  consistent and improved  beverage  quality,  increased  product yields,
reduced   employee   handling  and  cylinder   storage   requirements,   greater
productivity,  elimination  of downtime and product  waste during high  pressure
cylinder changeovers and enhanced safety. Consequently, we believe that bulk CO2
systems will  eventually  displace most high pressure  cylinders in the fountain
beverage market.

            We  estimate  there are  currently  approximately  150,000  bulk CO2
beverage users in the United States. Of these,  approximately 74,000 are already
our customers.  We also  currently  service  approximately  800 stand alone high
pressure CO2 customers.  There are an estimated  600,000 fountain beverage users

                                       3





in the  continental  United States.  Therefore,  the bulk CO2 industry  presents
substantial opportunity for growth. We plan on increasing the number of our bulk
CO2 customers  through sales and marketing  initiatives  aimed at bulk CO2 users
who are serviced by our  competitors  as well as the conversion of current users
of high pressure cylinders to bulk CO2. In addition, we may seek to increase our
customer base through carefully  selected  acquisitions of customer accounts and
bulk CO2 equipment.

                            TOTAL BEVERAGE CO2 USERS

                                    [CHART]


PRODUCTS AND SERVICES

            We offer our customers two principal services: (1) a stationary bulk
CO2 system  installed on the customer's site and (2) routine filling of the bulk
CO2 system with bulk CO2. The bulk CO2 system  installed  at a  customer's  site
consists of a cryogenic  vessel for the storage of bulk CO2 and related  valves,
regulators and gas lines.  The cryogenic vessel preserves CO2 in its liquid form
and then converts the liquid  product to gaseous CO2, the  necessary  ingredient
for beverage carbonation.  Presently, we offer bulk CO2 systems ranging from 300
to 600 lbs. of CO2  capacity.  This range of bulk CO2 system sizes permits us to
market our services to a range of potential customers.

            We  typically  enter into a six-year  bulk CO2 system  lease and CO2
supply agreement with our customers.  Generally, these agreements are classified
as one of two types: (1) "budget plan" service contracts or (2) "rental plus per
pound  charge"  contracts.  Under budget plan  contracts,  customers pay a fixed
monthly  charge for the lease of a bulk CO2 system  installed on the  customer's
site and refills of bulk CO2.  The bulk CO2 is  included  in the monthly  rental
charge  up  to a  predetermined  maximum  annual  volume.  This  arrangement  is
appealing to the customer  since we bear the initial cost of the  equipment  and
installation,  with the customer  paying a predictable  and modest monthly usage
fee. If the maximum annual volume of CO2 is exceeded, the customer is charged on
a per pound basis for additional bulk CO2 delivered. Under rental plus per pound
charge  contracts,  we also  lease a bulk CO2  system to the  customer,  but the
customer  is charged on a per pound basis for all bulk CO2  delivered.  Although
the bulk CO2 system is typically  owned by us and leased to the  customer,  some
customers own their own bulk CO2 systems. Even with customers that own their own
bulk CO2 systems, we seek to arrange for long-term bulk CO2 supply contracts.

            We believe that the use of long-term  contracts provides benefits to
both us and our  customers.  Customers are able to largely  eliminate CO2 supply
interruptions  and the need to  operate  CO2  equipment  themselves,  while  the
contract adds  stability to our revenue base.  Service  termination is typically
caused by  restaurant  closure.  After the  expiration  of the initial term of a
contract,  the contract  generally renews unless we or the customer notifies the
other of intent to  cancel.  To date,  our  experience  has been that  contracts
generally "roll-over" without a significant portion terminating in any one year.

            We also supply high pressure gases in cylinder form,  including CO2,
helium and nitrogen.  We estimate that we currently  service  approximately  800
stand-alone high pressure CO2 customers, most of whom are very low volume users.
Helium and nitrogen are supplied mostly to existing customers in connection with
filling balloons and dispensing beer, respectively.

            We have an agreement with The Coca-Cola Company  ("Coca-Cola")  that
establishes a framework to develop a strategic alliance between us for providing
Coca-Cola's  fountain  customers  in the United  States with quality CO2 and CO2
dispensing systems, technology and services that are superior to that which have

                                       4





thus far been  available.  While Coca-Cola will not be a customer of ours, it is
anticipated  that by working  together,  both we and  Coca-Cola  will benefit by
offering superior products and services to current and potential customers, many
of whom are the same.

            The framework for the strategic  alliance was  established  in March
2000.  During the fiscal year ended June 30,  2003,  we continued to develop the
strategic  alliance  and  Coca-Cola  assisted  us in  securing  several  key new
customer  contracts.  We plan to jointly develop a differentiated  CO2 marketing
program to be used exclusively for Coca-Cola's customers.

MARKETING AND CUSTOMERS

            At June 30,  2003,  we serviced  approximately  75,000 bulk and high
pressure CO2 customers,  none of which  accounted for more than 3% of our fiscal
2003 net sales.  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  most of the major
national and regional  chains  throughout the United  States.  We 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.
Our  products  and  services  are sold by a sales  force of 34  commission  only
independent sales  representatives  and 26 salaried sales personnel.  As of June
30,  2002 and 2003,  we had  backlogs  of 534 and  almost  4,400 new  locations,
respectively,  awaiting activation.  During fiscal 2004, we expect to place into
service  a  substantial  number of these  locations  and to  maintain  a similar
backlog  throughout  the year.  New  activations  are dependent upon a number of
factors,  including the  expiration of any existing  agreements the customer may
have with its current CO2 supplier.

COMPETITION

            We believe that we are the largest and the sole national supplier of
bulk CO2 systems and bulk CO2 for carbonating fountain beverages. In many of our
markets, we are a leading or the dominant supplier of bulk CO2 services.

            Major restaurant and convenience store chains continue to adopt bulk
CO2  technology  and search for qualified  suppliers to install and service bulk
CO2 systems.  With the exception of us, we believe that  qualified  suppliers of
bulk CO2 services do not presently  exist in many regions of the United  States.
Unlike many of our competitors for whom bulk CO2 is a secondary service line, we
have no material  lines of business at present  other than the provision of bulk
CO2 services.  All aspects of our operations are guided by our focus on the bulk
CO2 business, including our selection of operating equipment, design of delivery
routes, location of service locations,  structure of customer contracts, content
of  employee  training  programs  and  design  of  management   information  and
accounting  systems.  By restricting the scope of our activities to the bulk CO2
business,  and largely  avoiding the dilution of  management  time and resources
that would be required by other  service  lines,  we believe that we are able to
maximize the level of service we provide to our bulk CO2 customers.

            We offer a wide range of  innovative  sales,  marketing  and billing
programs. We believe that our ability to compete depends on a number of factors,
including   product  quality,   availability  and   reliability,   price,   name
recognition,  delivery  time and  post-sale  service  and  support.  Despite the
customer-level  advantages of bulk CO2 systems over high pressure cylinders,  we
generally price our services comparably to the price of high pressure cylinders.
This has proved an effective  inducement to cause customers to convert from high
pressure cylinders to bulk CO2 systems. We believe that we enjoy advantages over
our  competitors  due to the density of our route  structure and a lower average
time and distance  traveled  between stops.  Each bulk CO2 system serviced by us
has a label with a toll-free  help line for the  customer's  use. The experience
level of our personnel  aids in the  resolution  of equipment  failures or other
service interruptions,  whether or not caused by our equipment.  Recognizing the
public visibility of our customers,  we carefully maintain the appearance of our
vehicles and the professional image of our employees.

            Many  types of  businesses  compete  in the  fountain  beverage  CO2
business and market share is  fragmented.  High pressure  cylinders and bulk CO2
services are most frequently provided by distributors of industrial gases. These
companies generally provide a number of products and services in addition to CO2
and often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors  generally have been reluctant to attempt to convert
their high pressure  cylinder  customers to bulk CO2 systems for several reasons
including  the capital  outlays  required  to purchase  bulk CO2 systems and the
idling of existing  high  pressure  cylinders and  associated  equipment.  Other

                                       5





competitors  in the  fountain  beverage  CO2 business  include  fountain  supply
companies and  distributors  of restaurant  supplies and  groceries,  which vary
greatly in size.  There are also a number of small  companies  that provide bulk
CO2 services that operate on a local or regional geographic scope. While many of
these  suppliers  lack the  capital  necessary  to offer  bulk  CO2  systems  to
customers on lease,  suppliers  vary widely in size and some of our  competitors
may have significantly greater financial,  technical or marketing resources than
we do.

OPERATIONS

            At June 30, 2003, we operated 101 service  locations (91  stationary
depots and 10 mobile  depots)  located  throughout our 45 state service area and
operated 168 specialized bulk CO2 trucks and 73 technical service vehicles. Each
specialized  bulk CO2 truck  refills bulk CO2 systems at  customers'  sites on a
regular cycle and CO2 delivery  quantities are measured by flow meters installed
on the bulk CO2 trucks.  Each  stationary  depot is equipped with a storage tank
(up to 40 tons) which  receives bulk CO2 from large  capacity  tanker trucks and
from which our specialized bulk CO2 trucks are filled with bulk CO2 for delivery
to customers.  In most  instances,  the bulk CO2 system at a customer's  site is
accessible from the outside of the  establishment  and delivery of bulk CO2 does
not cause any interference with the operations of the customer. All dispatch and
billing  functions are  conducted  from our  corporate  headquarters  in Stuart,
Florida, with route drivers, installers and service personnel operating from our
service locations.

            Implementation of our Intelligent Distribution System, AccuRoute(R),
continued during the year. AccuRoute(R) includes these core components:

            Portable Account Link (PAL)

            This  is our  mobile  information  system  for  use in our  delivery
operation.  The system  utilizes a hand held device to provide  field  personnel
with up to date delivery route and customer account  information and also serves
as an input source to record all delivery transaction information.  PAL has been
operational since the spring of 2000.

            Scheduling System

            In order to ensure  reliability and consistent service levels to the
customer,  deliveries  are  made  at a  fixed  interval.  Information  from  the
scheduling  system is used to  determine  the  proper  frequency.  Accounts  are
closely monitored by our field and corporate  personnel.  Each account is placed
into the correct frequency grouping based on delivery history,  seasonality, and
promotions  reported to us by the customer.  The  scheduling  system  analyzes a
customer's CO2 usage and determines the optimal next delivery date,  considering
both maximum payload  delivery and safety stock held in the customer's tank. The
foundation of the scheduling system is the delivery  information gathered by the
PAL system.  The scheduling system utilizes  sophisticated  computer  algorithms
that consider:

            1. Tank size
            2. Delivery history
            3. Seasonal factors
            4. Safety margins

            Based on  delivered  quantities  over time,  the  scheduling  system
determines a daily usage rate. Usage,  combined with tank size and last delivery
date,  is used to  determine  how often a  customer's  tank must be filled.  The
scheduling  system was first deployed during the fall of 2000 and is continually
refined and enhanced.

            Route Optimization

            The route optimization system will produce efficient delivery routes
to minimize time and distance traveled between  deliveries.  We expect that this
will  significantly  improve the levels of service to our  customers by enabling
our  drivers  to  deliver  more  stops  in less  time.  Testing  of a  potential
third-party  solution  has taken place and we expect that  additional  solutions
will be evaluated in the near future.

            Mobile Fleet Communication

            We have implemented  two-way voice  communication and text messaging
primarily using the Nextel(R) wireless  communication system. This system allows
for real-time,  voice  communication or two-way text messaging with delivery and
service  personnel,  regardless  of their  location,  virtually  anywhere in the
country.  This  capability  has greatly  increased  our ability to maximize  the
utilization  of our  resources  and to provide  the  highest  level of  customer
service.

                                       6





            Customer Extranet

            Customers  will be able to log on to a secure  Web  site  and  among
other things,  maintain their  accounts,  review  account  balances and delivery
history,  as well as scheduled  deliveries,  and place orders or request special
service. The Customer Extranet is expected to be deployed during fiscal 2004.

BULK CO2 SUPPLY

            Bulk CO2 is currently a readily available  commodity product,  which
is  processed  and sold by  various  sources.  In May 1997,  we  entered  into a
ten-year  exclusive bulk CO2 requirements  contract with The BOC Group,  Inc., a
multinational  industrial  gases company,  that provides a stable supply of high
quality CO2 at competitive  prices. In addition,  the agreement provides that if
sufficient  quantities of bulk CO2 become  unavailable  for any reason,  we will
receive treatment as a preferred  customer.  For example,  in the event of a CO2
shortage,  many CO2 suppliers  reduce  deliveries of CO2 to all  customers.  Our
agreement with BOC provides that we will continue to receive deliveries in full,
along with BOC's other large customers, prior to deliveries to other customers.

BULK CO2 SYSTEMS

            We purchase new bulk CO2 systems from the two major manufacturers of
such  systems  and we  believe  that we are the  largest  purchaser  of bulk CO2
systems  from these  manufacturers  combined.  We  currently  purchase  bulk CO2
systems in four sizes (300, 400, 450 or 600 lbs. of bulk CO2 capacity) depending
on the needs of our customers.  Bulk CO2 systems are vacuum insulated containers
with extremely high insulation  characteristics  allowing the storage of CO2, in
its liquid form, at very low  temperatures.  Bulk CO2 systems  operate under low
pressure,  are  fully  automatic,   and  require  no  electricity.   Based  upon
manufacturers'  estimates,  the service life of a bulk CO2 system is expected to
exceed 20 years.  We maintain an adequate  inventory of bulk CO2 systems to meet
expected customer demand.

EMPLOYEES

            At June 30, 2003, we employed 503 full-time  employees,  172 of whom
were involved in management,  sales or customer support,  251 of whom were route
drivers and 80 of whom were in  technical  service  functions.  We consider  our
relationship with our employees to be good.

TRADEMARKS

            We  market  our  services   using  the  NuCO2(R)  and   AccuRoute(R)
trademarks  which have been  registered by us with the U.S. Patent and Trademark
Office. The current  registrations for these trademarks expire in 2007 and 2013,
respectively.

SEASONALITY

            At June 30,  2003,  approximately  20,000 of our bulk CO2  customers
were billed under rental plus per pound charge contracts or by the pound for all
bulk CO2 delivered. Customers who purchase bulk CO2 by the pound tend to consume
less  CO2 in the  winter  months  and our  revenues  to such  customers  will be
correspondingly lower in times of cold or inclement weather.

REGULATORY MATTERS

            Our business is subject to various federal, state and local laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of our products.  For example, the transportation of bulk
CO2 is  subject to  regulation  by various  federal,  state and local  agencies,
including the U.S.  Department of  Transportation.  Regulatory  authorities have
broad powers and we are subject to regulatory and  legislative  changes that can
affect the economics of the industry by requiring changes in operating practices
or by  influencing  the demand for,  and the costs of,  providing  services.  We
believe that we are in compliance  in all material  respects with all such laws,
regulations  and  standards  currently in effect and that the cost of compliance
with such laws,  regulations  and  standards has not and is not  anticipated  to
materially adversely effect us.

                                  RISK FACTORS

            Set forth below and elsewhere in this Annual Report on Form 10-K and
in other documents we file with the SEC are risks and  uncertainties  that could
cause actual results to differ  materially from the results  contemplated by the
forward-looking statements contained in this Annual Report on Form 10-K.

                                       7





WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND FACE  UNCERTAINTY IN OUR ABILITY
TO BECOME A PROFITABLE COMPANY.

            We have incurred substantial losses since our inception in 1990. Our
net loss was $15.5  million for fiscal 2001,  $11.0  million for fiscal 2002 and
$4.9  million  for fiscal  2003.  We are  uncertain  whether  we will  install a
sufficient number of our bulk CO2 systems or obtain sufficient market acceptance
to allow us to  achieve  or  sustain  profitability.  Our  losses  to date  have
resulted  primarily  from expenses we incurred in 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 cost of this expansion and the significant depreciation
expense of our installed  base of bulk CO2 systems have resulted in  significant
operating losses to date and accumulated net losses of $57.9 million at June 30,
2003.

WE HAVE SUBSTANTIAL INDEBTEDNESS AND OUR OBLIGATION TO SERVICE THAT INDEBTEDNESS
COULD DIVERT FUNDS FROM  OPERATIONS  AND LIMIT OUR ABILITY TO OBTAIN  ADDITIONAL
FUNDING TO EXPAND OUR BUSINESS.

            As of September 19, 2003, we had  outstanding  indebtedness of $73.0
million,  which  included  $43.0  million  under our credit  facility  and $30.0
million of our 16.3% senior subordinated notes due 2009.

            If we are unable to  generate  sufficient  cash flow to service  our
indebtedness, we will have to:

            o    reduce or delay planned capital expenditures,
            o    sell assets,
            o    restructure or refinance our indebtedness, or
            o    seek additional equity capital.

            We are uncertain  whether any of these strategies can be effected on
satisfactory  terms,  if at all,  particularly  in light of our high  levels  of
indebtedness.  In addition,  the extent to which we continue to have substantial
indebtedness could have significant consequences, including:

            o    our ability to obtain  additional  financing  in the future for
                 working capital,  capital expenditures,  acquisitions and other
                 general  corporate   purposes  may  be  materially  limited  or
                 impaired,

            o    a substantial portion of our cash flow from operations may need
                 to be dedicated to the payment of principal and interest on our
                 indebtedness   and  therefore  not  available  to  finance  our
                 business, and

            o    our high degree of indebtedness  may make us more vulnerable to
                 economic downturns,  limit our ability to withstand competitive
                 pressures or reduce our  flexibility  in responding to changing
                 business and economic conditions.

            Also, our lenders require that we comply with financial and business
covenants. If we fail to maintain these covenants,  our lenders could declare us
in default.  They could demand the repayment of our indebtedness to them if this
default  were not cured or  waived.  At  various  times in the past we have been
unable to meet certain covenants and have had to obtain waivers or modifications
of terms from our  lenders.  Although we believe  that we will be able to comply
with the current  provisions of our borrowing  arrangements,  circumstances  may
result in our having to obtain waivers or further modifications in the future.

OUR FUTURE  OPERATING  RESULTS REMAIN  UNCERTAIN  DESPITE THE GROWTH RATE IN OUR
REVENUE.

            You should not consider growth rates in our revenue to be indicative
of growth rates in our operating results.  In addition,  you should not consider
prior growth rates in our revenue to be indicative of future growth rates in our
revenue. The timing and amount of future revenues will depend almost entirely on
our ability to obtain  agreements with new customers to install bulk CO2 systems
and use our services.  Our future operating results will depend on many factors,
including:

            o    the level of product and price competition,
            o    the ability to manage our growth,
            o    the ability to hire additional employees, and
            o    the ability to control costs.

WE LACK  PRODUCT  DIVERSITY,  AND  OUR  BUSINESS  DEPENDS  ON  CONTINUED  MARKET
ACCEPTANCE  BY THE  FOOD AND  BEVERAGE  INDUSTRY  OF OUR  PRODUCT  AND  CONSUMER
PREFERENCE FOR CARBONATED BEVERAGES.

            We depend on continued market  acceptance of our bulk CO2 systems by
the food and beverage  industry,  which  accounts for  approximately  95% of our
revenues.  Unlike  many of our  competitors  for whom  bulk  CO2 is a  secondary
business,  we have no material  lines of business other than the leasing of bulk

                                       8





CO2 systems and the sale of CO2. We do not  anticipate  diversifying  into other
product or service  lines in the future.  The retail  beverage  CO2  industry is
mature,  with only limited growth in total demand for CO2 foreseen.  Our ability
to grow is dependent  upon the success of our  marketing  efforts to acquire new
customers and their  acceptance  of bulk CO2 systems as a  replacement  for high
pressure CO2  cylinders.  While the food and beverage  industry to date has been
receptive to bulk CO2 systems,  we cannot be certain that the operating  results
of our installed  base of bulk CO2 systems will continue to be favorable or that
past results will be indicative of future market  acceptance of our service.  In
addition,  any recession  experienced  by the food and beverage  industry or any
significant  shift in consumer  preferences  away from  carbonated  beverages to
other  types of  beverages  would  result  in a loss of  revenues,  which  would
adversely  affect our  financial  condition  and results of  operations  and our
ability to service our indebtedness.

