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, 1998

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


For the transaction 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:  (561) 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. /X/



                                                           (continued next page)
<PAGE>
            The  aggregate  market value at September  18, 1998 of shares of the
Registrant's  common  stock,  $.001 par value per share  (based upon the closing
price of $6.1875 per share of such stock on the Nasdaq  National  Market on such
date), held by  non-affiliates of the Registrant was approximately  $34,807,701.
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 18, 1998,  there were  outstanding  7,216,664 shares of
the Registrant's common stock, $.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

            The  information  required by Items 10, 11, 12 and 13 of Part III is
incorporated by reference to the  Registrant's  definitive proxy statement to be
filed not later than October 28, 1998 pursuant to Regulation 14A.



                                      -1-
<PAGE>
                                     PART I

1.          BUSINESS.

GENERAL

         NuCo2 Inc., a Florida corporation  organized in 1990 (together with its
subsidiaries, the "Company"), is the dominant national supplier of liquid carbon
dioxide ("bulk CO2") to retail  establishments such as restaurants,  convenience
stores,  taverns,  theaters,  theme  parks,  resorts and stadiums for use in the
carbonation and dispensing of fountain beverages.

         For the fiscal year ended June 30,  1998,  the Company had net sales of
approximately  $35.1  million,  compared  to net  sales of  approximately  $18.9
million for the fiscal  year ended June 30,  1997,  an  increase  of 85.2%.  The
Company  believes  that  earnings  before  interest,   taxes,  depreciation  and
amortization  ("EBITDA") is the principal financial measure by which the Company
should be measured as it continues to achieve  national  market  presence and to
build  route  density.  EBITDA  for the  fiscal  year  ended  June 30,  1998 was
approximately $7.1 million, compared to EBITDA of approximately $4.1 million for
the fiscal year ended June 30, 1997,  with fourth  quarter fiscal 1998 net sales
and EBITDA setting record levels.

         Starting from its Florida base,  the Company,  through a combination of
internal  growth  and over 30  acquisitions,  expanded  its  service  area to 44
states,  operating 68 service and supply depots and  servicing  over 47,700 bulk
CO2 customers as of August 31, 1998. During the fiscal year ended June 30, 1998,
the Company  expanded  its service  area by 13 states and during the fiscal year
ended June 30, 1997,  the Company  expanded  its service area by 12 states.  The
Company  services  most  of the  major  national  and  regional  restaurant  and
convenience store chains, movie theater operators and theme parks throughout the
continental  United  States  including  McDonald's,  Pizza Hut,  Kentucky  Fried
Chicken, Burger King, Checkers,  Chevy's,  7-Eleven, Circle K, EZ Serve, Conoco,
Carmike  Cinemas,  AMC  Theaters,  Friendly's  Restaurant,  Applebee's,  Cracker
Barrel,  Shoney's,  Inc., Hard Rock Cafe, Planet Hollywood,  Universal  Studios,
Walt Disney World, Raymond James Stadium and Pro Player Stadium.

         The Company offers its customers two principal  services:  a stationary
bulk CO2 system installed on the customer's  premises and routine filling of the
system  with bulk CO2 on a defined  schedule.  The bulk CO2  system  utilizes  a
cryogenic  vessel  that  preserves  carbon  dioxide in its liquid  form and then
converts the liquid product to gaseous carbon dioxide,  the necessary ingredient
for beverage carbonation.  Typically the bulk CO2 system is owned by the Company
and leased to the customer under a five year  noncancelable  contract,  although
some customers own their own bulk CO2 system.

         Carbon dioxide is universally  used for the  carbonation and dispensing
of fountain beverages.  In most instances,  carbon dioxide is presently supplied
to fountain  beverage users in the form of gas, which is transported  and stored
in high  pressure  cylinders.  The  Company's 44 state  service area enables the
Company to reach over 96% of  potential  CO2 beverage  users in the  continental
United  States.  The  Company  believes  that bulk CO2 systems  will  eventually
displace most high pressure  cylinders in the beverage CO2 market because from a
user's  perspective,  bulk CO2 systems  enjoy several  qualitative  and economic
advantages over high pressure cylinders,  and, therefore,  the bulk CO2 industry
presents  substantial  opportunity  for growth.  The Company  estimates  that it
currently  services  approximately  9,000 high  pressure CO2  customers and that
there is a total of approximately  800,000  potential  beverage CO2 users in the
United States.


<PAGE>
         The Company intends to continue to expand its bulk CO2 business through
a combination of internal growth, conversion of high pressure CO2 beverage users
and  acquisitions,  building  route  densities  in  order to  achieve  operating
economies of scale and profitability throughout its service area.

         In April 1997, the Company signed an agreement with MiCell Technologies
Inc.  ("MiCell") to be the exclusive United States and Canadian supplier of bulk
CO2  systems  and  liquid  carbon  dioxide to the  MiCell  customer  base in the
industrial  laundry and  professional  garment care industry (dry cleaning) that
will utilize the MiCare garment cleaning fluid system  technology  developed and
patented by MiCell.  This system  utilizes  carbon dioxide in  conjunction  with
non-toxic  cleaning  solutions.  MiCell  surfacants  allow  for a wide  range of
performance  in liquid CO2  systems,  that in  addition  to garment  care,  also
includes parts cleaning,  precision cleaning and textile  processing.  MiCell is
currently field testing its system and expects to commence  commercialization by
the end of 1998.

         In July 1997,  the  Company  reached  an  agreement  with  Geotechnical
Instruments,  Inc.  to be the  exclusive  distributor  in the  United  States of
stationary carbon dioxide detectors.

INDUSTRY OVERVIEW

            CO2 is  universally  used  for the  carbonation  and  dispensing  of
fountain  beverages.   The  Company  believes  that  bulk  CO2  technology  will
eventually displace most high pressure cylinders in the beverage CO2 market and,
therefore,  the bulk CO2 industry presents  substantial  opportunity for growth.
Major  restaurant  and  convenience  store  chains  continue  to adopt  this new
technology  and search for  qualified  suppliers  to install and  service  these
systems. Unlike high pressure cylinders,  which are typically changed when empty
and  transported  to the supplier's  depot for  refilling,  bulk CO2 systems are
permanently  installed at the customer's site and are kept charged by filling by
the  supplier  from a  specialized  bulk CO2 truck on a constant  "stay  filled"
basis. Advantages to users of bulk CO2 systems include enhanced safety, improved
beverage  quality and product  yields,  reduced  employee  handling and cylinder
storage  requirements,  and  elimination  of system  downtime and product  waste
during cylinder changeovers.

            Many types of businesses  compete in the beverage CO2 business,  and
market share is  fragmented.  High  pressure  cylinders and bulk CO2 service 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  cylinder  CO2  customers  to bulk CO2 systems for several  reasons,  that
include the capital  outlays  required to  purchase  the bulk CO2  systems,  the
idling  of  high  pressure   cylinders  and   associated   equipment,   and  the
inefficiencies  that would result from splitting their CO2 customer base between
two CO2  technologies.  Other  competitors  in the beverage  CO2 market  include
fountain supply companies and distributors of restaurant supplies and groceries,
which firms vary  greatly in size.  There are a number of small  companies  that
provide bulk CO2 service that operate on a local or regional  geographic  scope.
Many of these suppliers lack the capital  necessary to offer bulk CO2 systems to
customers on lease, or to purchase  additional or replacement  specialized  bulk
CO2 trucks and stationary depots.

            Management  believes that demand for bulk CO2 systems will be driven
by the safety,  product quality and other operating advantages afforded to users
by such systems, and the increasing  availability and acceptance within the food
and beverage  industry of bulk CO2 systems.  In addition,  the Company  believes
that,  other than the  Company,  qualified  suppliers of bulk CO2 systems do not
presently exist in many regions of the United States.

COMPETITIVE STRATEGY

            The central elements of the Company's  competitive  strategy are the
following:

            Focus on Bulk CO2 Market.  Unlike many of its  competitors  for whom
bulk CO2 is a secondary  service  line,  the  Company  has no material  lines of
business  at  present  other  than  the  provision  of bulk  CO2,  and  does not
anticipate  diversifying into other product or service lines. All aspects of the
Company's operations are guided by its focus on the bulk CO2 business, including
its selection of operating  equipment,  design of delivery  routes,  location of
depots,  structure of customer contracts,  content of employee training programs
and design of management  information and accounting systems. By restricting its
scope of activities to the bulk CO2 business,  and largely avoiding the dilution
of management time and Company resources that would be required by other service
lines,  the  Company  believes  it is able to  maximize  the level of service it
provides to its bulk CO2 customers.  The Company also believes that its focus on
this  product  line also  helps  minimize  operating  costs  through  the use of
equipment  dedicated  to bulk CO2  applications  and  through  the high level of
product experience held by its employees.


                                      -2-
<PAGE>
            Company  Owned  Equipment.  The Company  generally  places a Company
owned  bulk CO2  system on the  customer's  premises  under a  long-term  supply
contract.  This arrangement is often appealing to the customer since the Company
bears the initial  capital  cost of the  equipment  and  installation,  with the
customer  only facing a  predictable  and modest  monthly usage fee. The Company
believes that its ability to place its equipment on the customers premises helps
create customer loyalty.

            Long term Customer Contracts. The Company typically enters into five
year bulk CO2 system  lease  agreements  with its  customers.  Generally,  these
contracts are  classified as one of two types:  "budget plan" service  contracts
and "rental plus per pound charge" contracts. Pursuant to budget plan contracts,
customers  pay fixed  monthly  charges for the lease of a Company owned bulk CO2
system installed on the customer's premises and refills of bulk CO2 according to
a predetermined  schedule. The bulk CO2 is included in the monthly rental charge
up to a  predetermined  maximum annual  volume.  If the maximum annual volume is
exceeded, the customer is charged for additional bulk CO2 delivered. Pursuant to
rental  plus per pound  charge  contracts,  the  Company  also leases a bulk CO2
system to the customer, but the customer is charged on a per pound basis for all
bulk CO2 delivered.  In exchange for a noncancelable monthly charge, the Company
installs and rents to its customers a Company owned bulk CO2 system and, through
a delivery routing system, services the bulk CO2 system and supplies bulk CO2 to
the customer's  site on a regular basis.  Even with customers that own their own
bulk CO2 systems,  the Company seeks to arrange for multi-year supply contracts.
The Company believes that the use of long-term  contracts  provides  benefits to
both  itself and its  customers.  Customers  are able to largely  eliminate  CO2
supply interruptions and the need to operate CO2 equipment themselves, while the
contract adds stability to the Company's  revenue base.  After the expiration of
the initial  term of a contract,  the term of the  contract  continues in effect
until  either the Company or the  customer  notifies  the other of its desire to
terminate.  Generally,  the Company  has been  successful  contracting  with its
customers for a new long-term supply contract. To date, the Company's experience
has been that  contracts  roll-over  without a significant  portion of contracts
expiring without renewal in any one year. The largest number (approximately 40%)
of the Company's current contracts with customers expire by their terms in 2003.

            Capture  Advantages  of  Scale  and  Route  Density.  In many of its
current  markets the Company has  established  itself as the leading or dominant
supplier  of  bulk  CO2,  and  believes  it  enjoys  cost  advantages  over  its
competitors due to the greater density of the Company's route structure; a lower
average time and distance  traveled  between stops, and a lower average cost per
delivery.  Greater  scale  may also  lead to  better  vehicle  and  fixed  asset
utilization, as well as the ability to spread fixed marketing and administrative
costs over a broader revenue base.

            Superior Customer Service. The Company seeks to differentiate itself
through its attention to customer service.  Each bulk CO2 system serviced by the
Company  has a label with a  toll-free  help line for the  customer's  use.  The
Company has an advanced  dispatch and delivery system,  including the ability to
communicate by radio with route personnel at all times.  The Company responds to
service calls on a 24-hour,  seven day a week basis, and the experience level of
its  personnel  aids in the  resolution  of equipment  failures or other service
interruptions, whether or not caused by the Company's equipment. Recognizing the
public  visibility  of  its  customers,  the  Company  carefully  maintains  the
appearance of its vehicles and the professional image of its employees.

            Rapid Installation and Diverse  Configurations.  The bulk CO2 system
installed at the customer's site consists of a cryogenic  vessel for the storage
of liquid CO2 and related valves, regulators and gas lines. The Company operates
a fleet of 77 installation vehicles with dedicated installation personnel. A key
attribute in marketing  the Company's  services to  multi-unit  customers is its
ability to rapidly install bulk CO2 systems at customers' locations with minimal
disruption.  The Company  offers  systems  ranging  from 50 to 600 pounds of CO2
capacity.  With the recent  introduction  of the 50 pound capacity  system,  the
range of system  sizes  permits  the  Company to market its  services to a broad
range of potential customers.

            Attractive  Pricing to Customer.  The Company carefully monitors the
prices  offered in its markets by  providers  of high  pressure  CO2  cylinders.
Despite the  customer-level  advantages  of bulk CO2 systems over high  pressure
cylinders,  the Company generally prices its services comparably to the price of
high  pressure  cylinders.  This has  proved an  effective  inducement  to cause
customers to convert from cylinders to bulk CO2 systems.  When appropriate,  the
Company will adjust  pricing to meet local market  conditions  in order to build
route density.


                                      -3-
<PAGE>
GROWTH STRATEGY

            The  objective of the Company is to  strengthen  its position as the
dominant  national supplier of bulk CO2 systems for beverage  applications.  The
Company   intends  to  implement  its  strategy   through  (i)  internal  market
development  by which it builds route  densities  necessary to become the lowest
cost  operator  and (ii) a program of strategic  acquisitions,  by which it will
enter a new market area, or through tuck-in acquisitions whereby it consolidates
an underpenetrated existing market.

            Internal Market Development. The majority of growth is driven by the
conversion  of high  pressure  cylinder  CO2  users  to bulk  CO2  systems.  The
Company's  ability to drive  conversion  is  illustrated  by its  success in the
Florida  market,  where  it  continues  to  rapidly  add  new  bulk  CO2  system
installations,  even after  actively  marketing  in the state  since  1990.  The
Company's  internal  growth  initiatives   consist  of  marketing   multi-system
placements  to  corporate  and  franchised   operations  of  large   restaurant,
convenience  store and theater chains.  The Company's  relationships  with chain
customers in one geographic  market frequently help it to establish service with
these same chains when the Company expands to new markets. As the Company enters
a new market,  the Company may seek to  establish  an initial  presence  through
acquisition.  After  accessing the chain  accounts in a new market,  the Company
attempts  to  rapidly  build  route  density  by  leasing  bulk CO2  systems  to
independent restaurants, convenience stores and theaters.

            The  Company  believes  that  optimal  route  density is achieved at
approximately 350 accounts per bulk CO2 truck, and the Company typically employs
targeted  sales efforts to build density within an existing  route.  The Company
maintains  a  "hub  and  spoke"  route  structure  and  establishes   additional
stationary bulk CO2 depots as a service area expands through  geographic growth.
The Company's route density and market share is highest in Florida,  and is less
developed in the other areas where the Company  presently  has  operations.  The
Company's  entry to these states was  accomplished  largely by  acquisitions  of
businesses  with more thinly  developed  route networks than are typical for the
Company.  The  Company  expects to benefit  from  route  efficiencies  and other
economies of scale as it builds its customer  base in these states  through more
intensive internal marketing initiatives.

            Strategic  Acquisitions.  It has been the Company's  experience that
acquisition  opportunities on satisfactory terms have been regularly  available.
The Company  estimates that there are more than 100 distributors  throughout the
United  States  that  service   between  250  and  750  bulk  CO2  accounts  and
approximately  10  distributors  that  each  service  between  1,000  and  6,000
accounts,  many of which may represent attractive acquisition candidates for the
Company.  The Company has generally been able to acquire smaller distributors at
prices  near  their  asset  value.  Since this cost per system is similar to the
Company's internal installation costs, these acquisitions  represent an economic
means of  acquiring  accounts.  The  Company's  strategy is to acquire  bulk CO2
operations in strategic  markets in new territories,  as well as, target tuck-in
operations  that  can  be  easily  integrated  into  established  routes.  These
transactions  typically  involve the  purchase of  installed  bulk CO2  systems,
equipment  and  customer  lists and  require  little  additional  administrative
expense to operate. With these acquisitions,  all administrative  functions such
as billing,  dispatching and accounting are moved to the Company's  headquarters
in Stuart, Florida.