OUR  MARKET IS HIGHLY  COMPETITIVE  AND OUR  INABILITY  TO  RESPOND  TO  VARIOUS
COMPETITIVE  FACTORS MAY RESULT IN A LOSS OF CURRENT  CUSTOMERS AND A FAILURE TO
ATTRACT NEW CUSTOMERS.

            The industry in which we operate is highly  competitive.  We compete
regionally  with  several  direct  competitors.  We cannot be certain that these
competitors  will not  substantially  increase their  installed base of bulk CO2
systems and expand their service nationwide. Because there are no major barriers
to entry, we also face the risk of a  well-capitalized  competitor's  entry into
our  existing  or  future  markets.  In  addition,   we  compete  with  numerous
distributors of bulk and high pressure CO2, including:

            o    industrial gas and welding supply companies,
            o    specialty gas companies,
            o    restaurant and grocery supply companies, and
            o    fountain supply companies.

            These  suppliers vary widely in size.  Some of our  competitors  may
have significantly  greater financial,  technical or marketing resources than we
do. Our  competitors  might  succeed in  developing  technologies,  products  or
services that are superior, less costly or more widely used than those that have
or are being  developed by us or that would render our  technologies or products
obsolete or noncompetitive.  In addition, competitors may have an advantage over
us with  customers who prefer  dealing with one company that can supply bulk CO2
as well as fountain  syrup. We cannot be certain that we will be able to compete
effectively with current or future competitors.

OUR  INABILITY  TO  MANAGE  GROWTH  MAY  OVEREXTEND  OUR  MANAGEMENT  AND  OTHER
RESOURCES,  CAUSING  INEFFICIENCIES,  WHICH MAY  ADVERSELY  AFFECT OUR OPERATING
RESULTS.

            We have  experienced  rapid  growth and intend to continue to expand
our operations aggressively. Because of our limited product line, we must expand
operations to become profitable. We may be unable to:

            o    manage effectively the expansion of our operations,
            o    implement and develop our systems, procedures or controls,
            o    adequately support our operations, or
            o    achieve and manage the  currently  projected  installations  of
                 bulk CO2 systems.

            If we  are  unable  to  manage  growth  effectively,  our  business,
financial  condition  and results of  operations  and our ability to service our
indebtedness  could be seriously harmed. The growth in the size and scale of our
business  has  placed,  and we expect  it will  continue  to place,  significant
demands on our personnel and operating systems. Our additional planned expansion
may further strain management and other resources.  Our ability to manage growth
effectively will depend on our ability to:

            o    improve our operating systems,
            o    expand, train and manage our employee base, and
            o    develop additional service capacity.

WE ARE DEPENDENT ON  THIRD-PARTY  SUPPLIERS AND IF THESE  SUPPLIERS  CEASE DOING
BUSINESS WITH US, WE MAY HAVE DIFFICULTY  FINDING SUITABLE  REPLACEMENTS TO MEET
OUR NEEDS.

            We do not conduct  manufacturing  operations  and  depend,  and will
continue to depend,  on outside  parties for the manufacture of bulk CO2 systems
and components. We intend to significantly expand our installed base of bulk CO2
systems.  Our  expansion  may be limited by the  manufacturing  capacity  of our
third-party   manufacturers.   Manufacturers   may  not  be  able  to  meet  our
manufacturing  needs  in a  satisfactory  and  timely  manner.  If  there  is an
unanticipated  increase in demand for bulk CO2 systems, we may be unable to meet
such demand due to manufacturing constraints.  We purchase bulk CO2 systems from
Chart,  Inc. and Harsco  Corporation,  the two major  manufacturers  of bulk CO2
systems.  Should either  manufacturer cease  manufacturing bulk CO2 systems,  we
would be required  to locate  additional  suppliers.  We may be unable to locate

                                       9





alternate  manufacturers  on a timely  basis.  A delay in the supply of bulk CO2
systems could cause potential  customers to delay their decision to purchase our
services or to choose not to purchase our services.  This would result in delays
in or loss of future revenues.

            In  addition,  we purchase CO2 for resale to our  customers.  In May
1997, we entered into a ten-year  exclusive bulk CO2 requirements  contract with
The BOC Group, Inc. In the event that BOC is unable to fulfill our requirements,
we would have to locate  additional  suppliers.  A delay in locating  additional
suppliers or our inability to locate  additional  suppliers would result in loss
of revenues, which would adversely affect our financial condition and results of
operations and our ability to service our indebtedness.

YOU MAY NOT BE ABLE TO SELL OUR  STOCK ON TERMS  FAVORABLE  TO YOU  BECAUSE  OUR
COMMON STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

            Our  common  stock  price  has  fluctuated  substantially  since our
initial  public  offering in December 1995. The market price of our common stock
could decline from current levels or continue to fluctuate.  The market price of
our common stock may be significantly affected by the following factors:

            o    announcements of  technological  innovations or new products or
                 services by us or our competitors,
            o    trends and fluctuations in the use of bulk CO2 systems,
            o    timing of bulk CO2 systems installations  relative to financial
                 reporting periods,
            o    release of reports,
            o    operating results below expectations,
            o    changes  in, or our  failure to meet,  financial  estimates  by
                 securities analysts,
            o    industry developments,
            o    market acceptance of bulk CO2 systems,
            o    economic and other external factors, and
            o    period-to-period fluctuations in our financial results.

            In  addition,   the  securities  markets  have  from  time  to  time
experienced  significant price and volume fluctuations that are unrelated to the
operating  performance of particular  companies.  These market  fluctuations may
also materially and adversely affect the market price of our common stock. Also,
daily  trading  volume in our common  stock has from time to time been light and
you may not be able to sell our common  stock on terms  favorable  to you in the
volume and at the times you desire.

OUR OPERATING  RESULTS MAY FLUCTUATE DUE TO SEASONALITY  SINCE CONSUMERS TEND TO
DRINK FEWER QUANTITIES OF CARBONATED BEVERAGES DURING THE WINTER MONTHS.

            Approximately  12% of our  bulk  CO2  customers  lease  our bulk CO2
systems  and,  in  addition,  are  billed by the  pound for bulk CO2  delivered.
Approximately  15% of our bulk CO2  customers own their own bulk CO2 systems and
are billed by the pound for all CO2  delivered.  We believe  that, on a relative
basis,  customers  purchasing  bulk CO2 by the pound tend to consume less CO2 in
the winter months. Our sales to such customers will be correspondingly  lower in
times of cold or inclement weather.  We cannot be certain,  however,  that these
seasonal trends will continue.  Consequently,  we are unable to predict revenues
for any future quarter with any significant degree of accuracy.

FOR THE FORESEEABLE FUTURE,  YOUR ONLY RETURN ON INVESTMENT,  IF ANY, WILL OCCUR
ON THE SALE OF OUR STOCK BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS.

            We have  never  declared  or paid any cash  dividends  on our common
stock.  We currently  intend to retain any future  earnings for funding  growth.
Therefore,  we do not expect to pay any dividends in the foreseeable  future. In
addition,  the payment of cash dividends is restricted by financial covenants in
our loan agreements.

OUR OPERATING  RESULTS ARE AFFECTED BY RISING  INTEREST  RATES SINCE MORE OF OUR
CASH FLOW WILL BE NEEDED TO SERVICE OUR INDEBTEDNESS.

            The  interest  rate on our credit  facility  fluctuates  with market
interest rates  resulting in greater  interest costs in times of rising interest
rates.  Consequently,  our  profitability  is  sensitive  to changes in interest
rates.

OUR  INSURANCE  POLICIES MAY NOT COVER ALL  OPERATING  RISKS AND A CASUALTY LOSS
BEYOND OUR COVERAGE COULD NEGATIVELY IMPACT OUR BUSINESS.

            Our operations are subject to all of the operating hazards and risks
normally  incidental to handling,  storing and transporting CO2. As a compressed
gas, CO2 is classified as a hazardous  material.  We maintain insurance policies

                                       10





in such  amounts and with such  coverages  and  deductibles  that we believe are
reasonable and prudent. We cannot assure you that our insurance will be adequate
to protect us from all  liabilities  and expenses that may arise from claims for
personal and property  damage arising in the ordinary course of business or that
current  levels of insurance  will be  maintained  or  available  at  economical
prices.  If a  significant  liability  claim is  brought  against us that is not
covered  by  insurance,  we may have to pay the claim with our own funds and our
financial  condition and ability to service our indebtedness  could be seriously
harmed.

OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH MAY INCREASE
OUR  COST  OF  DOING  BUSINESS.  IN  ADDITION,  FAILURE  TO  COMPLY  WITH  THESE
REGULATIONS  MAY  SUBJECT US TO FINES,  PENALTIES  AND/OR  INJUNCTIONS  THAT MAY
ADVERSELY AFFECT OUR OPERATING RESULTS.

            Our  business is subject to federal  and state laws and  regulations
adopted  for the  protection  of the  environment,  the health and safety of our
employees and users of our products and services. The transportation of bulk CO2
is subject to regulation by various federal, state and local agencies, including
the U.S. Department of Transportation.  These regulatory  authorities have broad
powers, and we are subject to regulatory and legislative changes that can affect
the  economics of our industry by  requiring  changes in operating  practices or
influencing  the demand for and the cost of providing  services.  A  significant
increase in the cost of our operations  could  adversely  affect our chances for
profitability.

OUR OFFICERS AND  DIRECTORS ARE ABLE TO EXERT  SIGNIFICANT  CONTROL OVER MATTERS
REQUIRING  SHAREHOLDER  APPROVAL,  WHICH MAY  ADVERSELY  AFFECT  THE PRICE  THAT
INVESTORS ARE WILLING TO PAY FOR OUR COMMON STOCK.

            Executive  officers,  directors  and entities  affiliated  with them
beneficially own, in the aggregate,  approximately 28% of our outstanding shares
of common stock  (including  shares of common stock issuable upon  conversion of
preferred  stock).  These  shareholders,  if acting  together,  would be able to
significantly  influence  all matters  requiring  approval by our  shareholders,
including  the election of directors and the approval of  significant  corporate
transactions,  such as mergers or other business combination transactions.  This
concentration of ownership may also have the effect of delaying or preventing an
acquisition  or change in control of our  company,  which  could have a material
adverse effect on our common stock price.

OUR PREFERRED STOCK AND PROVISIONS OF OUR CHARTER AND FLORIDA LAW MAY NEGATIVELY
AFFECT THE ABILITY OF A POTENTIAL  BUYER TO PURCHASE ALL OR SOME OF OUR STOCK AT
AN OTHERWISE ADVANTAGEOUS PRICE, WHICH MAY LIMIT THE PRICE INVESTORS ARE WILLING
TO PAY FOR OUR COMMON STOCK.

            Our  common  stock is  subordinate  to all  outstanding  classes  of
preferred  stock in the  payment of  dividends  and other  distributions  on our
stock, including distributions upon liquidation or dissolution of NuCO2. We have
outstanding  two  series  of  preferred   stock,  the  Series  A  8%  Cumulative
Convertible Preferred Stock and the Series B 8% Cumulative Convertible Preferred
Stock.  Our board of directors  has the  authority to issue up to an  additional
4,992,500  shares of preferred  stock.  If we designate or issue other series of
preferred  stock, it will create  additional  securities that will have dividend
and  liquidation  preferences  over the common shares.  If we issue  convertible
preferred  stock, a subsequent  conversion may dilute the current  shareholders'
interest.  Without any further  vote or action on the part of the  shareholders,
our board of directors  will have the authority to determine the price,  rights,
preferences,  privileges and restrictions of the preferred  stock.  Although the
issuance of preferred stock will provide us with  flexibility in connection with
possible  acquisitions and other corporate  purposes,  the issuance of preferred
stock may make it more  difficult for a third party to acquire a majority of our
outstanding  voting stock.  We are subject to several  anti-takeover  provisions
that apply to a public corporation organized under Florida law. These provisions
generally require that an "affiliated transaction" (certain transactions between
a  corporation  and a  holder  of  more  than  10%  of  its  outstanding  voting
securities)  must be approved by a majority of  disinterested  directors  or the
holders  of  two-thirds  of the  voting  shares  not  beneficially  owned  by an
"interested  shareholder."  Additionally,  "control  shares" (shares acquired in
excess of certain  specified  thresholds)  acquired in specified  control  share
acquisitions  have voting  rights  only to the extent  conferred  by  resolution
approved by  shareholders,  excluding  holders of shares  defined as "interested
shares."

            A Florida corporation may opt out of the Florida  anti-takeover laws
if its articles of incorporation or, depending on the provision in question, its
bylaws so provide.  We have not opted out of the provisions of the anti-takeover
laws.  Consequently,  these  laws  could  prohibit  or delay a  merger  or other
takeover or change of control and may discourage  attempts by other companies to
acquire us.

FUTURE SALES OF SHARES MAY  ADVERSELY  AFFECT OUR STOCK PRICE SINCE ANY INCREASE
IN THE AMOUNT OF OUTSTANDING SHARES MAY HAVE A DILUTIVE EFFECT ON OUR STOCK.

            If our shareholders sell substantial  amounts of our common stock in
the public market,  the market price of our common stock could fall. These sales
could be due to shares issued upon exercise of outstanding  options and warrants

                                       11





and upon  conversion  of  preferred  stock.  These sales also might make it more
difficult for us to sell equity or equity-related  securities in the future at a
time and price that we deem appropriate.  We have outstanding  options under our
1995 stock option  plan,  directors'  stock  option plan and options  granted to
directors  to purchase an aggregate  of  1,496,520  common  shares at an average
exercise  price of $8.80 per share  and  outstanding  warrants  to  purchase  an
aggregate of 1,841,462  common shares at an average  exercise price of $9.76 per
share. In addition, we also have outstanding Series A 8% Cumulative  Convertible
Preferred Stock and Series B 8% Cumulative  Convertible  Preferred Stock that is
currently convertible at $9.28 and $12.92 per share, respectively,  into 694,709
and 222,269 common shares, respectively.

2.          PROPERTIES.
            ----------

            Our  corporate  headquarters  are  located in a 32,000  square  foot
rented facility in Stuart, Florida that accommodates corporate,  administrative,
marketing,  sales and  warehouse  space.  At June 30,  2003,  we also  rented 91
stationary service locations  throughout 45 states.  These facilities are rented
on terms  consistent with market  conditions  prevailing in the area. We believe
that our  existing  facilities  are  suitable  for our  current  needs  and that
additional or replacement  facilities,  if needed,  are available to meet future
needs.

3.          LEGAL PROCEEDINGS.
            ------------------

            We are  involved  from  time to time in  litigation  arising  in the
ordinary  course  of  business,  none of which is  expected  to have a  material
adverse effect on our financial condition or results of operations.

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

            Not applicable.

5.          MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
            ----------------------------------------------------------------------

            Our common  stock  trades on the Nasdaq  National  Market  under the
symbol "NUCO".  The following  table  indicates the high and low sale prices for
our common  stock for each  quarterly  period  during  fiscal 2002 and 2003,  as
reported by the Nasdaq National Market.

                                               High                    Low
                                               ----                    ---
CALENDAR 2001
-------------
Third Quarter                                $ 13.200                $ 7.940
Fourth Quarter                                 12.850                  9.820

CALENDAR 2002
-------------
First Quarter                                $ 13.050                $11.120
Second Quarter                                 14.000                 10.900
Third Quarter                                  13.850                  7.000
Fourth Quarter                                 10.560                  7.000

CALENDAR 2003
-------------
First Quarter                                $  8.210                $ 3.900
Second Quarter                                  9.780                  4.990

            At  September  19,  2003,  there were  approximately  200 holders of
record of our common stock, although there is a much larger number of beneficial
owners.

            We have never paid cash  dividends on our common stock and we do not
anticipate  declaring any cash dividends on our common stock in the  foreseeable
future.  We intend to retain all future  earnings for use in the  development of
our  business.  In  addition,  the payment of cash  dividends is  restricted  by
financial covenants in our loan agreements.

                                       12





            The following table sets forth certain information  regarding equity
compensation plans as of June 30, 2003.

                      EQUITY COMPENSATION PLAN INFORMATION

                                 Number of securities to be    Weighted-average exercise price     Number of securities remaining
                                   issued upon exercise of         price of outstanding          available for future issuance under
                                    outstanding options,           options, warrants and        equity compensation plans (excluding
Plan Category                       warrants and rights                 rights                   securities reflected in column (a))
-------------                       -------------------                 ------                   -----------------------------------
                                          (a)                            (b)                                    (c)

Equity compensation plans              1,354,420                         $9.13                                186,322
approved by security             shares of Common Stock                                               shares of Common Stock
holders ...

Equity compensation plans                117,500(1)                      $8.68                                    0
not approved by security         shares of Common Stock
holders ...

              Total...                 1,471,920                         $9.09                                186,322
                                 shares of Common Stock                                               shares of Common Stock

------------------------------
(1)   Represents  (i) 50,000  options to purchase  common stock  exercisable  at
      $7.82 per share  granted to five  Directors in January  2001,  (ii) 30,000
      warrants to purchase  common stock  exercisable at $14.64 per share issued
      to a placement  agent in October  1997,  (iii)  1,500  options to purchase
      common stock  exercisable  at $10.25 per share  granted to a consultant in
      December  1997,   and  (iv)  36,000  options  to  purchase   common  stock
      exercisable at $4.85 per share granted to six Directors in March 2003.

            On August 22,  2002,  we sold  1,663,846  shares of our common stock
without  registration under the Securities Act of 1933, as amended  ("Securities
Act") to 24  "accredited  investors" at a price of $9.75 per share for aggregate
cash proceeds of $16,222,499  in reliance upon the exemption  from  registration
provided by Section 4(2) of the  Securities  Act and  Regulation  D  thereunder.
Commissions in the amount of $920,138 were paid.

                                       13





6.          SELECTED FINANCIAL DATA.
            -----------------------

            The Selected  Financial  Data set forth below reflect our historical
results of  operations,  financial  condition and operating data for the periods
indicated  and should be read in  conjunction  with the  consolidated  financial
statements  and notes  thereto  and  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations included elsewhere in this Annual
Report on Form 10-K.