                                      -4-
<PAGE>
            As the Company  enters a new  market,  or  consolidates  an existing
market,  incumbent  bulk CO2  distributors  may be  willing  to be  acquired  on
satisfactory  terms for the following  reasons:  (i)  distributors  realize that
successful  competition  with the Company  will be  difficult if the Company has
already  achieved greater route density;  (ii) a distributor's  primary business
often is distribution of other industrial gases and welding supplies,  with bulk
CO2 not  representing  a key  service,  and a  reasonable  offer to  purchase  a
non-core   business  is  often   appealing;   (iii)  because  of  the  operating
efficiencies the Company brings to the accounts serviced, the accounts have more
value for the Company than for the seller;  (iv) a  distributor  may have little
opportunity for growth because of its inability to access capital; and (v) there
are few other credible buyers competing with the Company.

MARKETING AND CUSTOMERS

            The Company  markets its bulk CO2 systems to large customers such as
restaurant  and  convenience  store chains,  movie  theater  operators and theme
parks. The Company's  customers  include most of the major national and regional
chains  throughout the United States.  The Company  approaches large chains on a
corporate  or regional  level for approval to become the  exclusive  supplier of
bulk CO2 on a national basis or within a designated territory.  The Company then
directs  its sales  efforts  to the  managers  or owners  of the  individual  or
franchised operating units. Whereas the large chains offer immediate penetration
on a national or regional  basis,  the small  operators are  important  accounts
because they provide geographic density which optimizes delivery  efficiency and
reduces  cost on a per  customer  basis.  The  introduction  of smaller bulk CO2
systems (50 and 100 pound capacity  vessels),  which the Company helped develop,
allows the Company to penetrate the market for lower volume users of CO2 such as
mall-based food courts, small restaurants and mass-market retailers.

            As of August 31,  1998,  the  Company  distributed  bulk CO2 to over
47,700  customers,  none of which  accounted  for more than 5% of the  Company's
fiscal 1998 net sales. The Company has negotiated multi-system placements or CO2
supply  contracts  with numerous  customers,  including  McDonald's,  Pizza Hut,
Kentucky Fried Chicken,  Burger King, Checkers,  Chevy's,7-Eleven,  Circle K, EZ
Serve, Conoco, Carmike Cinemas, AMC Theaters, Friendly's Restaurant, Applebee's,
Cracker Barrel,  Shoney's,  Inc., Hard Rock Cafe,  Planet  Hollywood,  Universal
Studios,  Walt Disney World , Raymond James Stadium and Pro Player Stadium.  The
Company's relationships with chain customers in one geographic market frequently
help it establish service with these same chains when the Company expands to new
markets.  After  accessing  the chain  accounts  in a new  market,  the  Company
attempts  to  rapidly  build  route  density  by  leasing  bulk CO2  systems  to
independent restaurants, convenience stores and theaters.

            The Company also  supplies  high  pressure  gases in cylinder  form,
including  CO2,  helium and nitrogen.  The Company  estimates  that it currently
services  approximately  9,000 high  pressure CO2  customers,  most of whom were
either  customers of acquired  companies or are low volume users for which it is
not economical to convert to bulk CO2 systems. However, with the introduction of
50 and 100 pound capacity bulk CO2 systems,  the Company  anticipates  that many
low volume users will convert from high pressure cylinders.  Helium and nitrogen
are mostly  supplied to existing  bulk  customers  in  connection  with  filling
balloons and dispensing beer, respectively.

                                      -5-
<PAGE>
OPERATIONS

            As of August 31, 1998, the Company  operated 68 bulk CO2 service and
supply depots located  throughout its service area and operates 153  specialized
bulk CO2 trucks,  77  installation  and service  vehicles  and 17 high  pressure
cylinder  delivery  trucks.  Each  specialized  bulk CO2 truck  covers up to 350
accounts,  depending on market density,  refilling customer systems on a regular
schedule.  All delivery  quantities are measured by flow meters installed on the
Company's  tank  trucks.  This  information  is then loaded  onto the  Company's
centralized  billing  system,  which is  maintained  on an IBM AS/400  computer.
Service and supply  depots are equipped with large storage tanks (up to 40 tons)
which receive liquefied CO2 from large capacity tanker trucks and from which the
Company's bulk CO2 trucks refill for delivery to customers.  In most cases,  the
tank is accessible from the outside of the establishment.

            The Company has a record of timely bill  collections,  with accounts
receivable  historically  averaging 37 days of sales. The Company attributes its
successful  collection  history to several  factors:  (i) the Company  generates
invoices  immediately  after  delivery;  (ii) since fountain soda is generally a
highly  profitable  item,  customers are less likely to risk their CO2 supply by
not paying  their  bills;  (iii) the  Company  performs  continuous  proprietary
account  monitoring and may interrupt service to those customers that are behind
on their  accounts;  and  (iv)  the use of a  locking  device  on the fill  port
prevents customers from receiving bulk CO2 from other sources while bills to the
Company remain unpaid.

            All dispatch and billing  functions are conducted from the Company's
corporate  headquarters,  with route drivers,  installers and service  personnel
operating from the Company's depots.

BULK CO2 SUPPLY

            Bulk CO2 is currently a readily available commodity product which is
processed and sold by various sources.  In May 1997, the Company entered into an
exclusive ten year carbon dioxide supply agreement with The BOC Group, Inc. (the
"BOC CO2 Supply  Agreement").  The agreement  provides readily  available,  high
quality  CO2 as  well  as  relatively  stable  bulk  carbon  dioxide  prices  at
competitive levels.

BULK CO2 SYSTEMS

            The Company  purchases  new bulk CO2 systems from  Minnesota  Valley
Engineering,   Inc.  and   Taylor-Wharton   Cryogenics  (a  division  of  Harsco
Corporation), the two major manufacturers. The Company believes that it has been
the  largest  single  purchaser  of bulk  CO2  systems  from  the two  principal
manufacturers  combined.  The Company  purchases  vessels in six sizes (50, 100,
250,  300,  400 or 600 lbs.)  depending on the CO2 needs of its  customers.  The
Company's vessels are vacuum insulated containers with extremely high insulation
characteristics  allowing  the storage of CO2, in its liquid  form,  at very low
temperatures.  The vessels  operate under low pressure,  are fully automatic and
require no electricity.  The service life of the Company's  vessels,  based upon
manufacturers'   estimates,   is  expected  to  exceed  20  years  with  minimal
maintenance.

            The  Company's   in-house   service   department   coordinates   all
installations  and repairs of  equipment.  In addition to the normal single unit
bulk CO2 system installation,  the Company has performed many complex multi-unit
installations  in  stadiums  (e.g.,  Pro Players  Stadium  and Miami  Arena) and
amusement parks (e.g. Universal Studios).  These installations  involve erecting
custom-designed  piping  systems  to link bulk CO2  systems  situated  in remote


                                      -6-
<PAGE>
locations.  The Company's strong technical  capabilities  represent an important
competitive  advantage and have often  resulted in the  equipment  manufacturers
consulting with the Company on product modifications.

TRADEMARKS

            "NuCo2(R)"  is a registered  trademark  of the Company.  The Company
markets its services utilizing the "NuCo2(R)" trademark.

REGULATORY MATTERS

            The business of the Company is subject to federal and state laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of the Company's products. 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 the Company is 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.
In addition,  the Company voluntarily complies with applicable safety standards.
Management  believes that the Company is 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 have a material adverse effect on the Company.

COMPETITION

            The Company  competes with other  distributors  of bulk CO2 and high
pressure CO2, including several regional  industrial gas distributors,  numerous
small  independent   operators  and  distributors  of  restaurant  supplies  and
groceries.  Bulk CO2 systems  typically are serviced by  industrial  and welding
supply  companies,  specialty gas  distributors  and fountain supply  companies.
These  suppliers range widely in size.  Some of the Company's  competitors  have
significantly  greater  financial,  technical  or marketing  resources  than the
Company. The Company believes that its ability to compete depends on a number of
factors, including price, product quality, availability and reliability,  credit
terms, name recognition, delivery time and post-sale service and support.

EMPLOYEES

            At June 30, 1998 the Company had 451  full-time  employees,  of whom
147 were involved in an executive,  marketing or administrative capacity, 214 of
whom were  route  drivers  and 90 of whom were in  installation  functions.  The
Company considers its relationship with its employees to be good.

SEASONALITY

            Of the Company's over 46,000 bulk CO2 customers, as of June 30, 1998
approximately  8,300 were  billed  utilizing  a "rental  plus per pound  charge"
program.  Additionally,  6,800  accounts  use their own bulk CO2 systems and are
billed by the pound for bulk CO2 delivered. Customers purchasing bulk CO2 by the
pound will tend to consume less CO2 in the winter  months and the  Company's net
sales  to such  customers  will be  correspondingly  lower  in  times of cold or
inclement weather.

BACKLOG

            As of June 30,  1998,  the  Company  had a backlog of  approximately
2,500 orders for its budget plan service.

2.          PROPERTIES.

            The Company's corporate  headquarters are located in a 32,400 square
foot  facility  in  Stuart,   Florida.  This  facility  accommodates  corporate,
administrative,  marketing,  sales  and  warehouse  space.  Annual  rent for the
facility is $237,175.  As of August 31, 1998, the Company also leased liquid CO2
service and supply depots at 68 locations in 35 states.  The properties on which
such  facilities are located are leased on terms  consistent with market rentals
prevailing  in the  location's  area.  The Company  believes  that its  existing
facilities are adequate for its current needs and that additional  facilities in
its service area are available to meet future needs.


                                      -7-
<PAGE>
3.          LEGAL PROCEEDINGS.

            The Company is 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 the  financial  condition  or  results of  operations  of the
Company.

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

            Not applicable.



                                      -8-
<PAGE>
                                     PART II

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

            The Common  Stock  trades on the Nasdaq  National  Market  under the
symbol "NUCO".

            The  following  table sets  forth,  for the periods  indicated,  the
highest  and lowest bid  quotations  for the Common  Stock,  as  reported by the
Nasdaq National Market. The prices reported reflect inter-dealer prices, without
retail   mark-up,   mark-down  or   commission,   and  may  not  reflect  actual
transactions.


CALENDAR 1996                           HIGH                       LOW
-------------                           ----                       ---
Third Quarter                            31                       19 1/2
Fourth Quarter                           22                       11 1/4

CALENDAR 1997
First Quarter                            17 5/8                   11
Second Quarter                           18 3/8                   11 7/8
Third Quarter                            18 1/4                   14 3/8
Fourth Quarter                           16 1/8                   10 1/4

CALENDAR 1998
First Quarter                            13 3/4                   10 1/2
Second Quarter                           13 1/4                    9 7/8

            At June 30, 1998, there were  approximately 196 holders of record of
the Company's Common Stock. This number does not include an indeterminate number
of shareholders whose shares are held by brokers in "street name."

            The  Company  has not paid any cash  dividends  on the Common  Stock
since its inception and the Board of Directors does not anticipate declaring any
cash  dividends  on the Common  Stock in the  foreseeable  future.  The  Company
currently  intends to utilize any earnings it may achieve for the development of
its  business and working  capital  purposes.  In addition,  the payment of cash
dividends  on the Common  Stock is  restricted  by  financial  covenants  in the
Company's   credit  facility  with  SunTrust  Bank,   South  Florida,   National
Association and 12% Senior Subordinated Notes due October 31, 2004.

6.          SELECTED CONSOLIDATED FINANCIAL DATA.

            The Selected Consolidated Financial Data set forth below reflect the
historical results of operations,  financial condition and operating data of the
Company 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
herein.



                                      -9-
<PAGE>
<TABLE>
<CAPTION>

                                                                                   Fiscal Year Ended June 30,
                                                                                   --------------------------

                                                                  1998            1997           1996         1995            1994
                                                                  ----            ----           ----         ----            ----
                                                                     (in thousands, except per share amounts and Operating Data)

INCOME STATEMENT DATA:
<S>                                                            <C>             <C>           <C>           <C>           <C>      
Net sales..............................................        $  35,077       $ 18,944      $  11,966     $  6,062      $   4,221
Cost of products sold..................................           18,578          8,992          5,177        2,503          1,897
Selling, general and administrative expenses...........            9,396          5,859          3,066        1,448          1,093
Depreciation and amortization..........................            8,912          4,246          2,417        1,380            803
                                                               ---------       --------      ---------     --------      ---------

Operating income (loss)................................           (1,809)          (153)         1,305          731            428
Interest expense, net..................................            3,639           (681)         1,258        1,264            953
Other expenses.........................................            -               -              -            -               145
                                                               ---------       --------      ---------     --------      ---------

Income (loss) before extraordinary item................           (5,448)           527             47         (533)          (670)
Extraordinary item.....................................              187          -                860         -              -
                                                               ---------       --------      ---------     --------      ---------

Net income (loss)......................................           (5,635)           527           (813)        (533)          (670)

Dividends on Preferred Stock...........................             -              -              (111)        -              -
                                                               ---------       --------      ----------    --------      ---------

Net income (loss)......................................        $  (5,635)      $    527      $    (924)    $   (533)     $    (670)
                                                               ==========      ========       =========     ========      =========

Income (loss) per common share before
      extraordinary item...............................        $   (0.75)      $    .07      $    (.02)    $   (.17)
Extraordinary item.....................................            (0.03)          -              (.19)        -
                                                               ---------       --------      ----------    --------
Net income (loss) per common share                             $   (0.78)      $    .07      $    (.21)    $   (.17)

Weighted average shares outstanding....................            7,210          7,318          4,500        3,379

OTHER DATA:
EBITDA (1).............................................        $   7,103       $  4,093      $   3,722     $  2,111      $   1,231


OPERATING DATA:
Company owned bulk CO2 systems serviced:
      Beginning of period..............................           21,919         12,884          7,967        4,237          2,558
      New installations, net...........................            9,446          5,817          3,337        1,703          1,329
      Acquisitions.....................................            7,930          3,218          1,580        2,027            350
                                                               ---------      ---------      ---------     --------      ---------
Total Company owned bulk CO2 systems serviced:.........           39,295         21,919         12,884        7,967          4,237
Customer owned bulk CO2 systems serviced...............            6,800          4,800          2,900        2,300
                                                               ---------      ---------      ---------     --------
Total bulk CO2 systems serviced........................           46,095         26,719         15,784       10,267
Service and supply depots..............................               65             38             24           15              7

BALANCE SHEET DATA:
Cash and cash equivalents..............................              337         11,673         43,001          562             58
Total assets...........................................          124,498         73,344         74,633       21,143          9,864
Total debt (including short-term debt).................           59,328          9,546         10,844       17,391          9,369
Total shareholders' equity (deficit)...................           55,643         60,702         60,684          743           (724)
</TABLE>

---------------------
(1)   EBITDA  represents  operating income plus  depreciation and  amortization.
      Information  regarding  EBITDA is presented  because of its use by certain
      investors  as one  measure of an issuer's  ability to generate  cash flow.
      EBITDA  should not be  considered an  alternative  to, or more  meaningful
      than,  operating  income or cash flows  from  operating  activities  as an
      indicator of an issuer's operating performance.


                                      -10-
<PAGE>
7.          MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
            RESULTS OF OPERATIONS.

            This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties.  The Company's actual results could differ  materially from those
anticipated  in these  forward-looking  statements.  Factors that may cause such
differences  include,  but are not limited to, the Company's  expansion into new
markets, competition,  technological advances, Year 2000 issues and availability
of managerial personnel.