                                                                                   Fiscal Year Ended June 30,
                                                                                   --------------------------
                                                                   2003          2002          2001        2000         1999
                                                                   ----          ----          ----        ----         ----
                                                                   (in thousands, except per share amounts and Operating Data)
Income Statement Data:
Net sales ....................................................   $  74,409    $  72,312    $  67,633    $  57,951    $  47,098
Cost of products sold, excluding depreciation and amortization      35,538       35,491       33,177       28,565       24,548
Selling, general and administrative expenses .................      17,485       17,614       17,368       12,352       10,121
Depreciation and amortization ................................      17,167       16,319       17,475       15,501       12,763
Loss on asset disposal .......................................       1,671        4,661        4,891          901        1,110
                                                                 ---------    ---------    ---------    ---------    ---------

Operating income (loss) ......................................       2,548       (1,773)      (5,278)         632       (1,444)
Interest expense .............................................       7,487        8,402       10,207       10,015        7,489
Loss on early extinguishment of debt .........................        --            796         --           --           --
                                                                 ---------    ---------    ---------    ---------    ---------


Net (loss) ...................................................   $  (4,939)   $ (10,971)   $ (15,485)   $  (9,383)   $  (8,933)
                                                                 =========    =========    =========    =========    =========

Net (loss) per common share ..................................   $   (0.54)   $   (1.32)   $   (2.01)   $   (1.30)   $   (1.24)

Weighted average shares outstanding ..........................      10,396        8,742        7,926        7,238        7,217

Other Data:
EBITDA (1) ...................................................   $  19,715    $  14,546    $  12,197    $  16,133    $  11,319


Operating Data:
Company owned bulk CO2 systems serviced
     Beginning of period .....................................      61,000       60,000       58,000       50,395       39,295
     New installations, net ..................................       1,877        1,000        2,000        7,605       11,100
                                                                 ---------    ---------    ---------    ---------    ---------
Total company owned bulk CO2 systems serviced ................      62,877       61,000       60,000       58,000       50,395
Customer owned bulk CO2 systems serviced .....................      11,088        9,000        9,000       10,000        8,605
                                                                 ---------    ---------    ---------    ---------    ---------
Total bulk CO2 systems serviced ..............................      73,965       70,000       69,000       68,000       59,000
Total high pressure CO2 customers ............................         833        1,000        2,000        5,000        6,000
                                                                 ---------    ---------    ---------    ---------    ---------
Total customers ..............................................      74,798       71,000       71,000       73,000       65,000
Stationary depots ............................................          91           76           74           70           69
Mobile depots ................................................          10           22           19           21           15
Bulk CO2 trucks ..............................................         168          161          157          158          166
Technical service vehicles ...................................          73           76           87           95           86
High pressure cylinder delivery trucks .......................        --           --              2            7            7

Balance Sheet Data:
Cash and cash equivalents ....................................   $     455    $   1,562    $     626    $     279    $   1,579
Total assets .................................................     125,846      132,638      138,016      148,549      141,630
Total debt (including short-term debt) .......................      70,529       87,660       87,346       92,082       82,461
Redeemable preferred stock ...................................       9,258        8,552        5,466        5,050         --
Total shareholders' equity ...................................      34,936       25,219       33,982       38,240       47,733

                                       14





(1) RECONCILIATION OF GAAP AND EBITDA

                                                                 Fiscal Year Ended June 30,
                                                  ---------------------------------------------------------
                                                    2003       2002         2001        2000        1999
                                                    ----       ----         ----        ----        ----
   Net loss                                      $ (4,939)   $(10,971)   $(15,485)   $ (9,383)   $ (8,933)
   Interest expense                                 7,487       8,402      10,207      10,015       7,489
   Depreciation and amortization                   17,167      16,319      17,475      15,501      12,763
   Loss on early extinguishment of debt              --           796        --          --          --
                                                 --------    --------    --------    --------    --------

EBITDA                                           $ 19,715    $ 14,546    $ 12,197    $ 16,133    $ 11,319
                                                 ========    ========    ========    ========    ========

Cash flows provided by (used in):
   Operating activities                          $ 15,826    $ 10,858    $  5,213    $  6,559    $  4,249
   Investing activities                          $(13,891)   $(12,817)   $(11,761)   $(20,694)   $(25,620)
   Financing activities                          $ (3,042)   $  2,895    $  6,895    $ 12,835    $ 22,614

            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.

7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS.
            ---------------------------------------------------------------

OVERVIEW

            We believe that we are the largest  supplier in the United States of
bulk CO2 systems and bulk CO2 for  carbonating  fountain  beverages based on the
number of bulk CO2 systems leased to customers. As of June 30, 2003, we operated
a national network of 101 service locations in 45 states servicing approximately
75,000 bulk and high pressure  customers.  Currently,  99% of fountain  beverage
users in the  continental  United  States are within our present  service  area.
Historically,  due to a combination of internal growth and acquisitions, we have
experienced high levels of growth in terms of number of customers and net sales,
averaging 20% to 50% per year from 1995 through 2000. Today, the majority of our
growth is internal  resulting  from the conversion of high pressure CO2 users to
bulk CO2 systems.

            During fiscal 2001 and continuing through the early stages of fiscal
2003,  we initiated  several  actions that have improved our ability to contract
and retain  customers,  while  maintaining a superior level of customer service.
These actions had a significant  positive impact on our operating  effectiveness
during  the later  stages of fiscal  2003 and should  provide a strong  base for
profitable  growth in fiscal 2004.  During fiscal 2001 and 2002, we deliberately
slowed new customer contract signings and the related  installation rate of bulk
CO2  systems.  This  decision  was made to enable us to focus on  improving  our
operating  effectiveness  in order to better  position us for future growth.  We
decentralized  service  location  management  from our  headquarters  in Stuart,
Florida to the depot  locations  themselves and in connection with this decision
hired new full-time  depot and regional  managers.  This slowed our gross margin
improvement plan in fiscal 2001 and 2002,  although it is anticipated to enhance
it in the future. The result of this decision was that our revenue growth slowed
from prior years although  revenue still grew at 16.7%,  6.9% and 2.9% in fiscal
2001,  2002 and 2003,  respectively.  The ramp down in growth  enabled our sales
force to  concentrate  on signing  higher margin new  customers  and  re-signing
existing customers at increased rates.

            We believe that our future revenue growth, gains in gross margin and
profitability  will be dependent upon (i) increases in route density in existing
markets and the expansion and  penetration of bulk CO2 system  installations  in
new market  regions,  both resulting from  successful  ongoing  marketing,  (ii)
improved  operating  efficiencies  and (iii)  price  increases.  New  multi-unit
placement   agreements   combined  with   single-unit   placements   will  drive

                                       15





improvements in achieving route density. Our success in reaching multi-placement
agreements is due in part to our national  delivery  system.  We maintain a "hub
and spoke" route structure and establish additional  stationary bulk CO2 service
locations as service areas expand through geographic growth. Our entry into many
states was  accomplished  largely through the  acquisition of businesses  having
thinly  developed route networks.  We expect to benefit from route  efficiencies
and other  economies  of scale as we build  our  customer  base in these  states
through  intensive  regional and local  marketing  initiatives.  Greater density
should also lead to enhanced  utilization of vehicles and other fixed assets and
the ability to spread fixed  marketing and  administrative  costs over a broader
revenue base.

            Generally,  our  experience  has been that as our service  locations
mature their gross profit  margins  improve as a result of their volume  growing
while fixed costs remain essentially unchanged.  New service locations typically
operate at low or negative  gross  margins in the early  stages and detract from
our highly profitable service locations in more mature markets.  Fiscal 2001 and
2002 and the early  stages of fiscal 2003 were periods of  transition  for us in
which we achieved significant  progress in better positioning  ourselves for the
next phase of growth.  Accordingly,  we believe that we are in position to build
our  customer  base in fiscal  2004 while  maintaining  and  improving  upon our
superior levels of customer service.  In addition,  we will continue to focus on
improving   operating   effectiveness,   increasing   prices  and  strengthening
management.  We anticipate that these initiatives will contribute  positively to
all areas of our company.

GENERAL

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

            Cost of products  sold is comprised of  purchased  CO2,  vehicle and
service location costs associated with the storage and delivery of CO2. 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 bulk CO2  systems,  we  capitalize  costs that are
associated  with specific  installations  of such systems with  customers  under
non-cancelable  contracts  and which would not be incurred  but for a successful
placement. 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 $57.9 million at June 30, 2003.

RESULTS OF OPERATIONS

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

                                       16





                                                   Fiscal Year Ended
                                                        June 30,
                                                 ---------------------------
                                                 2003       2002        2001
                                                 ----       ----        ----
Income Statement Data:

Net sales                                        100.0 %    100.0 %    100.0 %
Cost of products sold, excluding
  depreciation and amortization                    47.8       49.1       49.1
Selling, general and administrative expenses       23.5       24.4       25.7
Depreciation and amortization                      23.1       22.6       25.8
Loss on asset disposal                              2.2        6.4        7.2
                                                   ----       ----       ----
Operating income (loss)                             3.4       (2.5)      (7.8)
Loss on early extinguishment of debt               --          1.1       --
Interest expense                                   10.1       11.6       15.1
                                                   ----       ----       ----

Net (loss)                                         (6.6)%    (15.2)%    (22.9)%
                                                   ====       ====       ====

FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002

NET SALES

            Net sales increased by $2.1 million,  or 2.9%, from $72.3 million in
2002 to $74.4 million in 2003. Sales derived from our service plans increased by
$3.3 million,  or 4.6%, due to an increase in the number of accounts,  partially
offset by the net impact of a $0.6  million  decrease  in revenue  derived  from
changes in the  amount of CO2 sold to the average  customer  under our  variable
product purchase plans,  which includes our equipment lease and product purchase
plans,  and a $0.6 million  decrease from rental of high pressure  cylinders and
the sale of gases other than CO2.

            While our bulk CO2 customer  base  increased by 4.7%,  the amount of
CO2 sold to the average  customer  decreased by 1.2%, from 2,311 lbs. in 2002 to
2,283 lbs. in 2003. As part of our pricing  initiatives,  we were able to obtain
an average price increase of 2.1% on tank rentals from  approximately 80% of our
customers under contract. In addition, while we were able to achieve significant
price increases from 4,200 of our renewal  customers,  these  improvements  were
offset by incentive pricing provided to a national restaurant organization.

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


                                                      Fiscal Year Ended June 30,
                                                      --------------------------
Service Plan                                              2003          2002
                                                         ------         -----
        Bulk budget plan(1)                               65.5%         65.6%
        Equipment lease/product purchase plan(2)           8.7           7.1
        Product purchase plan(3)                           8.4           8.6
        High pressure cylinder(4)                          6.1           7.1
        Other revenues(5)                                 11.3          11.6
                                                         -----         -----
                                                         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.

            During fiscal 2002,  we adopted a plan to phase out those  customers
that use only high pressure cylinders and who do not utilize one of our bulk CO2
service plans.  Revenues  derived from our  stand-alone  high pressure  cylinder

                                       17





customers may not be fully eliminated from our ongoing revenues  inasmuch as our
goal is to convert these customers to a bulk CO2 service plan. Accordingly,  the
expected  declining  revenues derived from  stand-alone  high pressure  cylinder
customers  is not  expected  to  have  a  material  impact  on  our  results  of
operations.

COST OF PRODUCTS SOLD

            Costs of products  sold  remained  constant at $35.5 million in both
2002 and 2003,  while  decreasing  as a  percentage  of net sales  from 49.1% to
47.8%.  Product costs  increased by $0.1 million,  from $10.8 million in 2002 to
$10.9 million in 2003,  while decreasing as a percentage of net sales from 15.0%
to 14.6%. The base price with our CO2 primary supplier  decreased by 2.0%, while
the volume of CO2 sold by us increased by 3.5%.

            Operational wages and benefits  decreased from $15.0 million in 2002
to $13.9 million in 2003, primarily due to a $0.5 million reduction in headcount
and a $0.6 million  reduction  in  installation  costs due to greater  operating
efficiencies.

            Truck delivery expenses  increased by $0.3 million from $5.3 million
in 2002 to $5.6  million in 2003.  Increases  in fuel costs and  insurance  were
partially  offset  by a  reduction  in net  lease  costs.  We have  been able to
minimize the impact of increased fuel costs and variable lease costs  associated
with truck usage by reducing the overall miles driven by 14% compared to 2002.

            Other  operational costs increased by $0.7 million from $4.4 million
in 2002 to $5.1  million in 2003 due to a $0.4  million  increase  in  occupancy
costs  attributable to an increase in the number of service  depots,  and a $0.4
million  increase  in tank  repair  expenses,  due in part to an increase in the
number of refurbished tanks placed into service.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling,  general  and  administrative  expenses  decreased  by $0.1
million,  or 0.7%,  from $17.6 million in 2002 to $17.5  million in 2003,  while
decreasing as a percentage of net sales from 24.4% in 2001 to 23.5% in 2003.

            Selling  expenses  increased by $0.5  million,  from $3.0 million in
2002 to $3.5  million in 2003.  Wages and  related  benefits  increased  by $0.4
million; however, we reduced the headcount of our sales organization in February
2003,  which we believe will result in  improvements  to our  selling,  wage and
related  expenses on a going-forward  basis,  while not hindering our ability to
generate account bookings.

            General and administrative  expenses  decreased by $0.6 million,  or
4.6%, from $14.6 million in 2002 to $14.0 million in 2003.  This  improvement is
due to a $1.9 million  reduction of expense  related to  uncollectible  accounts
receivable.  During fiscal 2003, we initiated numerous procedures to improve our
review and collection of our outstanding  receivable accounts.  This improvement
was partially offset by an increase in wages and benefits of $0.5 million, which
is primarily attributable to severance and accrued incentives.  Professional and
consulting fees also increased by $0.6 million,  primarily due to  non-recurring
fees incurred  during the first six months of fiscal 2003 for repairs of certain
software,   improvements  in  our  processes  to  track  and  collect   customer
receivables,  and  other  process  improvements.   Finally,  other  general  and
administrative   expenses  increased  $0.2  million,  the  result  of  increased
insurance costs and other general expenses.

DEPRECIATION AND AMORTIZATION

            Depreciation and  amortization  increased from $16.3 million in 2002
to $17.2  million  in 2003.  As a  percentage  of net  sales,  depreciation  and
amortization expense increased from 22.6% in 2002 to 23.1% in 2003. Depreciation
expense  increased  from $12.6  million in 2002 to $13.8  million in 2003 due in
part to our plan to replace all 50 and 100 lb.  tanks over the next three years,
resulting in accelerated depreciation expense of $1.0 million in 2003 related to
the shortened lives of these assets.  Amortization  expense  decreased from $3.7
million  in  2002  to  $3.4  million  in  2003,  primarily  due  a  decrease  in
amortization  related to the acquisition of customer  lists,  many of which were
almost fully amortized as of March 31, 2003,  partially offset by an increase in
the  amortization of financing  charges  primarily  related to amendments to our
loan agreements in February 2003.

LOSS ON ASSET DISPOSAL

            Loss on asset  disposal  decreased from $4.7 million in 2003 to $1.7
million in 2003,  while  decreasing  as a  percentage  of net sales from 6.4% to
2.2%.  During 2002,  we adopted a plan to replace all 50 and 100 lb. tanks still
in service at customer sites over a three to four year period (see Note 2 to the
Financial  Statements).  The  decision  to replace  these  tanks was based on an
evaluation of the general economic viability of the asset class. Such conclusion
was achieved by examining  undiscounted  cash flow  generation,  contribution to
depot fixed overhead, pricing and targeted margins. As a result of our decision,
the 50 and 100 lb. tanks at customer sites as of June 30, 2002 were written down
by $1.8 million to their estimated net realizable value of $2.8 million, and the

                                       18





useful  lives of these  assets  were  shortened  to not  exceed a period of four
years.  In  connection  with the  decision to replace  the 50 and 100 lb.  asset
class,  we recognized an additional  loss of $1.1 million  during the year ended
June 30, 2002 relating to the 50 and 100 lb. tanks  removed from service  during
the year,  all of which were  subsequently  disposed of in the first  quarter of
fiscal 2003.

OPERATING INCOME

            For the reasons previously discussed,  operating income increased by
$4.3  million  from an  operating  loss of $1.8  million in 2002 to an operating
income of $2.5 million in 2003. As a percentage of net sales,  operating  income
(loss) improved from (2.5)% in 2002 to 3.4% in 2003.

LOSS ON EARLY EXTINGUISHMENT OF DEBT

            We accelerated the recognition of $0.8 million in deferred financing
costs in 2002 associated with the refinancing of our long-term debt.

INTEREST EXPENSE

            Interest  expense  decreased by $0.9  million,  from $8.4 million in
2002 to $7.5 million in 2003,  and  decreased as a percentage  of net sales from
11.6% in 2002 to  10.1%  in 2003,  due to a  decrease  in the  average  level of
outstanding  debt.  This  reduction  of debt is primarily  due to $15.1  million
generated from the private  placement of 1,663,846 shares of our common stock in
August  2002,  which was used to reduce  the  outstanding  balance of our senior
facility.  The effective  interest rate of all debt outstanding  during 2003 was
9.6%, as compared to 9.7% in 2002.

NET (LOSS)

            For the reasons  described  above,  net (loss) improved from $(11.0)
million in 2002 to $(4.9)  million in 2003.  No provision for income tax expense
has been  made due to  historical  net  losses.  At June  30,  2003,  we had net
operating loss  carryforwards  for federal income tax purposes of $99.0 million,
which are available to offset future federal taxable income,  if any, in varying
amounts through June 2023.

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,  increased by $5.2 million,
or 35.5%, from $14.5 million in 2002 to $19.7 million in 2003 and increased as a
percentage of net sales from 20.1% to 26.5%.

                                                 Fiscal Year Ended June 30,
                                                 --------------------------
                                                2003                     2002
                                                ----                     ----

Net (loss)                                    $ (4,939)                $ (10,971)
Interest expense                                 7,487                     8,402
Depreciation and amortization                   17,167                    16,319
Early Extinguishment of Debt                       -                         796
                                              --------                 ---------
EBITDA                                        $ 19,715                 $  14,546
                                              ========                 =========

Cash flows provided by (used in):
  Operating activities                        $ 15,826                 $  10,858
  Investing activities                        $(13,891)                $ (12,817)
  Financing activities                        $ (3,042)                $   2,895

                                       19





FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001

NET SALES

            Net sales  increased  $4.7 million,  or 6.9%,  from $67.6 million in
2001 to $72.3  million  in  2002.  Sales  increased  by $5.0  million,  or 7.5%,
primarily due to pricing  initiatives  on both new and renewal  customers.  Such
increase was offset by a $0.3 million decrease in revenues from stand-alone high
pressure  cylinder  customers,  a  result  of  the  planned  phase-out  of  such
customers.

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

                                                        Fiscal Year Ended June 30,
                                                        --------------------------
                                                            2002       2001
                                                            ----       ----
          Bulk budget plan(1)                               65.6%      64.2%
          Equipment lease/product purchase plan(2)           7.1        7.8
          Product purchase plan(3)                           8.6        8.7
          High pressure cylinder(4)                          7.1        7.9
          Other revenues(5)                                 11.6       11.4
                                                           -----      -----
                                                           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 C02 gases.
          (5) Surcharges and other charges.

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

COST OF PRODUCTS SOLD

            Costs of products  sold  increased by $2.3  million,  or 7.0%,  from
$33.2  million in 2001 to $35.5  million  in 2002,  and as a  percentage  of net
sales,  equaled  49.1% in both  fiscal  years.  Operational  wages and  benefits
increased by $1.5 million from $13.5  million in 2001 to $15.0  million in 2002,
and as a percentage of net sales, increased from 20.0% in 2001 to 20.8% in 2002.
The increases are primarily attributable to increased field management personnel
to  enhance  the  operational  effectiveness  of  our  depots  locally.  Product
purchases  increased by $1.1 million from $9.7 million in 2001 to $10.8  million
in 2002, and as a percentage of net sales, increased from 14.3% in 2001 to 15.0%
in 2002.  The dollar  increase is  attributable  to increased  purchases of CO2,
partially offset by lower per pound costs,  based on volume  incentive  pricing.
Truck expenses  decreased $0.7 million from $6.0 million in 2001 to $5.3 million
in 2002 while  decreasing  as a percentage of sales from 8.8% in 2001 to 7.4% in
2002. The dollar decrease is primarily  attributable to decreased fuel and truck
repair costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

            Selling,  general  and  administrative  expenses  increased  by $0.2
million,  or 1.4%, from $17.4 million in 2001 to $17.6 million in 2002, and as a
percentage  of net  sales  decreased  from  25.7% in 2001 to 24.4% in 2002.  The
increase is  primarily  attributable  to  increases  in selling,  executive  and
administrative  wages and  benefits  and  other  general  expenses,  offset by a
decrease in bad debt expense.