OVERVIEW

            At June 30, 1998 the Company  leased  approximately  39,300 bulk CO2
systems to its customers,  principally pursuant to five year noncancelable lease
contracts.  These customers include restaurants,  convenience stores,  theaters,
taverns and other businesses  which dispense  carbonated  beverages.  Generally,
these  contracts  are  classified  as one of two  types:  "budget-plan"  service
contracts and "rental plus per pound charge" contracts.  Pursuant to budget plan
service  contracts,  customers  pay a fixed  monthly  charge  for the lease of a
Company owned bulk CO2 system  installed on the customer's  premises and refills
of bulk CO2 according to a predetermined  schedule.  The bulk CO2 is included in
the monthly rental charge up to a  predetermined  maximum annual volume.  If the
maximum annual volume is exceeded,  the customer is charged for additional  bulk
CO2 delivered.  Pursuant to rental plus per pound charge contracts,  the Company
also leases a bulk CO2 system to the customer,  but the customer is charged on a
per pound basis for all bulk CO2 delivered.  The Company's  contracts  generally
provide for price increases based upon increases in the consumer price index.

            The Company  provides some services  besides those offered under the
above two types of contracts.  As of June 30, 1998,  the Company  provided "fill
only" service to approximately 6,800 customers.

            As  of  June  30,  1998,   approximately  15,100  of  the  Company's
approximately  46,100 bulk CO2 customers  were billed on a per pound basis which
varies with the quantity of bulk CO2  delivered.  These  customers  will tend to
consume less CO2 in the winter months, and this may cause the Company's revenues
and  earnings  for its  fiscal  quarters  ending  in  December  and  March to be
relatively lower than for its other quarters. As of June 30, 1998, approximately
31,000 of the Company's approximately 46,100 bulk CO2 customers were billed at a
flat monthly rate which generally does not vary throughout the year.

            The  Company's  installed  base of bulk CO2  systems  has  increased
through internally  generated new customers and through  acquisitions.  As route
density increases,  route profitability  increases as the fixed costs associated
with the  route are  spread  over a larger  revenue  base.  Since the  Company's
inception in February 1990 to June 30, 1998,  approximately 23,800 Company owned
bulk CO2 systems have been installed and approximately  21,800 customer accounts
have been acquired through 35 acquisitions.

            The Company  intends to continue to grow  through a  combination  of
internal growth and acquisitions.  The Company requires  significant  capital to
purchase and install bulk CO2 systems at  customers'  locations  and to grow the
network of service  and supply  depots and  specialized  CO2  delivery  vehicles
required to service these  installations.  Once  installed,  however,  there are
minimal additional capital requirements for bulk CO2 systems in service, and the
Company has generally experienced  significant positive cash flows on a per-unit
basis,  represented by per-unit  operating income adjusted for per-unit non-cash
charges for  depreciation  and  amortization.  The Company  believes its current
installed  base of bulk CO2 systems is stable,  partly due to the  existence  of
long-term contracts with its customers. In fiscal 1996, 1997 and 1998, less than
5% of Company owned bulk CO2 systems  experienced service  termination.  Service
termination is typically caused by restaurant closure. Affected bulk CO2 systems
are either removed and  reconditioned  for use with other customers,  or left in
place  when  prospects  for a new  restaurant  in the same  location  are deemed
favorable.

GENERAL

            Under the budget plan, the Company's net sales consist of charges to
customers  for the use of Company  owned bulk CO2  systems  and a  predetermined
quantity  of liquid CO2. On customer  invoices,  the Company  does not  separate
charges for equipment use from charges for liquid CO2  delivered;  customers are
presented  with a single  amount  payable.  Customers  are  invoiced  monthly in
advance of services  rendered.  For  customers  on rental plus per pound  charge
contracts,  invoices are broken down into the two respective services,  with the
charge for liquid CO2 supply  varying with the amount  delivered.


                                      -11-
<PAGE>
The Company's net sales also include  revenues  received from customers to which
it supplies only CO2 refill services, based on the amount delivered.

            Cost of  products  sold is  comprised  of  purchased  CO2 and labor,
vehicle and depot costs  associated  with the Company's  storage and delivery of
bulk CO2 to customers.  Selling,  general and administrative expenses consist of
salaries,  dispatch  and  communications  costs,  and expenses  associated  with
marketing, administration, accounting and employee training. Consistent with the
capital  intensive  character of its business,  the Company  incurs  significant
depreciation  and  amortization  expenses.  These stem from the  depreciation of
Company owned bulk CO2 systems;  depreciation  and  amortization  of bulk system
installation  costs;  amortization  of sales  commissions,  and  amortization of
goodwill, deferred financing costs and other intangible assets.

            With respect to bulk CO2 systems, the Company only capitalizes costs
that are  associated  with specific  successful  placements of such systems with
customers under  noncancelable  contracts and which would not be incurred by the
Company  but for a  successful  placement.  All  other  service,  marketing  and
administrative costs are expensed as incurred.  Capitalized  component parts and
direct  costs  associated  with  installation  of bulk CO2  equipment  leased to
customers was approximately $3.2 million,  $6.3 million and $12.4 million at the
end of fiscal 1996, 1997 and 1998,  respectively.  Depreciation and amortization
expense related to capitalized  component parts and direct costs associated with
installation was  approximately  $406,000,  $924,000 and $1.8 million for fiscal
1996, 1997 and 1998, respectively.

            The Company  believes  EBITDA is useful as a means of measuring  the
growth and earning power of its  business.  In addition,  the Company's  current
bank credit  facility  utilizes  EBITDA for its formal  calculation of financial
leverage,  affecting the amount of funds  available to the Company for borrowing
under such credit facility. EBITDA represents operating income plus depreciation
and amortization.  Information  regarding EBITDA is presented because of its use
by certain investors as one measure of a corporation's  ability to generate cash
flow.  EBITDA  should not be considered an  alternative  to, or more  meaningful
than,  operating income or cash flows from operating  activities as an indicator
of a corporation's  operating performance.  EBITDA excludes significant costs of
doing business and should not be considered in isolation from GAAP measures.

RESULTS OF OPERATIONS

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

                                                                                              YEAR ENDED JUNE 30,
                                                                                              -------------------
                                                                                     1998            1997              1996
                                                                                     ----            ----              ----

Income Statement Data:

<S>                                                                                 <C>              <C>               <C>
Net sales..............................................                             100.0%           100.0%            100.0%

Cost of products sold..................................                              53.0             47.5              43.3

Selling, general and administrative expenses...........                              26.8             30.9              25.6

Depreciation and amortization..........................                              25.4             22.4              20.2
                                                                                 --------           ------            ------
Operating income (loss)................................                              (5.2)             (.8)             10.9

Interest expense (income)..............................                              10.4             (3.6)             10.5
                                                                                 --------           -------           ------
Income (loss) before extraordinary item................                             (15.6)             2.8                .4

Extraordinary item.....................................                                .5               --              (7.2)
                                                                                 --------           -------           ------

Net income (loss)......................................                             (16.1%)            2.8%             (6.8%)
                                                                                 =========           =====            =======
Other Data:

   EBITDA..............................................                              20.3%            21.6%             31.1%
                                                                                 =========           =====            =======
</TABLE>

                                      -12-
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

            Net sales increased $16.1 million,  or 85.2%,  from $18.9 million in
fiscal 1997 to $35.1 million in fiscal 1998.  Approximately  $6.1 million of the
increase  represented net sales from the 15 acquisitions  during the fiscal year
ended June 30,  1998.  In addition,  approximately  $2.9 million of the increase
represented  net sales from the nine  acquisitions  during fiscal 1997 which are
included  for the full year in fiscal  1998 as  compared  to from their dates of
acquisition in fiscal 1997. At June 30, 1998,  there were  approximately  39,300
Company  owned  bulk  systems  in  service,  an  increase  of  17,400  over  the
approximately  21,900 Company owned bulk systems in service at the end of fiscal
1997.  Of such  increase,  approximately  7,900  resulted from  acquisitions  of
businesses  completed  during fiscal 1998 and the remaining  9,500 resulted from
internal marketing  efforts.  Increases in net sales due to price increases were
insignificant.

            Cost of products sold increased by $9.6 million from $9.0 million in
fiscal 1997 to $18.6  million in fiscal 1998,  and  increased as a percentage of
net sales from 47.5% in fiscal 1997 to 53.0% in fiscal 1998.  This  increase was
attributable to the expansion of the Company into new territories.  Fully loaded
route drivers increased by $3.2 million from $3.0 million in fiscal 1997 to $6.2
million in fiscal 1998, and increased as a percentage of net sales from 16.0% to
17.7%.  The number of depots  operated by the Company at June 30, 1998 increased
to 65, compared to 38 at June 30, 1997. Rent expense and utilities  increased by
$850,000  from  $729,000  in fiscal  1997 to $1.6  million in fiscal  1998,  and
increased as a percentage of net sales from 3.8% to 4.5%. Auto and truck expense
increased  by $1.5  million  from $1.5 million in fiscal 1997 to $3.0 million in
fiscal 1998 and increased as a percentage  of net sales from 7.8% to 8.5%.  When
the  Company  opens new  depots  and  expands  into new  markets,  higher  costs
expressed  as a  percentage  of net sales are  incurred  until route  density is
achieved.  The  Company  typically  services  approximately  350  customers  per
delivery vehicle in its mature markets.  In new territories,  a delivery vehicle
can initially service as few as 100 customers.

            Selling,  general  and  administrative  expenses  increased  by $3.5
million from $5.9  million in fiscal 1997 to $9.4  million in fiscal  1998,  and
decreased  as a  percentage  of net sales from 30.9% in fiscal  1997 to 26.8% in
fiscal 1998.  The dollar  increase was primarily  attributable  to growth in the
number of marketing and administrative  personnel and their associated expenses,
as well as the costs of expanding  the  Company's  geographic  areas of service.
Fully loaded marketing, administrative and executive personnel increased by $2.4
million from $3.2  million in fiscal 1997 to $5.6  million in fiscal  1998,  and
decreased  as a  percentage  of net sales from 16.9% in fiscal  1997 to 16.1% in
fiscal 1998. The percentage  decrease is  attributable to economies of scale. At
June 30, 1997 the Company had  operations  in 30 states and at the end of fiscal
1998, the Company had operations in 43 states.

            Depreciation  and  amortization  increased by $4.7 million from $4.2
million in fiscal 1997 to $8.9  million in fiscal 1998.  As a percentage  of net
sales, such expense increased from 22.4% in fiscal 1997 to 25.4% in fiscal 1998.
Depreciation  expense increased by $2.9 million from $3.1 million in fiscal 1997
to $6.0  million in fiscal  1998  principally  due to the  increase  in bulk CO2
systems leased to customers. As a percentage of net sales,  depreciation expense
increased  from  16.5% in  fiscal  1997 to 17.2% in  fiscal  1998.  Amortization
expense  increased  by $1.8  million  from $1.1  million in fiscal  1997 to $2.9
million in fiscal 1998 primarily due to the increase in amortization of deferred
lease   acquisition  costs  and  goodwill  and  customer  lists  resulting  from
acquisitions.  As a percentage of net sales, amortization expense increased from
5.9% in fiscal 1997 to 8.2% in fiscal 1998.

            Net  interest  income in fiscal  1997 was  $681,000  compared to net
interest expense in fiscal 1998 of $3.6 million.  This change is attributable to
the decreased  level of cash and cash  equivalents  and the  increased  level of
long-term and subordinated debt in fiscal 1998 as compared to fiscal 1997.

            During  fiscal  1998,  the  Company  wrote-off  $187,000 of deferred
financing costs related to its NationsBank credit facility which was replaced by
a new syndicated bank group facility led by SunTrust Bank.

            For the reasons  described above, the Company's net income in fiscal
1997 was $527,000  compared to a net loss of $5.6  million in fiscal  1998.  The
Company has made no  provision  for income tax expense in either  fiscal 1997 or
fiscal 1998 due to its historical net losses.  At June 30, 1998, the Company had
net  operating  loss  carryforwards  for  federal  income tax  purposes of $26.2
million,  which are available to offset future  federal  taxable  income through
2013.
            For the reasons described above,  EBITDA increased from $4.1 million
in fiscal 1997 to $7.1 million in fiscal 1998,  but decreased as a percentage of
net sales from 21.6% to 20.3%.


                                      -13-
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996

            Net sales  increased $7.0 million,  or 58.3%,  from $12.0 million in
fiscal  1996 to $18.9  million in fiscal  1997.  Approximately  $938,000  of the
increase  represented net sales  resulting from the May 1996  acquisition of the
BevServ   Division  of  The  Coca-Cola   Bottling  Company  of  New  York,  Inc.
("BevServ"). In addition, approximately $332,000 of the increase represented net
sales from three  acquisitions  in fiscal 1996 which are  included  for the full
year in fiscal 1997 as compared  to from their  dates of  acquisition  in fiscal
1996 and approximately  $1.4 million of the increase  represented net sales from
the eight  acquisitions  in fiscal  1997.  At June 30,  1997,  there were 21,919
Company owned systems in service,  an increase of 9,035 over the 12,884  Company
owned  systems in service at the end of fiscal  1996.  Of such  increase,  3,218
resulted from  acquisitions of businesses  completed  during fiscal 1997 and the
remaining 5,817 resulted from internal marketing  efforts.  Approximately 31% of
the acquired  systems were obtained through the May 1997 acquisition of the bulk
CO2 assets of BOC Gases ("BOC").  Increases in net sales due to price  increases
were insignificant.

            Cost of products sold increased by $3.8 million from $5.2 million in
fiscal 1996 to $9.0 million in fiscal 1997, and increased as a percentage of net
sales from  43.3% in fiscal  1996 to 47.5% in fiscal  1997.  This  increase  was
attributable to the expansion of the Company into new territories.  Fully loaded
route drivers increased by $1.3 million from $1.8 million in fiscal 1996 to $3.0
million in fiscal 1997, and increased as a percentage of net sales from 14.8% to
16.0%.  The number of depots  operated by the Company at June 30, 1997 increased
to 38, compared to 24 at June 30, 1996. Rent expense and utilities  increased by
$451,000 from $278,000 in fiscal 1996 to $729,000 in fiscal 1997,  and increased
as a  percentage  of net sales  from 2.3% to 3.8%.  When the  Company  opens new
depots and expands into new markets,  higher costs  expressed as a percentage of
net sales are incurred  until route density is achieved.  The Company  typically
services approximately 350 customers per delivery vehicle in its mature markets.
In new  territories,  a delivery  vehicle  can  initially  service as few as 100
customers.

            Selling,  general  and  administrative  expenses  increased  by $2.8
million from $3.1  million in fiscal 1996 to $5.9  million in fiscal  1997,  and
increased  as a  percentage  of net sales from 25.6% in fiscal  1996 to 30.9% in
fiscal 1997. The increase was primarily  attributable to growth in the number of
marketing and administrative personnel and their associated expenses, as well as
the costs of expanding the Company's  geographic areas of service.  Fully loaded
marketing, administrative and executive personnel increased by $1.6 million from
$1.6 million in fiscal 1996 to $3.2 million in fiscal 1997,  and  increased as a
percentage  of net sales from 13.5% in fiscal 1996 to 16.9% in fiscal  1997.  At
June 30, 1996 the Company had  operations  in 18 states and at the end of fiscal
1997, the Company had operations in 30 states.

            Depreciation  and  amortization  increased by $1.8 million from $2.4
million in fiscal 1996 to $4.2  million in fiscal 1997.  As a percentage  of net
sales, such expense increased from 20.2% in fiscal 1996 to 22.4% in fiscal 1997.
Depreciation  expense increased by $1.5 million from $1.6 million in fiscal 1996
to $3.1  million in fiscal  1997  principally  due to the  increase  in bulk CO2
systems leased to customers. As a percentage of net sales,  depreciation expense
increased  from  13.4% in  fiscal  1996 to 16.5% in  fiscal  1997.  Amortization
expense  increased by $308,000  from  $808,000 in fiscal 1996 to $1.1 million in
fiscal 1997  primarily  due to the increase in  amortization  of deferred  lease
acquisition costs, goodwill and customer lists resulting from acquisitions. As a
percentage of net sales, amortization expense decreased from 6.8% in fiscal 1996
to 5.9% in fiscal 1997.

            Net interest expense in fiscal 1996 was $1.3 million compared to net
interest  income in fiscal 1997 of $681,000.  This change is attributable to the
repayment of debt from the proceeds of the Company's  initial public offering in
December 1995 (the "IPO") and the increased  level of cash and cash  equivalents
in the 1997 period from the  Company's  secondary  public  offering in June 1996
(the "Secondary Offering").