            Selling and  administrative  wages and  benefits  increased  by $0.2
million from $9.7 million in 2001 to $9.9 million in 2002.  These costs  include
wages and benefits associated with the hiring of incremental sales and corporate
management.

            Other general  expenses  increased $0.3 million from $4.6 million in
2001 to $4.9 million in 2002. Bad debt expense  decreased $0.3 million from $3.1
million in 2001 to $2.8 million in 2002. As a percentage of net sales,  bad debt

                                       20





expense  decreased  from 4.5% in 2001 to 3.8% in 2002. The decrease is primarily
attributable  to corrective  action taken on the potential  uncollectability  of
certain accounts  receivable that came to light as a result of several issues in
the billing and cash application  areas noted in the prior year. We believe that
the  factors  that gave rise to these  issues  have been  addressed  in order to
prevent their  reoccurrence in the future.  Although there was a decrease in bad
debt expense for 2002 compared to 2001, a charge of $1.9 million was recorded in
the fourth  quarter to increase  reserves due to the unusually high closure rate
among  independent  operators  who have gone out of business  in recent  periods
because of unfavorable economic conditions.

DEPRECIATION AND AMORTIZATION

            Depreciation and  amortization  decreased from $17.5 million in 2001
to $16.3  million  in 2002.  As a  percentage  of net  sales,  depreciation  and
amortization expense decreased from 25.8% in 2001 to 22.6% in 2002. Depreciation
expense  increased from $12.3 million in 2001 to $12.6 million in 2002 primarily
as a result of new  asset  additions.  Amortization  expense  decreased  by $1.4
million from $5.1 million in 2001 to $3.7 million in 2002.

            The decrease in amortization  expense is a result of our adoption of
Statement  of  Financial  Accounting  Standard  No.  142,  "GOODWILL  AND  OTHER
INTANGIBLE   ASSETS."  This  accounting   standard  requires  that  goodwill  be
separately  disclosed from other intangible  assets in the balance sheet, and no
longer  be  amortized,  but  tested  for  impairment  on a  periodic  basis.  In
accordance  with this  standard we  discontinued  the  amortization  of goodwill
effective  July 1, 2001.  For fiscal 2002,  we were not required to recognize an
impairment of goodwill.

LOSS ON ASSET DISPOSAL

            Loss on asset  disposal  decreased $0.2 million from $4.9 million in
2001 to $4.7 million in 2002, while decreasing as a percentage of net sales from
7.2% in 2001 to 6.4% in 2002.

            In June 2001, we decided to discontinue  further  installation of 50
and 100 lb.  tanks.  As a result of this  decision,  a loss of $1.2  million was
recognized  for 50 and 100 lb tanks held in inventory  as of June 30,  2001.  In
addition,  during  2001 we  recognized  a loss of $1.8  million  as a result  of
adopting  a  conservative   approach  to  recognizing  a  loss  associated  with
unamortized tank costs at lost customer sites.

            During  2002,  we adopted a plan to replace all 50 and 100 lb. tanks
still in  service  at  customer  sites  over a three to four  year  period.  The
decision  to  replace  these  tanks was based on an  evaluation  of the  general
economic viability of the asset class. Such conclusion was achieved by examining
undiscounted cash flow generation, contribution to depot fixed overhead, pricing
and targeted margins.  As a result of our decision,  the 50 and 100 lb. tanks at
customer  sites as of June 30,  2002 were  written  down by $1.8  million to the
estimated net  realizable  value of $2.8 million,  and the useful lives of these
assets were  shortened  to not to exceed a period of four years.  In  connection
with the decision to replace the 50 and 100 lb asset  class,  we  recognized  an
additional  loss of $1.1 million  relating to the 50 and 100 lb.  tanks  removed
from service during the year, all of which were subsequently  disposed of in the
first quarter of fiscal 2003.

OPERATING INCOME (LOSS)

            Operating  loss  decreased by $3.5 million from $5.3 million in 2001
to $1.8 million in 2002. As a percentage of net sales,  operating loss decreased
from 7.8% in 2001 to 2.5% in 2002.

LOSS ON EARLY EXTINGUISHMENT OF DEBT

            We accelerated the recognition of $0.8 million in deferred financing
costs in 2002 associated with the refinancing of our long-term debt.

INTEREST EXPENSE

            Interest expense, net, decreased by $1.8 million, from $10.2 million
in 2001 to $8.4 million in 2002, and decreased as a percentage of net sales from
15.1% in 2001 to 11.6% in 2002. The dollar decrease is primarily attributable to
an overall  decline in interest rates as well as lower average debt levels.  The
effective interest rate of all debt outstanding during 2002 was 9.7% as compared
to 11.2% in 2001.

NET LOSS

            Net loss decreased by $4.5 million,  or 29.2%, from $15.5 million in
2001 to $11.0  million in 2002.  No  provision  for income tax expense in either
2001 or 2002 has been made due to  historical  net losses.  At June 30, 2002, we

                                       21





had net operating  loss  carryforwards  for federal income tax purposes of $94.0
million, which are available to offset future federal taxable income, if any, in
varying amounts through June 2022.

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,  increased by approximately
$2.3 million,  or 19.3%, from $12.2 million in 2001 to $14.5 million in 2002 and
increased as a percentage of net sales from 18.0% to 20.1%.

                                                  Fiscal Year Ended June 30,
                                                  --------------------------
                                                      2002          2001
                                                   ---------     ---------
          Net (loss)                               $(10,971)     $(15,485)
          Interest expense                            8,402        10,207
          Depreciation and amortization              16,319        17,475
          Loss on early extinguishment of debt          796          --
                                                   --------      --------
          EBITDA                                   $ 14,546      $ 12,197
                                                   ========      ========

          Cash flows provided by (used in):
            Operating activities                   $ 10,858      $  5,213
            Investing activities                   $(12,817)     $(11,761)
            Financing activities                   $  2,895      $  6,895

RECENT ACCOUNTING PRONOUNCEMENTS

            In April 2002, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT
OF FASB STATEMENT NO. 13, AND TECHNICAL  CORRECTIONS"  ("SFAS 145"). Among other
things, SFAS 145 rescinds the provisions of SFAS No. 4 that require companies to
classify  certain gains and losses from debt  extinguishments  as  extraordinary
items.   The  provisions  of  SFAS  145  related  to   classification   of  debt
extinguishments  are  effective for fiscal years  beginning  after May 15, 2002.
Gains and losses from extinguishment of debt will be classified as extraordinary
items only if they meet the criteria in APB Opinion No. 30 ("APB 30"); otherwise
such losses will be  classified  as a component  of  continuing  operations.  We
adopted SFAS 145 during the quarter ended September 30, 2002. In accordance with
APB 30 and SFAS 145, we have reclassified the $796,000 extraordinary loss on the
early  extinguishment  of debt for  fiscal  2002 to a  component  of  continuing
operations.

            In June  2002,  the FASB  issued  SFAS  146,  "ACCOUNTING  FOR COSTS
ASSOCIATED  WITH EXIT OR  DISPOSAL  ACTIVITIES"  ("SFAS  146")  which  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities and nullifies EITF Issue No. 94-3 "LIABILITY  RECOGNITION FOR CERTAIN
EMPLOYEE  TERMINATION  BENEFITS  AND OTHER COSTS TO EXIT AN ACTIVITY  (INCLUDING
CERTAIN  COSTS  INCURRED  IN A  RESTRUCTURING)"  ("EITF  94-3").  The  principal
difference between SFAS 146 and EITF 94-3 relates to SFAS 146's requirements for
recognition  of a  liability  for a cost  associated  with an  exit or  disposal
activity. SFAS 146 requires that a liability be recognized when the liability is
incurred.  Under EITF 94-3, a liability  for an exit cost was  recognized at the
date of an entity's  commitment to an exit plan. SFAS 146 also  establishes that
fair value is the  objective  for  initial  measurement  of the  liability.  The
provisions of SFAS 146 are effective  for exit or disposal  activities  that are
initiated  after  December 31, 2002, but early  application  is encouraged.  The
adoption  of SFAS 146 during the first  quarter of fiscal  2003 had no impact on
our  financial  position,  results  of  operations  or cash flow for the  period
presented.

            In  December  2002,  FASB  issued  SFAS  No.  148,  "ACCOUNTING  FOR
STOCK-BASED  COMPENSATION - TRANSITION AND  DISCLOSURE"  ("SFAS 148").  SFAS 148
amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED  COMPENSATION" ("SFAS 123"), to

                                       22





provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  SFAS 148 amends the  disclosure  requirements  of SFAS 123 to require
prominent  disclosure in both annual and interim financial  statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on the reported  results.  The  provisions of SFAS 148 are effective
for financial  statements  for fiscal years ending after  December 15, 2002. The
adoption of SFAS 148 had no impact our financial position, results of operations
or cash flows for the periods presented.

            In  the  first  quarter  of  fiscal  2003,  we  adopted  SOP  01-06,
"ACCOUNTING BY CERTAIN ENTITIES (INCLUDING ENTITIES WITH TRADE RECEIVABLES) THAT
LEND TO OR FINANCE THE ACTIVITIES OF OTHERS" ("SOP 01-06").  SOP 01-06 addresses
disclosures on accounting  policies relating to trade accounts receivable and is
effective  prospectively  for  financial  statements  issued  for  fiscal  years
beginning  after  December 15, 2001. The adoption of SOP 01-06 had no impact our
financial  position,  results  of  operations  or cash  flows  for  the  periods
presented.

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

            In May 2003, the FASB issued SFAS No. 150,  "ACCOUNTING  FOR CERTAIN
FINANCIAL  INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES  AND EQUITY"
("SFAS 150").  SFAS 150 establishes  standards for how an issuer  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  SFAS 150 requires  that an issuer  classify a financial  instrument
that is within the scope of SFAS No. 150 as a  liability.  SFAS 150 is effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise is effective  beginning September 1, 2003. The adoption of SFAS 150 is
not expected to have a material  effect on our  financial  position,  results of
operations or cash flows.

            In May  2003,  the EITF   reached a  consensus  on Issue No.  00-21,
"REVENUE  ARRANGEMENTS WITH MULTIPLE  DELIVERABLES"  ("EITF 00-21").  EITF 00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which the vendor will perform multiple revenue generating activities. Currently,
we as lessor,  recognize revenue from leasing CO2 systems on straight-line basis
over the life of the related leases.  As discussed in Note 1(i) to the Financial
Statements,  the majority of CO2 system leases  generally  include  payments for
leasing the  equipment  and a continuous  supply of CO2.  For periods  beginning
after June 15, 2003,  EITF 00-21 will require us to segregate the recognition of
revenues  derived from the lease portion of these  agreements from the revenues,
net income and EBITDA derived from CO2 usage.  Such  segregation  may impact the
recognition  of  revenues  on a  quarterly  basis as CO2  usage  by the  average
customer  fluctuates  during a fiscal  year  based on factors  such as  weather,
traditional  summer  and  holiday  periods.  We  are  currently  evaluating  the
potential impact of the  implementation of EITF 00-21 on our financial  position
and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

            Our  cash   requirements   consist   principally   of  (1)   capital
expenditures  associated  with  purchasing and placing new bulk CO2 systems into
service  at  customers'  sites;  (2)  payments  of  principal  and  interest  on
outstanding indebtedness; and (3) working capital. Whenever possible, we seek to
obtain the use of  vehicles,  land,  buildings,  and other  office  and  service
equipment under operating  leases as a means of conserving  capital.  As of June
30, 2003, we anticipated making cash capital expenditures of approximately $15.0
million in fiscal  2004,  primarily  for  purchases  of bulk CO2 systems for new
customers,  the  replacement  with  larger  bulk CO2  systems  of 50 and 100 lb.
systems in service at existing  customers,  as appropriate,  and replacement CO2
tanks for our bulk truck fleet.  In June 2002,  we adopted a plan to replace all
50 and 100 lb.  bulk CO2  systems in service at  customers  over a three to four
year period. While this decision may not increase revenues from these customers,
it  is  expected  to  improve   operating   efficiencies,   gross   margins  and
profitability.  Once bulk CO2  systems  are placed into  service,  we  generally
experience  positive  cash  flows on a  per-unit  basis,  as there  are  minimal
additional capital expenditures required for ordinary operations. In addition to
capital  expenditures  related to internal  growth,  we review  opportunities to
acquire bulk CO2 service accounts, and may require cash in an amount dictated by
the scale and terms of any such transactions successfully concluded.

                                       23





            On  September  24,  2001,  we entered  into a $60.0  million  second
amended and restated  revolving  credit  facility with a syndicate of banks (the
"Amended Credit Facility").  Prior to June 30, 2002, the Amended Credit Facility
was amended to adjust certain financial covenants for the quarter ended June 30,
2002 and prospectively,  and non-compliance with the minimum EBITDA covenant for
the three months ended March 31, 2002 was waived.  As of June 30, 2002,  we were
not in  compliance  with certain of our  financial  covenants.  On September 30,
2002,  the  Amended  Credit  Facility  was amended to adjust  certain  financial
covenants  for  the  quarter  ended   September  30,  2002  and   prospectively,
non-compliance with financial covenants for the three months ended June 30, 2002
was waived,  and the  maturity of the Amended  Credit  Facility  was extended to
November 17, 2003.  On August 22, 2002,  we completed  the private  placement of
1,663,846  shares of our common stock to 24  accredited  investors at a price of
$9.75 per share realizing net cash proceeds of approximately $15.1 million after
$1.1  million of issuance  costs.  Pursuant to the  requirements  of the Amended
Credit  Facility,  we used $14.5 million of the proceeds to pay down outstanding
debt under the Amended  Credit  Facility.  As of September  30, 2002, we were in
compliance  with  all  of the  financial  covenants  under  the  Amended  Credit
Facility. On February 7, 2003, the Amended Credit Facility was amended to adjust
certain  financial  covenants  prospectively,  non-compliance  with the  minimum
EBITDA  covenant for the three months  ended  December 31, 2002 was waived,  the
maturity of the Amended Credit  Facility was extended to April 29, 2004, and the
Amended Credit  Facility was reduced to $45.0 million.  As of March 31, 2003 and
June 30, 2003, we were in compliance  with all of the financial  covenants under
the Amended Credit Facility.

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

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

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

                                       24





            On August  25,  2003,  concurrently  with the  closing of the Senior
Credit  Facility,  we prepaid  the 1997  Notes and 1999  Notes and issued  $30.0
million of our 16.3% Senior  Subordinated  Notes Due February 27, 2009 (the "New
Notes") with interest only payable  quarterly in arrears on February 28, May 31,
August 31 and November 30 of each year,  commencing  November 30, 2003. Interest
on the New Notes is 12% per annum payable in cash and 4.3% per annum payable "in
kind" by adding the amount of such interest to the  principal  amount of the New
Notes then  outstanding.  Ten year  warrants to purchase an aggregate of 425,000
shares of our common  stock at an exercise  price of $8.79 per share were issued
in connection  with the New Notes.  As with the Senior Credit  Facility,  we are
required to meet certain affirmative and negative covenants under the New Notes,
including but not limited to financial covenants.

            Although we believe  that we will be able to comply with the current
provisions of our borrowing arrangements, circumstances may result in our having
to obtain waivers or further modifications in the future.

            During fiscal 2003, our capital  resources  included cash flows from
operations,  proceeds  from  the  private  placement  of our  common  stock  and
available  borrowing capacity under the Amended Credit Facility.  As of June 30,
2003,  a total of  $30.7  million  was  outstanding  under  the  Amended  Credit
Facility.  As of September  19, 2003, a total of $43.0  million was  outstanding
under the Senior Credit Facility with a weighted average interest rate of 6.04%.

            We believe that cash flows from operations and available  borrowings
under the Senior Credit Facility will be sufficient to fund proposed  operations
for at least the next twelve months.

            The table below sets forth our obligations (in thousands) as of June
30, 2003,  reflecting the payoff of our Amended Credit Facility,  1997 Notes and
1999 Notes in August 2003:

                                         Less than 1
Contractual obligations          Total       Year     2-3 Years   4-5 Years  Thereafter
                               --------------------------------------------------------
Senior Credit Facility         $43,253     $ 2,294     $15,350     $15,609     $10,000
Subordinated debt               30,000        --          --          --        30,000
Non-competition agreements          80          80        --          --          --
Employment Agreements            1,960         758       1,142          60
Operating leases                12,934       3,915       5,240       2,776       1,002
                               -------     -------     -------     -------     -------
Total obligations              $88,227     $ 7,047     $21,732     $18,445     $41,002
                               =======     =======     =======     =======     =======

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

            WORKING CAPITAL.  At June 30, 2003 and June 30, 2002, we had working
capital of $(1.7) million and $2.3 million, respectively.  While working capital
decreased from 2002 to 2003, we used excess funds generated by operations offset
by capital needs, as discussed below,  along with $14.5 million generated by the
private  placement of our common stock, to reduce the outstanding  amounts under
our Amended Credit Facility.

            CASH  FLOWS  FROM  OPERATING  ACTIVITIES.  Cash  flows  provided  by
operations increased by $4.9 million from $10.9 million in 2002 to $15.8 million
in 2003.  The  improvement  is primarily  due to our  improvement  in net income
(excluding  non-cash charges) of $3.1 million and a $1.9 million  improvement in
the working capital components of our balance sheet.

            CASH FLOWS FROM INVESTING ACTIVITIES. During 2003 and 2002, net cash
used in investing activities was $13.9 million and $12.8 million,  respectively.
These  investing  activities  were primarily  attributable  to the  acquisition,
installation and direct placement costs of bulk CO2 systems.

            CASH FLOWS FROM FINANCING ACTIVITIES. During 2003 cash flows used in
financing  activities  was $3.0  million  compared to $2.9  million  provided by
operations in 2002.  During  fiscal 2003, we completed the private  placement of
1,663,846  shares of our common stock to 24  accredited  investors at a price of
$9.75 per share realizing net cash proceeds of approximately $15.1 million after
$1.1  million of issuance  costs.  Pursuant to the  requirements  of the Amended
Credit  Facility,  we used $14.5 million of the proceeds to pay down outstanding
debt under the  Amended  Credit  Facility.  In  addition,  during a  significant
portion of 2003, our cash flows  generated from  operations  exceeded our growth
capital  needs,  thus allowing us to use the remaining  portion to apply towards
our outstanding debt levels.

                                       25





            In 2002, cash flows from financing  activities included $5.4 million
from the  issuance  of  2,500  shares  of  Series  B 8%  Cumulative  Convertible
Preferred  Stock and the exercise of stock  options,  offset  principally  by an
increase in deferred  financing  costs under the Amended Credit  Facility.  As a
result of amending the Amended Credit Facility in August 2001, we simultaneously
paid down the existing facility and received funding, from net proceeds from the
issuance of long-term debt of $0.1 million.

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  supply  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.

CRITICAL ACCOUNTING POLICIES

            In  preparing  our   financial   statements,   we  make   estimates,
assumptions  and judgments  that can have a  significant  impact on our revenue,
operating  income and net income,  as well as on the reported amounts of certain
assets and  liabilities  on our balance  sheet.  We believe that the  estimates,
assumptions and judgments  involved in the accounting  policies  described below
have the greatest potential impact on our financial  statements,  so we consider
these to be our critical accounting  policies.  Estimates in each of these areas
are based on historical  experience and a variety of assumptions that we believe
are appropriate. Actual results may differ from these estimates.