            During  fiscal  1996,  the  Company  wrote-off  $785,000 of deferred
financing  costs and incurred  $75,000 in prepayment  penalties  related to debt
which was repaid with the proceeds of the IPO.

            For the reasons  described  above,  the Company's net loss in fiscal
1996 was $813,000  compared to net income of $527,000 in fiscal  1997;  however,
net income before extraordinary item in fiscal 1996 was $46,822. The Company has
made no  provision  for income tax expense in either  fiscal 1996 or fiscal 1997
due to its historical net losses. At June 30, 1997 the Company had net operating
loss  carryforwards for federal income tax purposes of $12.5 million,  which are
available to offset future federal taxable income through 2012.

            For the reasons described above,  EBITDA increased from $3.7 million
in fiscal 1996 to $4.1 million in fiscal 1997,  but decreased as a percentage of
net sales from 31.1% to 21.6%.


                                      -14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

            The  Company's  cash  requirements  consist  principally  of capital
expenditures  associated  with  placing  new bulk CO2  systems  into  service at
customers'  locations;  payments of interest  on its  outstanding  indebtedness;
payments for acquired businesses;  and working capital.  Whenever possible,  the
Company seeks 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, 1998, the Company anticipated making cash capital expenditures of
at least $20.0  million to $30.0  million  during each of fiscal 1999 and fiscal
2000,  primarily for purchases of bulk C02 systems that it expects to place into
service  during this time.  Once bulk CO2 systems are placed into  service,  the
Company has generally  experienced  positive cash flows on a per-unit  basis, as
there  are  minimal  additional  capital  expenditures   required  for  ordinary
operations.  In addition to the capital expenditures related to internal growth,
the  Company  continually  reviews  opportunities  to acquire  bulk CO2  service
businesses, and may require cash in an amount dictated by the scale and terms of
any such transactions successfully concluded.

            During the fiscal year ended June 30, 1998,  the  Company's  capital
resources  included cash flows from  operations,  available  borrowing  capacity
under the Company's  credit  facilities  (NationsBank  credit  facility  through
October 1997 and SunTrust Facility thereafter) and proceeds from the sale of its
12% Senior  Subordinated  Promissory  Notes due 2004 (the "Notes").  In July and
September of 1997,  certain  assets,  primarily  consisting of bulk CO2 systems,
were acquired for $6.0 million in cash and $6.8 million in borrowings  under the
Company's NationsBank credit facility. Effective October 1, 1997, a newly formed
wholly-owned  subsidiary  of  the  Company  purchased  all  of  the  issued  and
outstanding  shares  of  common  stock of Koch  Compressed  Gases,  Inc.  for an
aggregate  purchase  price of $5.0 million which was funded  through a borrowing
under the NationsBank  credit facility.  On October 31, 1997, the Company repaid
its outstanding indebtedness under the NationsBank credit facility which totaled
approximately  $21.0  million with a portion of the  proceeds of the Notes.  The
Notes  which  aggregated  $30.0  million  were sold with seven year  warrants to
purchase an aggregate of 655,738  shares of Common Stock at an exercise price of
$16.40 per share.  Additionally,  NationsBanc Montgomery  Securities,  Inc., the
placement  agent for the Notes,  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 October 31, 1997,  the Company  finalized a $50.0 million  senior
secured  revolving credit facility with SunTrust Bank,  South Florida,  National
Association ("SunTrust Facility").  Pursuant to the SunTrust Facility,  upon the
achievement of $15.0 million  annualized one quarter EBITDA on a pro-forma basis
for  acquisitions,  the Company  shall  automatically  request that the SunTrust
Facility  be  increased  by an  additional  $50.0  million  to a total of $100.0
million. Additionally, the SunTrust Facility provides for interest and an unused
facility fee based on a pricing grid calculated  quarterly on senior funded debt
to  annualized  EBITDA.  The  SunTrust  Facility  expires on October  31,  2000;
however,   it  contains  a  two  year  renewal  option.   Additionally,   it  is
collateralized  by substantially  all of the assets of the Company.  In December
1997,  SunTrust  closed on a  syndication  of the SunTrust  Facility  with three
additional banks.

            In July and August 1998, the 12% Senior Subordinated Promissory Note
Agreement  and the  SunTrust  Facility,  respectively,  were  amended  to adjust
certain financial  covenants as of June 30, 1998 and prospectively.  In exchange
for the amendment to the 12% Senior Subordindated Promissory Note Agreement, the
exercise  price for 612,023  warrants  was reduced from $16.40 per stock unit to
$12.40 per stock unit. The Company  believes that it will be able to comply with
all of the financial covenants, as amended, during the next fiscal year.

            For the  period  November  1997  through  March  1998,  the  Company
purchased assets from various carbonic gas distributors  consisting primarily of
bulk CO2 and high  pressure  assets  for $5.3  million  cash,  $18.7  million in
borrowings  under the  Company's  SunTrust  Facility  and the issuance of 18,835
shares of Common Stock with a market value of $275,000.

            As of June 30, 1998, a total of $29.0 million was outstanding  under
the SunTrust  Facility  with  interest at two hundred  twenty-five  basis points
above the 90-day London  InterBank  Offering Rate ("LIBOR")  (7.875% to 8.00% at
June 30, 1998).

            Working Capital. At June 30, 1997 the Company had working capital of
$9.5 million. At June 30, 1998, the Company had negative working capital of $3.1
million.

            Cash Flows from Operating Activities.  During fiscal 1997 and fiscal
1998,  net cash  provided  by  operating  activities  was $4.3  million and $7.4
million,  respectively.  Cash flows from operating  activities increased by $3.1
million for the fiscal  year ended June 30, 1998  compared to the same period in
1997  primarily  due to an  increase in accounts  payable and  depreciation  and
amortization.


                                      -15-
<PAGE>
            Cash Flows from Investing Activities.  During fiscal 1997 and fiscal
1998,  the Company  made net  capital  expenditures  of $16.9  million and $23.5
million,  respectively, for new bulk CO2 systems and associated installation and
direct  placement  costs. In addition,  during the year ended June 30, 1997, the
Company made eight  acquisitions  and expended  cash of $17.7 million and during
fiscal 1998 the Company made15 acquisitions and expended cash of $12.4 million.

            Cash Flows From Financing Activities.  During fiscal 1997 cash flows
used in financing  activities were $2.4 million.  During fiscal 1998, cash flows
provided by financing  activities were $18.6 million.  For the fiscal year ended
June 30,  1997,  cash flows used in financing  activities  were  primarily  from
repayment of long-term debt owed and the redemption of a warrant. For the fiscal
year ended June 30,  1998,  cash flows  provided by  financing  activities  were
primarily  from the  issuance  of  subordinated  debt and  borrowings  under the
Company's SunTrust Facility.

            The  Company  believes  that  cash  from  operating  activities  and
available  borrowings  under the SunTrust  Facility  will be  sufficient to fund
proposed  operations for at least the next 12 months at its anticipated  rate of
growth.

YEAR 2000

            The Company has conducted a review to identify which of its computer
and other business operating systems will be affected by the "Year 2000" problem
and has  developed a project  plan and  schedule to solve this issue.  Among the
functions  and systems  impacted  could be  inventory  and  accounting  systems,
dispatch and delivery  systems,  electronic  data  interchange,  and  mechanical
systems  operating  everything  from office building  environmental  controls to
telephone switches and fax machines.  The Company is on schedule to be Year 2000
compliant  by  June  30,  1999.   The  Company   believes   that  the  costs  of
modifications,  upgrades,  or  replacements  of software,  hardware,  or capital
equipment  which  would  not  be  incurred  but  for  Year  2000   compatibility
requirements  have  not and will not have a  material  impact  on the  Company's
financial position or results of operations.