VALUATION OF LONG-LIVED ASSETS

            We review our long-lived assets for impairment, principally property
and equipment,  whenever  events or changes in  circumstances  indicate that the
carrying  amount  of the  assets  may not be  fully  recoverable.  To  determine
recoverability of our long-lived assets, we evaluate the probability that future
undiscounted  net cash  flows will be greater  than the  carrying  amount of our
assets.  Impairment  is measured  based on the  difference  between the carrying
amount of our assets and their estimated fair value. See Note 2 of the financial
statements for more information  regarding asset  write-downs  recognized during
the years ended June 30, 2002 and 2001.

            Certain events may occur that would materially  effect our estimates
and assumptions  related to  depreciation.  Unforeseen  changes in operations or
technology could  substantially  alter  management's  assumptions  regarding our
ability  to  realize  the  return of our  investment  in  operating  assets  and
therefore  affect the amount of  depreciation  expense  to charge  against  both
current  and future  revenues.  Because  depreciation  expense is a function  of
historical  experiences,  analytical studies and professional  judgments made of
property,  plant and  equipment,  subsequent  studies  could result in different
estimates of useful lives and net salvage values. If future depreciation studies
yield  results  indicating  that our assets  have  shorter  lives as a result of
obsolescence,  physical  condition,  changes  in  technology  or  changes in net
salvage values, the estimate of depreciation  expense could increase.  Likewise,
if studies  indicate that assets have longer lives, the estimate of depreciation
expense could decrease.  For the year ended June 30, 2003,  depreciation expense
was $13,836,983 representing 19.3% of operating expenses. If the estimated lives
of all assets being depreciated were increased by one year, depreciation expense
would have decreased by  approximately  $1,100,000 or 8.0%.  Conversely,  if the
estimated lives of all assets decreased by one year,  depreciation expense would
have increased by $1,400,000 or 10.1%.

            Goodwill  represents  the cost in  excess  of the fair  value of the
tangible and  identifiable  intangible  not assets of  businesses  acquired and,
prior to July 1, 2001,  was amortized on a  straight-line  method over 20 years.
Effective July 1, 2001, we adopted Statement of Financial  Accounting  Standards
No. 142,  "Goodwill and Other Intangible  Assets ", pursuant to which,  goodwill
and indefinite life intangible assets are no longer amortized but are subject to
annual impairment  tests.  Other intangible assets with finite lives continue to
be amortized  on a  straight-line  method over the periods of expected  benefit.
Other   intangible   assets  consist  of  customer  lists  and   non-competition
agreements, principally acquired in 1995 through 1998 in connection with certain
asset acquisitions. Customer lists are being amortized on a straight line method
over five  years,  the  average  life of customer  leases,  and  non-competition
agreements.  Which generally preclude the other party from competing with the us
in a  designated  geographical  area for a stated  period  of  time,  are  being
amortized  on a straight  line method over their  contractual  lives which range
from thirty to one hundred and twenty months.

RESERVES FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE

            We make ongoing  assumptions  relating to the  collectability of our
accounts  receivable.  The  accounts  receivable  amount  on our  balance  sheet
includes  a reserve  for  accounts  that  might  not be paid.  Such  reserve  is
evaluated and adjusted on a monthly basis by examining  our  historical  losses,
aging of our trade receivables,  the credit worthiness of significant  customers
based on ongoing evaluations,  and current economic trends that might impact the
level of credit losses in the future. The composition of receivables consists of
on-time payers, "slow" payers, and at risk receivables, such as receivables from
customers  who no  longer  do  business  with us,  are  bankrupt,  or are out of
business.   Substantially  all  at  risk  receivables   greater  than  120  days
outstanding  are fully  reserved,  with the reserve of all  receivables at risk,
regardless of days outstanding, exceeding 93% of the total amount as of June 30,
2003. While we believe that our current reserves are adequate to cover potential
credit losses,  we cannot  predict future changes in the financial  stability of

                                       26





our  customers  and we cannot  guarantee  that our reserves  will continue to be
adequate.  If actual credit losses are significantly greater than the reserve we
have established,  that would increase our general and  administrative  expenses
and reduce our  reported net income.  Conversely,  if actual  credit  losses are
significantly less than our reserve,  this would eventually decrease our general
and administrative expenses and increase our reported net income.

DEFERRED INCOME TAXES

            Deferred  income  taxes  reflect  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.  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.  We consider  the  scheduled  reversal of  deferred  tax  liabilities,
projected  future  taxable  income,  and tax planning  strategies in making this
assessment and record a valuation allowance to reduce our deferred tax assets to
the amount that is expected to be realized in future periods.


7A.         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 June 30, 2003, a total of $30.7 million was  outstanding  under the
Amended  Credit  Facility  with a weighted  average  interest  rate of 4.7%.  As
discussed in "Liquidity and Capital Resources," we terminated the Amended Credit
Facility and entered into the Senior Facility as of August 25, 2003.  Based upon
$43.0  million  outstanding  under the Senior  Credit  Facility at September 19,
2003, our annual  interest cost under the Senior Credit  Facility would increase
by approximately $0.4 million for each 1% increase in interest rates.

            In  order  to  reduce  our  exposure  to  increases  in  LIBOR,  and
consequently to increases in interest payments, we entered into an interest rate
swap  transaction  (the "Prior Swap") in the amount of $12.5 million (the "Prior
Notional Amount").  Pursuant to the Swap, we paid a fixed interest rate of 5.23%
per annum and received a LIBOR-based floating rate. The effect of the Prior Swap
was to neutralize  any changes in LIBOR on the Prior Notional  Amount.  The Swap
was  terminated  on August  25,  2003.  In  connection  with the  Senior  Credit
Facility,  we are  required to enter into an interest  rate Swap  agreement in a
notional amount equal at least 50% of the aggregate of the A Term Loan and the B
Term Loan prior to November 24, 2003.

8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
            -------------------------------------------

            See page F-1.

9.          CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING  AND
            FINANCIAL DISCLOSURE.
            --------------------------------------------------------------------

            None.

9A.         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 fourth fiscal
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.

                                       27





10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
            ---------------------------------------------------

            The information  required by Item 10 is incorporated by reference to
our  definitive  proxy  statement to be filed with the SEC no later than October
28, 2003 pursuant to Regulation 14A.

11.         EXECUTIVE COMPENSATION.
            -----------------------

            The information  required by Item 11 is incorporated by reference to
our  definitive  proxy  statement to be filed with the SEC no later than October
28, 2003 pursuant to Regulation 14A.

12.         SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND
            RELATED STOCKHOLDER MATTERS.
            --------------------------------------------------------------------

            The information  required by Item 12 is incorporated by reference to
our  definitive  proxy  statement to be filed with the SEC no later than October
28, 2003 pursuant to Regulation 14A.

13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
            -----------------------------------------------

            The information  required by Item 13 is incorporated by reference to
our  definitive  proxy  statement to be filed with the SEC no later than October
28, 2003 pursuant to Regulation 14A.

14.         PRINCIPAL ACCOUNTANT FEES AND SERVICES.
            ---------------------------------------

            Not applicable.

15.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
            -----------------------------------------------------------------

            (a) The following documents are filed as part of this report.

            (1) Financial statements.
                See Index to  Financial  Statements  which  appears  on page F-1
                herein.

            (2) Financial Statement Schedules

                II - Valuation and Qualifying Accounts.

            (3) Exhibits:

            Exhibit No.          Exhibit

            3.1          --      Amended and Restated  Articles of Incorporation
                                 of the Company. (2)

            3.2          --      Articles  of   Amendment  to  the  Articles  of
                                 Incorporation  of the Company,  dated  December
                                 18, 1995. (3)

            3.3          --      Articles  of   Amendment  to  the  Articles  of
                                 Incorporation  of the Company,  dated  December
                                 17, 1996. (3)

            3.4          --      Articles  of   Amendment  to  the  Articles  of
                                 Incorporation  of the  Company,  dated  May 10,
                                 2000. (5)

            3.5          --      Articles  of   Amendment  to  the  Articles  of
                                 Incorporation of the Company, dated November 1,
                                 2001. (7)

            3.6          --      Articles  of   Amendment  to  the  Articles  of
                                 Incorporation  of the Company,  dated March 31,
                                 2003. (1)

            3.7          --      Bylaws of the Company. (2)

            4            --      Rights  Agreement,  dated as of March 27, 2003,
                                 between  the  Company  and  Continental   Stock
                                 Transfer & Trust Company, as Rights Agent. (10)

                                       28



            10.1*        --      1995 Stock Option Plan of the Company. (5)

            10.2*        --      Directors' Stock Option Plan of the Company. (2)

            10.3         --      Credit  Agreement  among the  Company,  various
                                 lenders  and  BNP  Paribas,  as  Administration
                                 Agent, dated as of August 25, 2003. (1)

            10.4         --      Senior  Subordinated  Note Purchase  Agreement,
                                 dated as of August 25, 2003 between the Company
                                 and the Investors. (1)

            10.5         --      Warrant  Agreement  dated as of August 25, 2003
                                 among the Company and the Initial Holders. (1)

            10.6         --      Special  Warrant  Agreement  dated as of August
                                 25,  2003  among the  Company  and the  Initial
                                 Holders. (1)

            10.7         --      Special  Warrant  Agreement  dated as of August
                                 25,  2003  among the  Company  and the  Initial
                                 Holder. (1)

            10.8         --      Preferred Stock Purchase Agreement, dated as of
                                 May 15,  2000,  by and  between the Company and
                                 Chase Capital Investments, L.P. (5)

            10.9         --      Preferred Stock Purchase Agreement, dated as of
                                 November  1, 2001,  by and  between the Company
                                 and Paribas North America, Inc. (7)

            10.10        --      Warrant Agreement  ("Warrant  Agreement") dated
                                 as of October  31,  1997 among the  Company and
                                 the Initial Holders. (3)

            10.11        --      Amendment No. 1 to Warrant  Agreement  dated as
                                 of November 14, 1997. (3)

            10.12        --      Amendment No. 2 to Warrant  Agreement  dated as
                                 of May 4, 1999. (4)

            10.13        --      Stock Purchase Agreement,  dated as of December
                                 7, 2000 by and between The BOC Group,  Inc.,  a
                                 Delaware corporation and the Company. (6)

            10.14        --      Stock  Purchase  Agreement,  dated as of August
                                 22,  2002,  by and  between the Company and the
                                 purchasers named therein. (9)

            10.15        --      Registration  Right  Agreement,   dated  as  of
                                 August 22, 2002, by and between the Company and
                                 the selling shareholders named therein. (8)

            10.16*       --      Employment  Agreement  between  the Company and
                                 Michael  E.  DeDomenico,  dated  as of  June 2,
                                 2000. (5)

            10.17*       --      Employment  Agreement  between  the Company and
                                 William  Scott Wade,  dated as of May 13, 2002.
                                 (9)

            10.18*       --      Employment  Agreement  between  the Company and
                                 Robert R. Galvin, dated as of October 21, 2002.
                                 (1)

            10.19*       --      Stock Option Agreement  between the Company and
                                 Craig L. Burr dated March 21, 2003. (1)

            10.20*       --      Stock Option Agreement  between the Company and
                                 Robert L. Frome dated March 21, 2003. (1)

            10.21*       --      Stock Option Agreement  between the Company and
                                 Daniel Raynor dated March 21, 2003. (1)

            10.22*       --      Stock Option Agreement  between the Company and
                                 Richard D.  Waters,  Jr.  dated March 21, 2003.
                                 (1)

                                       29





            10.23*       --      Stock Option Agreement  between the Company and
                                 John E. Wilson dated March 21, 2003. (1)

            10.24*       --      Stock Option Agreement  between the Company and
                                 Craig L. Burr dated March 21, 2003. (1)

            10.25*       --      Stock Option Agreement  between the Company and
                                 Robert L. Frome dated March 21, 2003. (1)

            10.26*       --      Stock Option Agreement  between the Company and
                                 Daniel Raynor dated March 21, 2003. (1)

            10.27*       --      Stock Option Agreement  between the Company and
                                 John Walsh dated March 21, 2003. (1)

            10.28*       --      Stock Option Agreement  between the Company and
                                 Richard D.  Waters,  Jr.  dated March 21, 2003.
                                 (1)

            10.29*       --      Stock Option Agreement  between the Company and
                                 John E. Wilson dated March 21, 2003. (1)

            14           --      Code of Ethics. (1)

            23           --      Consent of  Margolin,  Winer & Evens LLP to the
                                 incorporation  by  reference  to the  Company's
                                 Registration   Statements  on  Form  S-8  (Nos.
                                 333-06705,  333- 30042 and  333-89096) and Form
                                 S-3   (No.   333-99201)   of  the   independent
                                 auditors' report included herein. (1)

            31.1         --      Section   302    Certification   of   Principal
                                 Executive Officer. (1)

            31.2         --      Section   302    Certification   of   Principal
                                 Financial Officer. (1)

            32.1         --      Section   906    Certification   of   Principal
                                 Executive Officer. (1)

            32.2         --      Section   906    Certification   of   Principal
                                 Financial Officer. (1)

            *   Indicates  a  management   contract  or  compensation   plan  or
                arrangement.

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

                A report  on From 8-K dated  May 6,  2003  reporting  an Item 12
                event was filed during the quarter ended June 30, 2003.

---------------------------

    (1)  Included herein.
    (2)  Incorporated  by reference to the Company's  Registration  Statement on
         Form SB-2,  filed with the  Commission on November 7, 1995  (Commission
         File No. 33-99078), as amended.
    (3)  Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 1998.
    (4)  Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 1999.
    (5)  Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2000.
    (6)  Incorporated  by reference to the  Company's  Form 10-Q for the quarter
         ended December 31, 2000.
    (7)  Incorporated  by reference to the  Company's  Form 10-Q for the quarter
         ended December 31, 2001.
    (8)  Incorporated  by reference to the Company's  Registration  Statement on
         From S-3,  filed with the  Commission on September 5, 2002  (Commission
         File No. 333- 99201).
    (9)  Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2002.
   (10)  Incorporated  by reference to the Company's  Registration  Statement on
         Form 8-A, filed on March 31, 2003.

                                       30





                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13  or  15(d)  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:  September 26, 2003                     /s/ Michael E. DeDomenico
                                               -------------------------
                                               Michael E. DeDomenico
                                               Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

Signature                         Title                       Date
---------                         -----                       ----



/s/ Craig L. Burr                 Director                    September 26, 2003
----------------------------
 Craig L. Burr


/s/ Michael E. DeDomenico         Director,                   September 26, 2003
 ---------------------------      Chief Executive Officer
 Michael E. DeDomenico


/s/ Robert L. Frome               Director                    September 26, 2003
------------------------
 Robert L. Frome


/s/ Daniel Raynor                 Director                    September 26, 2003
-----------------
 Daniel Raynor


____________________              Director
 John Walsh


/s/ Richard D. Waters, Jr.        Director                    September 26, 2003
--------------------------
Richard D. Waters, Jr.


                                  Director
------------------------
 John E. Wilson


/s/ Robert R. Galvin              Chief Financial Officer     September 26, 2003
 --------------------
 Robert R. Galvin

                                       31





                          INDEX TO FINANCIAL STATEMENTS


                                                                        Page No.
                                                                        --------

                                   NUCO2 INC.

Independent Auditors' Report .............................................F-2

Financial Statements:

        Balance Sheets as of June 30, 2003 and 2002.......................F-3

        Statements of Operations for the Fiscal Years Ended
           June 30, 2003, 2002 and 2001         ..........................F-4

        Statements of Shareholders' Equity for the Fiscal
            Years Ended June 30, 2003, 2002 and 2001......................F-5

        Statements of Cash Flows for the Fiscal Years Ended June
            30, 2003, 2002 and 2001.......................................F-6

Notes to Financial Statements.............................................F-8

Schedule II - Valuation and Qualifying Accounts for the Fiscal
   Years Ended June 30, 2003, 2002 and 2001    ...........................F-24

                                      F-1





                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
NuCO2 Inc.
Stuart, Florida

We have  audited the  accompanying  balance  sheets of NuCO2 Inc. as of June 30,
2003 and 2002, and the related statements of operations,  shareholders'  equity,
and cash flows for each of the three years in the period ended June 30, 2003. We
have also audited the financial  statement  schedule listed in the  accompanying
index.  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of NuCO2 Inc. as of June 30, 2003
and 2002,  and the results of its  operations and its cash flows for each of the
three years in the period  ended June 30,  2003 in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion, the related financial statement schedule when considered in relation to
the  basic  financial  statements  taken as a  whole,  presents  fairly,  in all
material respects, the information set forth herein.

As discussed in Note 1 to the financial  statements,  effective July 1, 2001 the
Company adopted Statement of Financial  Accounting  Standards No. 142, "Goodwill
and Other  Intangible  Assets,"  which  changed  the  method of  accounting  for
goodwill.


                                        /s/ MARGOLIN, WINER & EVENS LLP
                                        ----------------------------------------
                                        MARGOLIN, WINER & EVENS LLP


Garden City, New York
August 8, 2003, except for Notes 5 and 6
as to which the date is August 25, 2003

                                      F-2





                                   NUCO2 INC.
                                 BALANCE SHEETS
                      (In thousands, except share amounts)
                                     ASSETS
                                                                                         June 30,
                                                                                 ------------------------

                                                                                      2003        2002
                                                                                   ---------    --------
Current assets:
    Cash and cash equivalents                                                     $     455    $   1,562
    Trade accounts receivable; net of allowance for doubtful
        accounts of $2,299 and $3,085, respectively                                   6,217        7,171
    Inventories                                                                         210          235
    Prepaid expenses and other current assets                                         1,605        1,966
                                                                                  ---------    ---------
        Total current assets                                                          8,487       10,934
                                                                                  ---------    ---------

Property and equipment, net                                                          92,448       95,084
                                                                                  ---------    ---------

Other assets:
    Goodwill, net                                                                    19,222       19,222
    Deferred financing costs, net                                                     1,593        2,524
    Customer lists, net                                                                  25          281
    Non-competition agreements, net                                                     985        1,282
    Deferred lease acquisition costs, net                                             2,892        2,991
    Other assets                                                                        194          320
                                                                                  ---------    ---------
                                                                                     24,911       26,620
                                                                                  ---------    ---------
        Total assets                                                              $ 125,846    $ 132,638
                                                                                  =========    =========


                                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt                                          $   2,294    $      40
    Accounts payable                                                                  4,095        3,512
    Accrued expenses                                                                  1,315        2,304
    Accrued interest                                                                    981        1,479
    Accrued payroll                                                                   1,212          897
    Other current liabilities                                                           329          371
                                                                                  ---------    ---------
        Total current liabilities                                                    10,226        8,603

Long-term debt, excluding current maturities                                         28,659       48,254
Subordinated debt                                                                    39,576       39,366
Customer deposits                                                                     3,191        2,644
                                                                                  ---------    ---------
        Total liabilities                                                            81,652       98,867
                                                                                  ---------    ---------

Commitments and contingencies
Redeemable preferred stock                                                            9,258        8,552
                                                                                  ---------    ---------

Shareholders' equity:
    Preferred stock; no par value; 5,000,000 shares authorized;
        issued and outstanding 7,500 shares at June 30, 2003 and 2002                  --           --
    Common stock; par value $.001 per share; 30,000,000 shares authorized;
        issued and outstanding 10,633,405 shares at June 30, 2003 and 8,969,059
        at June 30, 2002                                                                 11            9
    Additional paid-in capital                                                       92,938       78,584
    Accumulated deficit                                                             (57,884)     (52,945)
    Accumulated other comprehensive loss                                               (129)        (429)
                                                                                  ---------    ---------
        Total shareholders' equity                                                   34,936       25,219
                                                                                  ---------    ---------
           Total liabilities and shareholders' equity                             $ 125,846    $ 132,638
                                                                                  =========    =========

See accompanying notes to financial statements.

                                      F-3





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

                                                                Years Ended June 30,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          --------    --------    ---------

 Net sales                                                $ 74,409    $ 72,312    $ 67,633
                                                          --------    --------    --------

 Costs and expenses:
     Cost of products sold,
         excluding depreciation and amortization            35,538      35,491      33,177
     Selling, general and administrative expenses           17,485      17,614      17,368
     Depreciation and amortization                          17,167      16,319      17,475
     Loss on asset disposal                                  1,671       4,661       4,891
                                                          --------    --------    --------
                                                            71,861      74,085      72,911
                                                          --------    --------    --------

 Operating income (loss)                                     2,548      (1,773)     (5,278)

 Interest expense                                            7,487       8,402      10,207

 Loss on early extinguishment of debt                         --           796        --
                                                          --------    --------    --------

     Net (loss)                                           $ (4,939)   $(10,971)   $(15,485)
                                                          ========    ========    ========


 Basic and diluted earnings per common share

     Net (loss)                                           $  (0.54)   $  (1.32)   $  (2.01)
                                                          ========    ========    ========

     Weighted average number of common and common
       equivalent shares outstanding, basic and diluted     10,396       8,742       7,926
                                                          ========    ========    ========


See accompanying notes to financial statements.

                                      F-4





                                   NUCO2 INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                      (In thousands, except share amounts)

                                                                                                        Accumulated
                                                                             Additional                   Other          Total
                                                                              Paid-In    Accumulated   Comprehensive  Shareholders'
                                                     Common Stock             Capital      Deficit         Loss          Equity
                                                     ------------             -------      -------         ----          ------
                                                  Shares        Amount
                                                  ------        ------
Balance, June 30, 2000                           7,275,015    $         7   $    64,722    $   (26,489)   $      --      $   38,240
Comprehensive (loss):
    Net (loss)                                        --             --            --          (15,485)          --         (15,485)
    Other comprehensive expense:
        Interest rate swap transaction                --             --            --             --             (343)         (343)
                                                                                                                         ----------
Total comprehensive (loss)                                                                                                  (15,828)
Redeemable preferred stock dividend                   --             --            (416)          --             --            (416)
Issuance of 1,111,111 shares of common stock     1,111,111              1         9,918           --             --           9,919
Issuance of 264,999 shares of common stock-
    exercise of options                            264,999              1         2,066           --             --           2,067
                                               -----------    -----------   -----------    -----------    -----------    ----------
Balance, June 30, 2001                           8,651,125              9        76,290        (41,974)          (343)       33,982
                                               -----------    -----------   -----------    -----------    -----------    ----------

Comprehensive (loss):
    Net (loss)                                        --             --            --          (10,971)          --         (10,971)
Other comprehensive expense:
    Interest rate swap transaction                    --             --            --             --              (86)          (86)
                                                                                                                         ----------
Total comprehensive (loss)                                                                                                  (11,057)
Redeemable preferred stock dividend                   --             --            (586)          --             --            (586)
Issuance of 65,574 shares of common stock -
    exercise of warrants                            65,574           --             436           --             --             436
Issuance of 252,360 shares of common stock -
    exercise of options                            252,360           --           2,444           --             --           2,444
                                               -----------    -----------   -----------    -----------    -----------    ----------
Balance, June 30, 2002                           8,969,059              9        78,584        (52,945)          (429)       25,219
                                               -----------    -----------   -----------    -----------    -----------    ----------

Comprehensive (loss):
    Net (loss)                                        --             --            --           (4,939)          --          (4,939)
    Other comprehensive income:
        Interest rate swap transaction                --             --            --             --              300           300
                                                                                                                         ----------
Total comprehensive (loss)                                                                                                   (4,639)
Redeemable preferred stock dividend                   --             --            (706)          --             --            (706)
Issuance of 500 shares of common stock -
    exercise of options                                500           --               6           --             --               6
Issuance of 1,663,846 shares of common stock     1,663,846              2        15,054           --             --          15,056
                                               -----------    -----------   -----------    -----------    -----------    ----------
Balance, June 30, 2003                          10,633,405    $        11   $    92,938    $   (57,884)   $      (129)   $   34,936
                                               ===========    ===========   ===========    ===========    ===========    ==========

See accompanying notes to financial statements.

                                      F-5





                                   NUCO2 INC.
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)


                                                                            Years Ended June 30,
                                                                            --------------------
                                                                       2003        2002         2001
                                                                       ----        ----         ----

Cash flows from operating activities:
Net (loss)                                                          $ (4,939)   $(10,971)   $(15,485)
   Adjustments to reconcile net (loss) to net cash
      provided by operating activities:
          Depreciation and amortization of property and equipment     13,836      12,604      12,349
          Amortization of other assets                                 3,331       3,715       5,126
          Amortization of original issue discount                        210         201         197
          Loss on asset disposal                                       1,671       4,661       4,891
          Loss on early extinguishment of debt                          --           796        --
          Changes in operating assets and liabilities:
            Decrease (increase) in:
              Trade accounts receivable                                  954         575       1,116
              Inventories                                                 25         (36)         23
              Prepaid expenses and other current assets                  361        (747)       (306)
            Increase (decrease) in:
              Accounts payable                                           743         714      (5,562)
              Accrued expenses                                          (989)       (634)      2,356
              Accrued payroll                                            316          17         504
              Accrued interest                                          (198)         51        (485)
              Other current liabilities                                  (42)        (43)        151
              Customer deposits                                          547         (45)        338
                                                                    --------    --------    --------

              Net cash provided by operating activities               15,826      10,858       5,213
                                                                    --------    --------    --------

Cash flows from investing activities:
   Proceeds from disposal of property and equipment                       19          91          31
   Purchase of property and equipment                                (12,752)    (11,675)    (10,509)
   Increase in non-competition agreements                               (160)       (160)        (80)
   Acquisition of businesses                                            --          --           (36)
   Increase in deferred lease acquisition costs                       (1,125)       (928)     (1,164)
   Decrease (increase) in other assets                                   127        (145)         (3)
                                                                    --------    --------    --------

              Net cash used in investing activities                 $(13,891)   $(12,817)   $(11,761)
                                                                    --------    --------    --------

See accompanying notes to financial statements.

                                      F-6





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

                                                                            Years Ended June 30,
                                                                            --------------------
                                                                       2003       2002         2001
                                                                       ----       ----         ----

Cash flows from financing activities:
   Proceeds from issuance of common stock                           $ 16,222    $   --      $  9,919
   Issuance costs - common stock                                      (1,168)       --          --
   Proceeds from issuance of redeemable preferred stock                 --         2,500        --
   Net proceeds from issuance of long-term debt
      and subordinated debt                                             --        50,000       5,900
   Repayment of long-term debt                                       (17,340)    (49,887)    (10,833)
   Increase in deferred financing costs                                 (762)     (2,598)       (158)
   Exercise of options and warrants                                        6       2,880       2,067
                                                                    --------    --------    --------

              Net cash (used in) provided by financing activities     (3,042)      2,895       6,895
                                                                    --------    --------    --------

(Decrease) increase in cash and cash equivalents                      (1,107)        936         347
Cash and cash equivalents, beginning of year                           1,562         626         279
                                                                    --------    --------    --------

Cash and cash equivalents, end of year                              $    455    $  1,562    $    626
                                                                    ========    ========    ========

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

      Interest                                                      $  7,475    $  8,066    $ 10,497
                                                                    ========    ========    ========

      Income taxes                                                  $   --      $   --      $   --
                                                                    ========    ========    ========

Supplemental disclosure of non-cash investing and financing activities:

            In 2003, 2002 and 2001, the Company increased the carrying amount of
the  redeemable  preferred  stock by $706,  $586,  and $416,  respectively,  for
dividends that have not been paid and  accordingly  reduced  additional  paid-in
capital by a like amount.

            In 2001, the Company transferred the net realizable value of certain
fixed assets held for sale in the amount of $237 to other assets.

            In 2001, the Company entered into a non-competition agreement with a
former executive officer in the amount of $480. At June 30, 2003, 2002 and 2001,
the unpaid  portion of the agreement  totaled $80, $240 and $400,  respectively,
and is included in accounts payable.


See accompanying notes to financial statements.

                                      F-7





                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

NOTE 1 -    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            (a)    BASIS OF PRESENTATION

                   The financial  statements  include the accounts of NuCO2 Inc.
and its wholly-owned subsidiary,  NuCO2 Acquisition Corp., which was merged into
the  Company   during  the  fiscal  year  ended  June  30,  2002.  All  material
intercompany accounts and transactions have been eliminated.

            (b)    DESCRIPTION OF BUSINESS

                   The Company is a supplier of bulk CO2  dispensing  systems to
customers in the food,  beverage,  lodging and  recreational  industries  in the
United States.

            (c)    CASH AND CASH EQUIVALENTS

                   The Company  considers  all highly  liquid  debt  instruments
purchased  with  an  original  maturity  of  three  months  or  less  to be cash
equivalents.

            (d)    INVENTORIES

                   Inventories,  consisting primarily of carbon dioxide gas, are
stated at the  lower of cost or  market.  Cost is  determined  by the  first-in,
first-out method.

            (e)    PROPERTY AND EQUIPMENT

                   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.  Upon early  service
termination,  the  unamortized  portion  of  direct  costs  associated  with the
installation  are expensed.  Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the respective assets or
the lease terms for leasehold improvements, whichever is shorter.

                   The  depreciable  lives  of  property  and  equipment  are as
follows:

                                                     Estimated Life
                                                     --------------
                   Leased equipment                   5-20 years
                   Equipment and cylinders            3-20 years
                   Vehicles                           3-5 years
                   Computer equipment                 3-7 years
                   Office furniture and fixtures      5-7 years
                   Leasehold improvements             lease term

            (f)    GOODWILL AND OTHER INTANGIBLE ASSETS

                   Goodwill,   net  of  accumulated   amortization   of  $5,006,
represents the cost in excess of the fair value of the tangible and identifiable
intangible  net assets of businesses  acquired and,  prior to July 1, 2001,  was
amortized on a straight-line  method over 20 years.  Effective July 1, 2001, the
Company adopted Statement of Financial  Accounting  Standards No. 142, "GOODWILL
AND OTHER INTANGIBLE  ASSETS,"  pursuant to which,  goodwill and indefinite life
intangible  assets are no longer amortized but are subject to annual  impairment
tests.  Other intangible  assets with finite lives continue to be amortized on a
straight-line  method over the periods of expected benefit.  The Company's other
intangible  assets  consist of customer  lists and  non-competition  agreements,
principally  acquired in 1995 through  1998 in  connection  with  certain  asset
acquisitions.  Customer lists are being amortized on a straight line method over
five years, the average life of customer leases, and non-competition agreements,
which  generally  preclude the other party from  competing with the Company in a
designated geographical area for a stated period of time, are being amortized on
a straight line method over their  contractual  lives which range from thirty to

                                      F-8



                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

one  hundred  and twenty  months.  Non-competition  agreements  also  include an
agreement  entered into in January 2001,  for $480,  with the  Company's  former
Chief Executive Officer and Chairman of the Board of Directors,  precluding this
former officer from competing with the Company for a period of five years.

            (g)    DEFERRED FINANCING COST, NET

                   Financing costs are being amortized on a straight-line method
over the term of the related  indebtedness,  ranging from fifteen to eighty-four
months.  Accumulated  amortization  of financing  costs was $4,007 and $2,313 at
June 30, 2003 and 2002, respectively.

            (h)    DEFERRED LEASE ACQUISITION COSTS, NET

                   Deferred lease acquisition costs, net, consist of commissions
associated  with the  acquisition of new leases and are being amortized over the
life of the  related  leases,  generally  five to six  years on a  straight-line
method.  Accumulated amortization of deferred lease acquisition costs was $5,508
and  $4,687  at June  30,  2003  and  2002,  respectively.  Upon  early  service
termination,  the unamortized  portion of deferred lease  acquisition  costs are
expensed.

            (i)    REVENUE RECOGNITION

                   The  Company  earns  its  revenues  from the  leasing  of CO2
systems and related gas sales. The Company,  as lessor,  recognizes revenue from
leasing of CO2  systems on a  straight-line  basis over the life of the  related
leases. The majority of CO2 system leases generally include payments for leasing
of equipment and a continuous supply of CO2 until usage reaches a pre-determined
maximum  annual  level,  beyond which the  customer  pays for CO2 on a per pound
basis. Other CO2 and gas sales are recorded upon delivery to the customer.

            (j)    INCOME TAXES

                   Income taxes are  accounted  for under  Financial  Accounting
Standards  Board Statement No. 109,  Accounting for Income Taxes.  Statement No.
109 requires recognition of deferred tax assets and liabilities for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or  tax  returns.  Under  this  method,   deferred  tax  assets  and
liabilities  are  determined  based  on the  difference  between  the  financial
statement  and tax bases of assets and  liabilities  using  enacted tax rates in
effect for the year in which the  differences  are  expected to  reverse.  Under
Statement No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is  recognized  in income in the period that includes the enactment
date.

            (k)    NET LOSS PER COMMON SHARE

                   Net loss per common  share is presented  in  accordance  with
SFAS No. 128,  "Earnings per Share." Basic earnings per common share is computed
using the  weighted  average  number of common  shares  outstanding  during  the
period.  Diluted  earnings per common share  incorporate the incremental  shares
issuable  upon the assumed  exercise of stock options and warrants to the extent
they are not anti-dilutive.

            (l)    USE OF ESTIMATES

                   The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Estimates used when  accounting for items such as allowances
for doubtful  accounts,  depreciation  and  amortization  periods,  valuation of
long-lived  assets  and  income  taxes  are  regarded  by  management  as  being
particularly  significant.  These  estimates and assumptions are evaluated on an
on-going basis and may require adjustment in the near term. Actual results could
differ from those estimates.

            (m)    IMPAIRMENT OF LONG-LIVED ASSETS

                   Long-lived assets,  other than goodwill,  consist of property
and equipment, customer lists, and non-competition agreements. Long-lived assets
being  retained  for use by the Company are tested for  recoverability  whenever
events or changes in  circumstances  indicate that their carrying values may not
be  recoverable by comparing the carrying value of the assets with the estimated
future  undiscounted  cash flows that are directly  associated with and that are
expected to arise as a direct result of the use and eventual  disposition of the

                                      F-9


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

asset.  Impairment  losses  are  recognized  only if the  carrying  amount  of a
long-lived  asset is not  recoverable  and exceeds the asset's  fair value.  The
impairment  loss would be calculated as the  difference  between asset  carrying
values and the fair value of the asset with fair value generally estimated based
on the present value of the estimated future net cash flows.

                   Long-lived  assets to be disposed of by abandonment  continue
to be  classified  as held and used until they cease to be used.  If the Company
commits to a plan to abandon a long-lived asset before the end of its previously
estimated useful life,  depreciation estimates are revised to reflect the use of
the asset over its shortened useful life. Long-lived assets to be disposed of by
sale that meet certain criteria are classified as held for sale and are reported
at the lower of their carrying amounts or fair values less cost to sell.

            (n)    EMPLOYEE BENEFIT PLAN

                   On June 1, 1996, the Company adopted a deferred  compensation
plan  under  Section  401(k) of the  Internal  Revenue  Code,  which  covers all
eligible  employees.  Under the provisions of the plan,  eligible  employees may
defer a percentage of their compensation subject to the Internal Revenue Service
limits. Contributions to the plan are made only by employees.

            (o)    STOCK-BASED COMPENSATION

                   At  June  30,   2003,   the  Company   had  two   stock-based
compensation  plans  which  are more  fully  described  in Note 8.  The  Company
accounts for these plans under the recognition and measurement principles of APB
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees,"  and  related
interpretations.  No  stock-based  compensation  cost is reflected in net income
(loss),  as all options granted under these plans had an exercise price equal to
the  market  value of the  underlying  Common  Stock on the date of  grant.  The
following table  illustrates the effect on net income (loss) and earnings (loss)
per share if the Company had applied the fair value  recognition  provisions  of
SFAS  No.  123,  "Accounting  for  Stock-Based   Compensation,"  to  stock-based
compensation.

                                                             2003        2002        2001
                                                             ----        ----        ----
Net (loss), as reported                                   $ (4,939)   $(10,971)   $(15,485)
Less:
   Stock-based compensation
       - fair value measurement                             (1,085)       (985)       (544)
                                                          --------    --------    --------
Net (loss), pro forma                                       (6,024)    (11,956)    (16,029)
Preferred stock dividends                                     (706)       (586)       (416)
                                                          --------    --------    --------
Net (loss) available to common shareholders - pro forma   $ (6,730)   $(12,542)   $(16,445)
                                                          ========    ========    ========

Basic and diluted loss per share - reported               $  (0.54)   $  (1.32)   $  (2.01)
                                                          ========    ========    ========
Basic and diluted loss per share - pro forma              $  (0.64)   $  (1.43)   $  (2.07)
                                                          ========    ========    ========

Expected volatility                                          40%         40%         40%
Risk free interest rate                                  2.6% - 3.2%  3.7% - 4.8% 4.6% - 6.0%
Expected dividend yield                                      0%          0%          0%
Expected lives                                            3-4 years    1-5 years   1-5 years

            (p)    INTERNAL USE SOFTWARE

                   Computer  software  developed or obtained for internal use is
included in property and  equipment  and is  accounted  for in  accordance  with
Statement  of Position  98-1,  "ACCOUNTING  FOR THE COSTS OF  COMPUTER  SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE". The Company  expenses all costs related
to the development of internal-use software other than those incurred during the
application development stage. Costs incurred during the application development
stage are capitalized and amortized on a straight-line method over the estimated
useful life of the software, three to five years.

                                      F-10


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

            (q)    VENDOR REBATES

                   Pursuant to EITF 02-16,  "ACCOUNTING BY A CUSTOMER (INCLUDING
A  RESELLER)  FOR CERTAIN  CONSIDERATION  RECEIVED  FROM A VENDOR,"  the Company
recognizes  rebates  received from its supplier of bulk CO2 tanks as a reduction
of  capitalizable  cost. The Company  received rebates of $393 during the fiscal
year ended June 30, 2003.

            (r)    TRADE RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

                   The Company  invoices its customers on a monthly basis,  with
payment due within 30 days of the  invoice  date.  The Company  does not provide
discounts for early payment, or add financing charges to late payments.

                   In conjunction  with its trade  receivables,  the Company has
established a reserve for accounts that might not be  collectable.  Such reserve
is  evaluated  and  adjusted  on a  monthly  basis by  examining  the  Company's
historical  losses,  aging of its trade  receivables,  the credit  worthiness of
significant customers based on ongoing evaluations,  and current economic trends
that might impact the level of credit losses in the future.  The  composition of
receivables consists of on-time payers,  "slow" payers, and at risk receivables,
such as  receivables  from customers who no longer do business with the Company,
are bankrupt, or out of business.  Substantially all at risk receivables greater
than  120  days  outstanding  are  fully  reserved,  with  the  reserve  of  all
receivables at risk, regardless of days outstanding,  exceeding 93% of the total
amount at risk as of June 30, 2003.

            (s)    RECENT ACCOUNTING PRONOUNCEMENTS

                   In April  2002,  the  Financial  Accounting  Standards  Board
("FASB") issued SFAS No. 145,  "RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB  STATEMENT  NO. 13, AND TECHNICAL  CORRECTIONS"  ("SFAS 145").
Among other things,  SFAS 145 rescinds the provisions of SFAS No. 4 that require
companies  to classify  certain  gains and losses from debt  extinguishments  as
extraordinary  items.  The provisions of SFAS 145 related to  classification  of
debt  extinguishments  are  effective for fiscal years  beginning  after May 15,
2002.  Gains  and  losses  from  extinguishment  of debt will be  classified  as
extraordinary  items only if they meet the  criteria in APB Opinion No. 30 ("APB
30");  otherwise  such losses will be  classified  as a component of  continuing
operations.  The Company adopted SFAS 145 during the quarter ended September 30,
2002. In accordance with APB 30 and SFAS 145, the Company  reclassified the $796
extraordinary  loss on the early  extinguishment  of debt for  fiscal  2002 to a
component of continuing operations.

                   In June 2002, the FASB issued SFAS 146, "ACCOUNTING FOR COSTS
ASSOCIATED  WITH EXIT OR  DISPOSAL  ACTIVITIES"  ("SFAS  146")  which  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities and nullifies EITF Issue No. 94-3 "LIABILITY  RECOGNITION FOR CERTAIN
EMPLOYEE  TERMINATION  BENEFITS  AND OTHER COSTS TO EXIT AN ACTIVITY  (INCLUDING
CERTAIN  COSTS  INCURRED  IN A  RESTRUCTURING)"  ("EITF  94-3").  The  principal
difference between SFAS 146 and EITF 94-3 relates to SFAS 146's requirements for
recognition  of a  liability  for a cost  associated  with an  exit or  disposal
activity. SFAS 146 requires that a liability be recognized when the liability is
incurred.  Under EITF 94-3, a liability  for an exit cost was  recognized at the
date of an entity's  commitment to an exit plan. SFAS 146 also  establishes that
fair value is the  objective  for  initial  measurement  of the  liability.  The
provisions of SFAS 146 are effective  for exit or disposal  activities  that are
initiated  after  December 31, 2002, but early  application  is encouraged.  The
adoption  of SFAS 146 during the first  quarter of fiscal  2003 had no impact on
the Company's  financial  position,  results of operations or cash flows for the
periods presented.

                   In December 2002,  the FASB issued SFAS No. 148,  "ACCOUNTING
FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED  COMPENSATION" ("SFAS 123"), to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  SFAS 148 amends the  disclosure  requirements  of SFAS 123 to require
prominent  disclosure in both annual and interim financial  statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on the reported  results.  The  provisions of SFAS 148 are effective
for financial  statements  for fiscal years ending after  December 15, 2002. The
adoption of SFAS 148 had no impact on the Company's financial position,  results
of operations or cash flows for the periods presented.

                   In the first quarter of fiscal 2003, the Company  adopted SOP
01-06,   "ACCOUNTING  BY  CERTAIN  ENTITIES   (INCLUDING   ENTITIES  WITH  TRADE
RECEIVABLES)  THAT LEND TO OR FINANCE THE  ACTIVITIES OF OTHERS" ("SOP  01-06").
SOP  01-06  addresses  disclosures  on  accounting  policies  relating  to trade
accounts  receivable  and is effective  prospectively  for financial  statements
issued for fiscal years  beginning  after December 15, 2001. The adoption of SOP
01-06 had no impact on the Company's financial  position,  results of operations
or cash flows for the periods presented.

                                      F-11


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

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

                   In May 2003,  the FASB issued SFAS No. 150,  "ACCOUNTING  FOR
CERTAIN  FINANCIAL  INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES AND
EQUITY"  ("SFAS  150").  SFAS No. 150  establishes  standards  for how an issuer
classifies and measures certain financial  instruments with  characteristics  of
both  liabilities  and equity.  SFAS No. 150 requires that an issuer  classify a
financial  instrument  that is within the scope of SFAS No. 150 as a  liability.
SFAS No. 150 is effective  for  financial  instruments  entered into or modified
after May 31, 2003, and otherwise is effective  beginning September 1, 2003. The
adoption  of SFAS No.  150 is not  expected  to have a  material  effect  on the
Company's financial position, results of operations or cash flows.

                   In May 2003, the EITF reached a consensus on Issue No. 00-21,
"REVENUE  ARRANGEMENTS WITH MULTIPLE  DELIVERABLES"  ("EITF 00-21").  EITF 00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which the vendor will perform multiple revenue generating activities. Currently,
the  Company,  as  lessor,  recognizes  revenue  from  leasing  CO2  systems  on
straight-line  basis over the life of the related  leases.  As discussed in Note
1(i) , the majority of CO2 system leases generally  include payments for leasing
the equipment and a continuous  supply of CO2. For periods  beginning after June
15, 2003,  EITF 00-21 will require the Company to segregate the  recognition  of
revenues  derived from the lease portion of these  agreements  from the revenues
derived from CO2 usage.  Such segregation may impact the recognition of revenues
on a quarterly basis as CO2 usage by the average  customer  fluctuates  during a
fiscal  year based on factors  such as weather,  traditional  summer and holiday
periods.  The  Company  is  currently  evaluating  the  potential  impact of the
implementation  of  EITF  00-21  on  its  financial   position  and  results  of
operations.

NOTE 2 -    PROPERTY AND EQUIPMENT, NET

            Property and equipment, net consists of the following:

                                                                As of June 30,
                                                           --------------------
                                                              2003       2002
                                                              ----       ----
          Leased equipment                                 $127,463   $119,773
          Equipment and cylinders                            16,405     15,357
          Tanks held for installation                         4,808      4,868
          Vehicles                                              300        325
          Computer equipment and software                     4,356      3,897
          Office furniture and fixtures                       1,643      1,406
          Leasehold improvements                              1,846      1,674
                                                           --------   --------
                                                            156,821    147,300
          Less accumulated depreciation and amortization     64,373     52,216
                                                           --------   --------

                                                           $ 92,448   $ 95,084
                                                           ========   ========

            Capitalized   component  parts  and  direct  costs  associated  with
installation  of equipment  leased to others  included in leased  equipment  was
$36,683  and  $32,406  at June 30,  2003  and  2002,  respectively.  Accumulated
depreciation and amortization of these costs was $22,450 and $18,258 at June 30,
2003 and 2002, respectively.  Upon early service termination, the Company writes
off  the  remaining  net  book  value  of  direct  costs   associated  with  the
installation of equipment.

            Depreciation and amortization of property and equipment was $13,836,
$12,604  and  $12,349  for the  years  ended  June 30,  2003,  2002,  and  2001,
respectively.

            In June 2001, the Company adopted a plan to discontinue installation
of 50 and 100 pound  tanks and to dispose of the 50 and 100 pound tanks held for
installation.  The Company's  supply of  uninstalled  50 and 100 pound tanks was
written down to estimated fair value of $163, and a loss of $1,155 was reflected

                                      F-12


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

in the statement of operations within the caption, loss on asset disposal. These
tanks were disposed of in fiscal 2002. During fiscal 2002, an additional loss in
the amount of $1,125 was recognized relating to 50 and 100 pound tanks that were
removed  from  service  during  the year.  Management  continued  to review  the
recoverability  of the  remaining  50 and 100 pound tanks in service and in June
2002,  adopted  a plan to  replace  all 50 and 100  pound  tanks in  service  at
customers  over a three to four year period.  The Company's  decision to replace
these  small  tanks was  based on an  evaluation  of  undiscounted  cash  flows,
contribution to fixed depot overhead,  pricing and targeted margins. As a result
of the  Company's  decision,  the  remaining 50 and 100 pound tanks were written
down to their  estimated  fair  value and a loss on  impairment  of  $1,809  was
recorded in June 2002.  As of June 30, 2003 and 2002,  the net book value of the
50 and 100 pound tanks  still in service  was $1,313 and  $2,765,  respectively,
which is being  depreciated  over the remaining  period of time that these tanks
are expected to be utilized.

NOTE 3 -    GOODWILL AND OTHER INTANGIBLE ASSETS

            The Company  adopted  SFAS 142 as of July 1, 2001,  resulting  in no
goodwill  amortization  expense  for the  years  ended  June 30,  2003 and 2002.
Goodwill and indefinite life intangible  assets are no longer  amortized but are
subject to annual impairment tests. The Company was not required to recognize an
impairment  of  goodwill.  If the  guidance of the  statement  had been  applied
retroactively,  prior year results  would have been  different  than  previously
reported.  A reconciliation of net income as reported to adjusted net income for
the exclusion of goodwill amortization is as follows:

                                                            Fiscal Year Ended June 30,
                                                     ------------------------------------------
                                                          2003         2002           2001
                                                          ----         ----           ----
Net (loss) - as reported                             $  (4,939)     $  (10,971)     $  (15,485)
Goodwill amortization                                     --              --             1,212
                                                     ---------      ----------      ----------
Net (loss) - as adjusted                             $  (4,939)     $  (10,971)     $  (14,273)
                                                     =========      ==========      ==========

Based and diluted (loss) per share - as reported     $   (0.54)     $    (1.32)     $    (2.01)
Goodwill amortization                                     --              --              0.15
                                                     ---------      ----------      ----------
Based and diluted (loss) per share - as adjusted     $   (0.54)     $    (1.32)     $    (1.86)
                                                     =========      ==========      ==========

Information regarding the Company's goodwill and other intangible assets is as
follows:

                                                                   Accumulated      Net Book
As of June 30, 2003:                                    Cost       Amortization      Value
                                                     --------      ------------     ---------
Goodwill                                             $ 24,228       $ 5,006         $ 19,222
Non-competition agreements                              3,110         2,125              985
Customer lists                                          5,370         5,345               25
                                                     --------       -------         --------
                                                     $ 32,708       $12,476         $ 20,232
                                                     ========       =======         ========

As of June 30, 2002:
Goodwill                                             $ 24,228       $ 5,006         $ 19,222
Non-competition agreements                              3,110         1,828            1,282
Customer lists                                          5,370         5,089              281
                                                     --------       -------         --------
                                                     $ 32,708       $11,923         $ 20,785
                                                     ========       =======          =======

            Amortization  expense for other intangible  assets was $552,  $1,155
and $1,235 for the years ended June 30, 2003, 2002 and 2001, respectively. There
were no  adjustments  or changes  in  amortization  periods of other  intangible
assets as a result of the initial application of SFAS 142.

            Estimated  amortization  expense  for each of the next five years is
$307,  $279,  $226,  $161, and $37 for fiscal years ending June 30, 2004,  2005,
2006, 2007, and 2008, respectively.

                                      F-13

                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

NOTE 4 -LEASES

            The Company leases equipment to its customers  generally pursuant to
five-year or six-year  non-cancelable  operating  leases which expire on varying
dates  through June 2009.  At June 30,  2003,  future  minimum  rentals due from
customers which includes, where applicable, a continuous supply of CO2 (see Note
1(i)), are approximately as follows:

                     Year Ending June 30,
                     --------------------
                          2004                        $  41,273
                          2005                           37,530
                          2006                           27,751
                          2007                           18,075
                          2008                           11,769
                          Thereafter                      4,296
                                                      ---------
                                                      $ 140,694
                                                      =========

            As discussed in Note 1(s),  the Company is currently  evaluating the
potential  impact  of EITF  00-21  on its  financial  position  and  results  of
operations.


NOTE 5 - LONG-TERM DEBT

Long-term debt consists of the following:

                                                                                                      As of June 30,
                                                                                                      --------------
                                                                                                   2003           2002
                                                                                                   ----           ----
Note payable to bank under credit  facility.  Drawings at June 30, 2003 and 2002 are at a
    weighted average interest rate of 4.70% and 5.39%, respectively.                            $   30,700     $  48,000
Various notes payable                                                                                  253           294
                                                                                                ----------     ---------
                                                                                                    30,953        48,294
Less current maturities of long-term debt                                                            2,294            40
                                                                                                ----------     ---------
       Long-term debt, excluding current maturities                                             $   28,659     $  48,254
                                                                                                ==========     =========

            (a)   FACILITIES AS OF JUNE 30, 2003

                  In September  2001,  the Company  entered into a $60.0 million
second amended and restated  revolving credit facility with a syndicate of banks
("Amended  Credit  Facility").  This  facility  replaced  the  Company's  former
facility,  which  was due to expire in May 2002.  The  Amended  Credit  Facility
contains  interest  rates and an unused  commitment  fee based on a pricing grid
calculated  quarterly  on total  debt to  annualized  EBITDA (as  defined).  The
Company is entitled to select the Base Rate or LIBOR,  plus  applicable  margin,
for principal  drawings under the Amended Credit Facility.  The applicable LIBOR
margin  pursuant to the pricing grid currently  ranges from 2.50% to 4.75%,  the
applicable unused commitment fee pursuant to the pricing grid ranges from 0.375%
to 0.50% and the  applicable  Base Rate  margin  pursuant  to the  pricing  grid
currently  ranges  from 1.50% to 3.75%.  Interest  only is payable  periodically
until the expiration of the Amended Credit Facility. The Amended Credit Facility
is collateralized  by substantially  all of the Company's assets.  Additionally,
the Company is precluded from declaring or paying any cash dividends, except the
Company may accrue and accumulate, but not pay, cash dividends on the redeemable
preferred  stock.  The Company is also required to meet certain  affirmative and
negative covenants including, but not limited to, financial covenants.

                  The  Company is required  to assess  compliance  with its debt
covenants  under  the  Amended  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  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
Amended  Credit  Facility to become  immediately  due and  payable.  The Amended
Credit Facility also includes certain cross-default  provisions to the Company's
12% Senior Subordinated Promissory Notes (see Note 6).

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

                                      F-14


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

all of the financial covenants under the Amended Credit Facility. On February 7,
2003,  the  Amended  Credit  Facility  was amended to adjust  certain  financial
covenants   for  the  quarter  ended   December  31,  2002  and   prospectively,
non-compliance  with the minimum  EBITDA  covenant  for the three  months  ended
December 31, 2002 was waived,  the maturity of the Amended  Credit  Facility was
extended to April 29, 2004, and the Amended Credit Facility was reduced to $45.0
million.  As of March 31, 2003 and June 30, 2003,  the Company was in compliance
with all of the financial covenants under the Amended Credit Facility.

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

                  Effective  July 1,  2000,  the  Company  adopted  SFAS No. 133
"ACCOUNTING   FOR  DERIVATIVE   INSTRUMENTS  AND  HEDGING   ACTIVITIES,"   which
establishes  accounting  and  reporting  standards for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not,  are required to be recorded on the balance  sheet at fair value.  For a
derivative designated as a cash flow hedge, the effective portions of changes in
the fair value of the derivative are recorded in other comprehensive  income and
are recognized in the income  statement  when the hedged item affects  earnings.
Ineffective  portions  of  changes  in the fair  value of cash flow  hedges  are
recognized in earnings.

                  The Company uses derivative  instruments to manage exposure to
interest rate risks.  The Company's  objectives for holding  derivatives  are to
minimize the risks using the most  effective  methods to eliminate or reduce the
impacts of this  exposure.  As of June 30,  2003,  the Company was a party to an
interest rate swap agreement (the "Prior Swap") with a notional  amount of $12.5
million and a scheduled  termination date of September 28, 2003. Under the Prior
Swap,  the Company pays a fixed  interest rate of 5.23% per annum and receives a
LIBOR-based floating rate.

                   The Prior Swap,  which is designated as a cash flow hedge, is
deemed to be a highly effective transaction, and accordingly, the gain/(loss) on
the  derivative  instrument  is reported as a component  of other  comprehensive
income/(loss).  For the years ended June 30,  2003,  2002 and 2001,  the Company
recorded a gain/(loss) of $300, $(86) and $(343), respectively, representing the
change in fair value of the Prior Swap, as other comprehensive income.

            (b)   REFINANCING EFFECTIVE AUGUST 25, 2003

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

                  The Company  will be required  to assess its  compliance  with
financial covenants under the Senior Credit Facility on a quarterly basis. These
financial  covenants  are  based  on a  measure  that  is  not  consistent  with
accounting  principles generally accepted in the United States of America.  Such
measure is EBITDA (as  defined),  which  represents  earnings  before  interest,
taxes,  depreciation  and  amortization,  as further modified by certain defined

                                      F-15



                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

adjustments.  The failure to meet these covenants, absent a waiver or amendment,
would  place the  Company in default  and cause the debt  outstanding  under the
Senior Credit Facility to immediately become due and payable.  The Senior Credit
Facility  also  includes  certain  cross-default  provisions to our 16.3% Senior
Subordinated Notes Due February 27, 2009.

                  The $43.0 million drawn under the Senior Credit Facility has a
weighted average interest rate of 6.04%. Pursuant to SFAS No. 6, "CLASSIFICATION
OF SHORT-TERM  OBLIGATIONS EXPECTED TO BE REFINANCED," the amounts due under the
Amended  Credit  Facility as of June 30, 2003 were  classified  on the Company's
balance sheet as long-term debt.

                  In connection with the  refinancing,  during the first quarter
of  fiscal  2004  the  Company  will  recognize  a loss  from the  write-off  of
unamortized  financing  costs  associated  with the Amended Credit  Facility and
record $2,203 in financing  costs  associated  with the Senior Credit  Facility.
Such costs will be amortized over the life of the Senior Credit Facility.  Based
on outstanding  borrowings as of August 25, 2003, the weighted average effective
interest  rate of the Senior Credit  Facility,  including  the  amortization  of
deferred  financing  costs,  is 7.06%.  As of June 30, 2003,  unamortized  costs
associated with the Amended Credit Facility were $935.

                  The  aggregate  maturities  of long-term  debt for each of the
five  years  subsequent  to  June  30,  2003,  based  on  the  August  25,  2003
refinancing, are as follows:

                            Year Ending June 30,
                            --------------------
                                 2004                     $  2,294
                                 2005                        6,048
                                 2006                        9,302
                                 2007                       11,557
                                 2008                        4,052

                  The  Prior  Swap  was   terminated  on  August  25,  2003.  In
connection with the termination of the Prior Swap prior to maturity, the Company
paid  $129.  In  connection  with the Senior  Credit  Facility,  the  Company is
required  to enter into an interest  rate Swap  agreement  in a notional  amount
equal to at least  50% of the  aggregate  of the A Term Loan and the B Term Loan
prior to November 24, 2003.

NOTE 6 -    SUBORDINATED DEBT

            (a)   FACILITIES AS OF JUNE 30, 2003

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

                  On May 4, 1999,  the Company sold an additional  $10.0 million
of its 12% Senior Subordinated  Promissory Notes (the "1999 Notes").  Except for
their October 31, 2005 maturity date, the 1999 Notes are substantially identical
to the 1997 Notes  described  above.  The 1999  Notes were sold with  detachable
6-1/2 year  warrants to purchase an aggregate of 372,892  shares of common stock
at an exercise  price of $6.65 per share,  of which  65,574 were  exercised  and
converted to shares of common stock during the year ended June 30, 2002.

                  In return for modifying certain financial  covenants governing
the 1997  Notes,  the  exercise  price of  612,053  of the  warrants  issued  in
connection  with the 1997 Notes was reduced to $6.65 per share.  On May 4, 1999,
the trading range of the Company's common stock was $6.44 to $6.88 per share. To
assist  with  the  valuation  of the  newly  issued  warrants  and the  repriced
warrants,  the Company hired an outside consultant.  Utilizing the Black-Scholes
Model, the warrants issued with the 1997 Notes were valued at $1.26 per warrant,
or an aggregate  value of $773,702,  and the warrants issued with the 1999 Notes

                                      F-16


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

at $1.47 per  warrant,  or an  aggregate  value of  $549,032.  Both  amounts are
reflected as Additional Paid-In Capital,  offset by the Original Issue Discount,
which is netted  against  the  outstanding  balance  of the 1997  Notes and 1999
Notes.  On August  22,  2002,  in  conjunction  with the  private  placement  of
1,663,846  shares of the  Company's  Common Stock (see Note 5(a)),  the warrants
issued in conjunction with the 1997 Notes and 1999 Notes were adjusted  pursuant
to anti-dilution  provisions to provide for the purchase of an additional 21,906
shares of the Company's Common Stock. After giving effect to the amortization of
the Original Issue  Discount,  the effective  interest rate on the 1999 Notes is
13.57% per annum.

                  As of June 30, 2003, the Company was in compliance with all of
the  financial  covenants  under the 1997 Notes and 1999  Notes.  On February 7,
2003, the interest  coverage  ratio  governing the 1997 Notes and 1999 Notes was
amended for the quarter ending March 31, 2003 and prospectively.

            (b)   REFINANCING EFFECTIVE AUGUST 25, 2003

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

                  In connection with the  refinancing,  during the first quarter
of fiscal 2004 the Company will recognize a loss attributable to the unamortized
financing  costs and Original Issue Discount  associated with the 1997 Notes and
1999 Notes,  and record $450 of financing  costs and  Origninal  Issue  Discount
associated with New Notes.  Such fees will be amortized over the life of the New
Notes. The weighted average effective interest rate of the New Notes,  including
the  amortization of deferred  financing  costs and Original Issue Discount,  is
18.0%. As of June 30, 2003, unamortized costs associated with the 1997 Notes and
1999 Notes were $658 and the unamortized Original Issue Discount was $424.

NOTE 7 -    PREFERRED STOCK

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

                  In November  2001, the Company sold 2,500 shares of its Series
B 8%  Cumulative  Convertible  Preferred  Stock,  no par  value  (the  "Series B
Preferred Stock"), for $1,000 per share (the initial "Liquidation  Preference").
Cumulative  dividends  are  payable  quarterly  in arrears at the rate of 8% per
annum on the  Liquidation  Preference,  and, to the extent not paid in cash, are
added to the Liquidation Preference.  Shares of the Series B Preferred Stock may
be  converted  into shares of common  stock at any time at a current  conversion
price of $12.92 per share.

                  During the fiscal  years ended June 30,  2003,  2002 and 2001,
the  carrying  amount (and  Liquidation  Preferences)  of the Series A Preferred
Stock and Series B Preferred  Stock  ("Preferred  Stock") was increased by $706,
$586 and $416, respectively, for dividends accrued. The Preferred Stock shall be
mandatorily redeemed by the Company within 30 days after a Change in Control (as
defined)  of the  Company  (the date of such  redemption  being  the  "Mandatory
Redemption  Date")  at  an  amount  equal  to  the  then  effective  Liquidation
Preference  plus accrued and unpaid  dividends  thereon  from the last  dividend
payment date to the Mandatory  Redemption Date, plus if the Mandatory Redemption
Date is on or prior to the fourth  anniversary  of the issuance of the Preferred
Stock,  the amount of any dividends  that would have accrued and been payable on
the  Preferred  Stock from the  Mandatory  Redemption  Date  through  the fourth
anniversary date.

                                      F-17


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

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

NOTE 8 -    SHAREHOLDERS' EQUITY

            (a)   NON-QUALIFIED STOCK OPTIONS AND WARRANTS

                  In May  1997,  the  Company  entered  into a  ten-year  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.

                  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 were granted at an exercise price equal to the average  closing price of
the Common Stock on the Nasdaq  National Market for the 20 trading days prior to
January  2,  2001,  or  $7.82.  In  March  2003,  the  Company  granted  to each
non-employee  director options for 6,000 shares of Common Stock. An aggregate of
36,000  options were granted at an exercise  price equal to the average  closing
price of the Common Stock on the Nasdaq  National Market for the 20 trading days
prior to March 12,  2003,  or  $4.85.  All  options  vest in five  equal  annual
installments  commencing upon issuance, and have a ten-year term. As of June 30,
2003 and  2002,  options  for  36,000  and  20,000  shares,  respectively,  were
exercisable.

            (b)   STOCK OPTION PLANS

                  The Board of Directors of the Company  adopted the 1995 Option
Plan (the "1995 Plan").  Under the 1995 Plan, the Company has reserved 1,950,000
shares of Common Stock for employees of the Company. Under the terms of the 1995
Plan,  options granted may be either  incentive  stock options or  non-qualified
stock options.  The exercise price of incentive  options shall be at least equal
to 100% of the fair market  value of the  Company's  Common Stock at the date of
the grant,  and the exercise  price of  non-qualified  stock  options  issued to
employees  may not be less than 75% of the fair  market  value of the  Company's
Common  Stock at the date of the grant.  The maximum term for all options is ten
years.  Options granted to date generally vest in equal annual installments from
one to five years,  though a limited number of grants were  partially  vested at
the grant date.  The  weighted-average  fair value per share of options  granted
during the years ended June 30, 2003, 2002 and 2001 was $2.41,  $4.78 and $4.30,
respectively.

                  The following summarizes the transactions pursuant to the 1995
Plan:


                                                        Weighted Average
                                         Options       Exercise Price Per
                                        Outstanding          Option             Options Exercisable
                                        -----------    ------------------       -------------------
Outstanding at June 30, 2000             1,091,734              $ 8.58                481,808
         Granted                           372,000               10.39
         Expired or canceled               (30,400)               6.95
         Exercised                        (262,999)               7.79
                                         ---------
Outstanding at June 30, 2001             1,170,335                9.38                581,499
         Granted                           429,100               12.15
         Expired or canceled              (184,625)              10.55
         Exercised                        (252,360)               9.69
                                         ---------
Outstanding at June 30, 2002             1,162,450               10.15                503,072
         Granted                           326,350                6.87
         Expired or canceled              (199,880)              11.36
         Exercised                            (500)              11.25
                                         ---------
Outstanding at June 30, 2003             1,288,420                9.13                640,373
                                         =========

                                      F-18


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

                  The following table sets forth certain  information as of June
30, 2003:

                                 Options Outstanding                                      Options Exercisable
                    ----------------------------------------------------       ---------------------------------------
Range of Exercise       Options      Weighted Average   Weighted Average                              Weighted Average
      Prices          Outstanding     Remaining Life     Exercise Price        Options Exercisable     Exercise Price
      ------          -----------     --------------     --------------        -------------------     --------------
$ 0.00 - $ 5.00         151,350             9.02             $ 4.82                    46,667              $ 4.85
$ 5.01 - $10.00         547,145             7.59               7.37                   269,888                7.03
$10.01 - $15.00         589,925             7.82              11.86                   323,819               11.69
                      ---------             ----             ------                  --------               -----
                      1,288,420             7.86             $ 9.13                   640,373              $ 9.23
                      =========             ====             =======                  ========              ======

            The Board of Directors of the Company  adopted the Directors'  Stock
Option  Plan  (the   "Directors'   Plan").   Under  the  Directors'  Plan,  each
non-employee  director will receive  options for 6,000 shares of Common Stock on
the date of his or her first election to the board of directors. In addition, on
the third  anniversary of each  director's  first election to the Board,  and on
each three year anniversary thereafter,  each non-employee director will receive
an  additional  option to purchase  6,000 shares of Common  Stock.  The exercise
price per share for all options  granted under the Directors' Plan will be equal
to the fair  market  value of the  Common  Stock  as of the date of  grant.  All
options  vest  in  three  equal  annual  installments  beginning  on  the  first
anniversary of the date of grant. The maximum term for all options is ten years.
The  weighted-average  fair value per share of options  granted during the years
ended June 30, 2003, 2002 and 2001 was $1.82, $3.55 and $3.87, respectively.

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

                                               Weighted Average
                                  Options     Exercise Price Per
                                Outstanding          Option            Options Exercisable
                                -----------          ------            -------------------
Outstanding at June 30, 2000      32,000           $    8.28                   16,000
         Granted                  24,000                8.97
         Expired or canceled      (6,000)               7.75
         Exercised                (2,000)               8.94
                                 -------
Outstanding at June 30, 2001      48,000                8.66                   22,000
         Granted                  12,000               11.10
                                 -------
Outstanding at June 30, 2002      60,000                9.15                   34,000
         Granted                   6,000                8.69
                                 -------
Outstanding at June 30, 2003      66,000                9.11                   45,997
                                 =======

            The following  table sets forth certain  information  as of June 30,
2003:

                                         Options Outstanding                        Options Exercisable
                      -----------------------------------------------------  ---------------------------------------
Range of Exercise       Options       Weighted Average   Weighted Average                           Weighted Average
      Prices          Outstanding      Remaining Life     Exercise Price     Options Exercisable     Exercise Price
      ------          -----------      --------------     --------------     -------------------     --------------
$ 5.01 - $10.00          42,000            6.25               $ 7.46               32,000                $ 7.24
$10.01 - $15.00          24,000            6.81                11.99               13,996                 12.31
                        -------            -----              ------              -------                ------
                         66,000            6.46               $ 9.11               45,997                $ 8.78
                        =======            =====              =======             =======                ======

NOTE 9 -    EARNINGS PER SHARE

            Basic (loss) per common share has been  computed by dividing the net
(loss),  after  giving  effect to  preferred  stock  dividends,  by the weighted

                                      F-19


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

average number of common shares outstanding during the period. Common equivalent
shares for stock  options and warrants are  calculated  pursuant to the treasury
stock method. During the years ended June 30, 2003, 2002 and 2001, respectively,
the Company  excluded the  equivalent of 287,915,  671,155 and 411,238 shares of
Common Stock in the  computation of loss per share as these options and warrants
to purchase common stock were anti-dilutive.

            The following table lists options and warrants outstanding as of the
periods shown which were not included in the  computation of diluted EPS because
the options and  warrants  exercise  price was greater  than the average  market
price of the common shares:

                                                         For the Year Ended June 30,
                                                -------------------------------------------
                 Range of Exercise Prices           2003          2002              2001
                 ------------------------           ----          ----              ----
                     $ 5.01 - $10.00              136,000              0                  0
                     $10.01 - $15.00              570,962        159,064             36,000
                     $15.01 - $20.00              444,679        443,715            443,715
                                                ---------       --------          ---------
                                                1,151,641        602,779            479,715
                                                =========       ========          =========

            Also,  not included in the  computation of diluted EPS for the years
ended June 30, 2003,  2002 and 2001 were  910,983,  841,609 and 577,191  shares,
respectively,  of Common  Stock  issuable  upon  conversion  of 7,500  shares of
Convertible Preferred Stock because the effect would be anti-dilutive.


                                                    For the Year Ended June 30,
                                               ------------------------------------
                                                   2003         2002           2001
                                                   ----         ----           ----
Net (loss)                                      $ (4,939)     $(10,971)     $(15,485)
Preferred stock dividends                           (706)         (586)         (416)
                                                --------      --------      --------
Net (loss) available to common shareholders     $ (5,645)     $(11,557)     $(15,901)
                                                ========      ========      ========
Weighted average outstanding shares
     of common stock                              10,396         8,742         7,926
                                                ========      ========      ========

Net (loss) per share - basic and diluted        $  (0.54)     $  (1.32)     $  (2.01)
                                                ========      ========      ========

NOTE 10 -INCOME TAXES

            The  tax  effects  of  temporary   differences  that  give  rise  to
significant  portions of deferred tax assets and deferred tax liabilities are as
follows:

                                                            As of June 30,
                                                      -----------------------
                                                         2003          2002
                                                       --------       -------
 Deferred tax assets:
        Allowance for doubtful accounts                $    805      $  1,080
        Amortization expense                              1,585           933
        Other                                                 4             5
        Net operating loss carryforwards                 34,658        36,716
                                                       --------      --------
              Total gross deferred tax assets            37,052        38,734
 Less valuation allowance                               (21,249)      (18,845)
                                                       --------      --------
        Net deferred tax assets                          15,803        19,889
                                                       --------      --------
 Deferred tax liabilities:
        Depreciation expense                            (15,803)      (19,889)
                                                       --------      --------
              Total gross deferred tax liabilities      (15,803)      (19,889)
                                                       --------      --------
Net deferred taxes                                     $   --        $   --
                                                       ========      ========

            The net change in the total valuation allowance for the years ended
June 30, 2003 and 2002 was an increase of $2,404 and $4,358, respectively.

                                      F-20


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

                  At  June  30,  2003,   the  Company  had  net  operating  loss
carryforwards  for Federal income tax purposes of  approximately  $99.0 million,
which expire in varying amounts between 2007 through 2023 as follows:

                      Year of
                      Expiration
                      ----------
                      2007-2011            $ 7,843
                      2012-2016             18,732
                      2017-2021             58,929
                      Thereafter            13,520
                                           -------
                                           $99,024
                                           =======

NOTE 11 - LEASE COMMITMENTS

            The Company leases office equipment,  trucks and warehouse/depot and
office  facilities  under operating  leases that expire at various dates through
June  2012.  Primarily all of the leases contain renewal options and escalations
for real estate taxes, common charges,  etc. Future minimum lease payments under
noncancelable  operating leases (that have initial  noncancelable lease terms in
excess of one year) are as follows:

                    Year Ending June 30,
                    --------------------
                           2004                       $      3,915
                           2005                              2,935
                           2006                              2,305
                           2007                              1,743
                           2008                              1,033
                           Thereafter                        1,003
                                                      ------------
                                                      $     12,934
                                                      ============

            Total  rental  costs  under  non-cancelable  operating  leases  were
approximately $5,344, $5,130 and $4,856 in 2003, 2002 and 2001, respectively.

NOTE 12  -  CONCENTRATION OF CREDIT AND BUSINESS RISKS

            The Company's business activity is with customers located within the
United  States.  For each of the years  ended June 30,  2003,  2002 and 2001 the
Company's   sales  to  customers  in  the  food  and  beverage   industry   were
approximately 95%.

            There were no customers  that accounted for greater than 3% of total
sales  for each of the three  years  ended  June 30,  2003,  nor were  there any
customers  that  accounted for greater than 5% of total  accounts  receivable at
June 30, 2003 or 2002.

            The  Company  purchases  new bulk  CO2  systems  from the two  major
manufacturers  of such  systems.  The  inability  of  either  or  both of  these
manufacturers  to deliver new systems to the Company  could cause a delay in the
Company's  ability to fulfill the demand for its services and a possible loss of
sales, which could adversely affect operating results.

                                      F-21


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

NOTE 13 - COMMITMENTS AND CONTINGENCIES

            In May 1997, the Company  entered into an exclusive  ten-year carbon
dioxide  supply  agreement  with The BOC Group,  Inc.  ("BOC") (See Note 8). The
agreement  ensures  readily  available  high  quality CO2 as well as  relatively
stable liquid carbon  dioxide  prices.  Pursuant to the  agreement,  the Company
purchases  virtually all of its liquid CO2 requirements  from BOC. The agreement
contains  annual  adjustments  over the prior  contract  year for an increase or
decrease in the Producer Price Index for Chemical and Allied Products ("PPI") 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.

            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.

NOTE 14 - RELATED PARTY TRANSACTION

            Robert L. Frome,  a Director of the Company,  is a member of the law
firm of Olshan Grundman Frome  Rosenzweig & Wolosky LLP, which law firm has been
retained by the Company. Fees paid by the Company to such law firm during fiscal
2003, 2002 and 2001, were $184, $140, and $281, respectively.

            In conection with the Refinancing  described in Note6(b),  25,000 of
the ten year  warrants  to  purchase  an  aggregate  of  425,000  shares  of the
Company's Common Stock Stock at an exercise price of $8.79 per share were issued
to Craig L. Burr,  a Director  of the  Company  and an  affiliate  of one of the
purchasers of the New Notes.

            In connection with the Refinancing  described in Note 6(b),  100,000
of the ten year  warrants  to  purchase an  aggregate  of 425,000  shares of the
Company's  Common  Stock at an exercise  price of $8.79 per share were issued to
affiliates of J.P. Morgan Partners (BHCA), L.P.,  purchasers of a portion of the
New Notes. In addition, the expiration date of warrants to purchase an aggregate
of 665,403  shares of the Company's  Common Stock at an exercise  price of $6.65
per share previously  issued to J.P. Morgan Partners (BHCA),  L.P. in connection
with the 1997 Notes and 1999 Notes was  extended  until  February  27, 2009 (See
Note 6(a)).  Richard D. Waters,  Jr., a Director of the Company, is an affiliate
of J.P. Morgan Partners (BHCA), L.P.

                                      F-22


                                   NUCO2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                    (In thousands, except per share amounts)

NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

            The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.

            (a) Cash and cash  equivalents,  accounts  receivable  and  accounts
payable and accrued expenses

                The  carrying  amounts  approximate  fair value due to the short
maturity of these instruments.

            (b) Long-term and subordinated debt

                The fair value of the Company's  long-term and subordinated debt
has been estimated based on the current rates offered to the Company for debt of
the same remaining maturities.

            The  carrying  amounts  and fair values of the  Company's  financial
instruments are as follows:

                                                                    As of June 30,
                                                                    --------------
                                                                 2003           2002
                                                                 ----           ----
              Cash and cash equivalents                        $    455      $ 1,562
              Accounts receivable                                 6,217        7,171
              Accounts payable and accrued expenses               7,604        8,193
              Long-term debt, including current maturities       30,953       48,294
              Subordinated debt                                  39,576       39,366

NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                                  1st Quarter            2nd Quarter             3rd Quarter             4th Quarter
                                  -----------            -----------             -----------             -----------
                               2003        2002        2003        2002        2003        2002        2003        2002
                               ----        ----        ----        ----        ----        ----        ----        ----
Net sales                    $ 18,678    $ 18,089    $ 18,101    $ 18,607    $ 18,340    $ 17,743    $ 19,290   $ 17,873
Gross profit                    9,539       9,275       9,399       9,626       9,597       8,779      10,336      9,141
Net (loss) income (a)          (2,110)     (1,913)     (2,314)       (789)       (777)     (1,813)        262     (6,456)

Basic and diluted (loss)
  earnings per common
  share (a)(b)               $  (0.24)   $  (0.23)   $  (0.23)   $  (0.11)   $  (0.09)   $  (0.23)   $   0.01   $  (0.74)

            (a)  During  the  fourth  quarter  of  fiscal  2002,  the  Company's
management  continued to monitor and evaluate the  collectibility  and potential
impairment of its accounts  receivable  and certain fixed assets.  In connection
therewith,   an  additional  allowance  for  doubtful  accounts  of  $1,862  and
write-downs of fixed assets of $1,809 were recorded in the fourth  quarter.  The
potential  uncollectibility  of  certain  accounts  receivable  and the  related
increase in the allowance for doubtful accounts came to light as a result of the
Company having  experienced  several problems relating to unusually high closure
rates  among  independent  operators  who have  gone out of  business  in recent
periods due to unfavorable economic conditions.  The write-downs of fixed assets
were due to the Company's  decision,  reached during the fourth quarter of 2002,
to replace all 50 and 100 pound tanks in service at  customer  locations  over a
three to four year  period  (Note  2). It is  management's  opinion  that  these
adjustments  are properly  recorded in the fourth  quarter  based upon facts and
circumstances that became available in that period.

            (b) Per  common  share  amounts  for the  quarters  have  each  been
calculated separately.  Accordingly, quarterly amounts may not add to total year
earnings  per  share  because  of  differences  in  the  average  common  shares
outstanding during each period.

                                      F-23





                                   NUCO2 INC.
                                   Schedule II
                        Valuation and Qualifying Accounts
                                  In Thousands

                                      Column B     Column C - Additions        Column D         Column E
                                      --------     --------------------        --------         --------
                                     Balance at    Charge
                                    beginning of   costs and    Charged to                      Balance at
                                        period     expenses  other accounts    Deductions     end of period
                                        ------     --------  --------------    ----------     -------------
Year ended June 30, 2001
   Allowance for doubtful accounts      $  622      $3,061        $ --           $1,177           $2,506
Year ended June 30, 2002
   Allowance for doubtful accounts      $2,506      $2,753        $ --           $2,174           $3,085
Year ended June 30, 2003
   Allowance for doubtful accounts      $3,085      $  860        $ --           $1,646           $2,299


                                      F-24`