            The Company is also engaged in  communications  with its significant
business partners,  suppliers and customers to determine the extent to which the
Company is vulnerable to such third  parties'  failure to address their own Year
2000  issues.  The  Company's  assessment  of the impact of its Year 2000 issues
includes an assessment of the Company's vulnerability to such third parties. The
Company is seeking assurances from its significant business partners,  suppliers
and customers  that their computer  applications  will not fail due to Year 2000
problems. Nevertheless, the Company does not control, and can give no assurances
as to the  substance  or  success  of the Year 2000  compliance  efforts of such
independent  third  parties and the Company  believes  that there is a risk that
certain of these third  parties on whom the  Company's  finances and  operations
depend  will  experience  Year 2000  problems  that could  affect the  financial
position or results of operations of the Company.  These risks include,  but are
not limited to, the  potential  inability  of  suppliers  to correctly or timely
provide  necessary   services,   materials  and  components  for  the  Company's
operations;  the  inability  of the  Company's  customers to timely or correctly
process and pay the Company's invoices; and the inability of lenders, lessors or
other  sources of the  Company's  necessary  capital and liquidity to make funds
available to the Company when required.

            In case the Company does  experience  severe Year 2000 financial and
operating  problems,  notwithstanding  its efforts to avoid or mitigate problems
inherent  in its own  computer  systems  or the  adverse  effects  of Year  2000
problems  experienced by third parties on whom it is substantially  reliant, the
Company has begun development of contingency plans.

INFLATION

            The modest  levels of  inflation  in the general  economy  since the
Company  began  business in 1990 have not  affected  its results of  operations.
Additionally,  the Company's  contracts with its customers  generally contain an
annual lease rate adjustment clause based on any increases in the consumer price
index.  The Company  believes that  inflation  will not have a material  adverse
effect on its future results of operations.

            The BOC CO2 Supply  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. However, such increases
shall not exceed 3% per year in the first five contract years.

                                      -16-
<PAGE>
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, 1998, a total of $29.0 million was  outstanding  under the
SunTrust  Facility with interest at two hundred  twenty-five  basis points above
the 90 day LIBOR  rate  (7.875%  to 8.00% at June 30,  1998).  Based  upon $29.0
million  outstanding under the SunTrust Facility at June 30, 1998, the Company's
annual interest cost under the SunTrust  Facility would increase by $290,000 for
each one percent increase in LIBOR (i.e., from 8.0% to 9.0%).

            In order to reduce the Company's exposure to increases in LIBOR, and
consequently  to  increases  in interest  payments,  on June 9, 1998 the Company
entered into an interest rate swap  transaction (the "Swap") with SunTrust Bank,
Atlanta, in the amount of $10.0 million (the "Notional  Amount").  The effective
date of the Swap is  September 2, 1998 and it  terminates  on September 5, 2000.
Pursuant to the Swap, the Company pays a fixed interest rate of 6% per annum and
receives a LIBOR-based  floating  rate.  The effect of the Swap is to neutralize
any changes in LIBOR on the Notional Amount.  If LIBOR decreases below 6% during
the  period  the Swap is in  effect,  interest  payments  by the  Company on the
Notional  Amount will be greater  than if the  Company had not entered  into the
Swap, since by exchanging LIBOR for a fixed interest rate, the Company would not
benefit from falling interest rates on LIBOR, a variable interest rate.

8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

            See page F-1


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

            On July 2, 1996,  the Audit  Committee  of the Board of Directors of
the Company dismissed KPMG Peat Marwick LLP ("KPMG") as independent  accountants
to the  Company  and  appointed  Cooper,  Selvin  &  Strassberg  LLP as the  new
independent  accountants  to the  Company.  KPMG's  accountant's  report  on the
financial  statements of the  Registrant for the fiscal year ended June 30, 1995
(the  period for which  KPMG was  engaged as  independent  accountants)  did not
contain any adverse  opinion or  disclaimer  of opinion and was not qualified or
modified as to uncertainty,  audit scope, or accounting principles.  In November
1997,  the partners and employees of Cooper,  Selvin & Strassberg LLP joined the
firm of Margolin, Winer & Evens LLP.

                                    PART III

            The information required by Items 10, 11, 12 and 13 of this Part III
is  incorporated  by reference to the definitive  proxy statement to be filed by
the Company no later than October 28, 1998 pursuant to Regulation 14A.



                                      -17-
<PAGE>
                                     PART IV

ITEM 14.     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.

            *3.2        --    Articles   of   Amendment   to  the   Articles  of
                              Incorporation  of the Company,  dated December 18,
                              1995.

            *3.3        --    Articles   of   Amendment   to  the   Articles  of
                              Incorporation  of the Company,  dated December 17,
                              1996.

            **3.4       --    Bylaws of the Company.

            *10.1       --    1995 Stock Option Plan.

            **10.2      --    Directors' Stock Option Plan.

            **10.3      --    Noncompetition  Agreement  between the Company and
                              Joseph M. Criscuolo, dated November 30, 1995.

            **10.4      --    Noncompetition  Agreement  between the Company and
                              Edward M. Sellian, dated November 30, 1995.

            **10.5      --    Lease for 2528 North  Tamiami  Trail,  Ft.  Myers,
                              Florida,   between   the  Company  and  Edward  M.
                              Sellian.

           ***10.6      --    Lease for 2800  Southeast  Market  Place,  Stuart,
                              Florida between the Company and Edward M. Sellian.

             *10.7      --    Lease for 2820  Southeast  Market  Place,  Stuart,
                              Florida  between the Company and Edward M. Sellian
                              dated as of February 1, 1998.

            ****10.8    --    Employment agreement between the Company and Joann
                              Sabatino, dated October 16, 1996.

            *10.9       --    Revolving  Credit  Agreement,  dated as of October
                              31, 1997 by and  between the Company and  SunTrust
                              Bank, South Florida, National Association.

            *10.10      --    Waiver and  Amendment  No. 1 to  Revolving  Credit
                              Agreement dated as of August 25, 1998 by and among
                              the  Company and  SunTrust  Bank,  South  Florida,
                              National Association.

            *10.11      --    Senior Subordinated Note Purchase Agreement, dated
                              as of October 31, 1997  between the  Company,  the
                              Subsidiary Guarantors and the Investors.

                                      -18-
<PAGE>
            *10.12      --    Amendment  No.  1  to  Senior   Subordinated  Note
                              Purchase  Agreement  dated as of November 14, 1997
                              between the Company, the Subsidiary Guarantors and
                              the Investors.

            *10.13      --    Amendment  No.  2  to  Senior   Subordinated  Note
                              Purchase  Agreement  dated  as of  June  30,  1998
                              between the Company, the Subsidiary Guarantors and
                              the Investors.

            *10.14      --    Warrant  Agreement  dated as of October  31,  1997
                              among the Company and the Initial Holders.

            *10.15      --    Amendment No. 1 to Warrant  Agreement  dated as of
                              November  14,  1997,  between  the Company and the
                              Initial Holders.

            *11         --    Statement re: computation of per share earnings.

        *****16         --    Letter of KPMG Peat Marwick dated July 2, 1996.

            *21         --    Subsidiaries

            *23         --    Consent  of  Margolin,  Winer &  Evens  LLP to the
                              incorporation   by  reference  to  the   Company's
                              Registration Statement on Form S-8 (No. 333-06705)
                              of  the  independent   auditors'  report  included
                              herein.

            *27         --    Financial Data Schedule.

            (b)         REPORTS ON FORM 8-K

            No  reports  were  filed on Form 8-K in the  quarter  ended June 30,
1998.

---------------------------
*           Included herein.
**          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.
***         Incorporated by reference to the Company's Registration Statement on
            Form SB-2,  filed with the  Commission  on June 7, 1996  (Commission
            File No. 333-3352).
****        Incorporated  by  reference  to the  Company's  Form  10-KSB for the
            fiscal year ended June 30, 1997.
*****       Incorporated  by reference to the  Company's  Form 8-K dated July 2,
            1996.


                                      -19-
<PAGE>
                                   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 24, 1998                  /S/ EDWARD M. SELLIAN
                                            ---------------------
                                            Edward M. Sellian,
                                            Chairman of the Board and 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/ EDWARD M. SELLIAN           Director                     September 24, 1998
------------------------
    Edward M. Sellian


/S/ JOHN A. KERNEY              Director                     September 24, 1998
------------------------
    John A. Kerney


/S/ ROBERT L. FROME             Director                     September 24, 1998
------------------------
    Robert L. Frome


/S/ ROBERT RANIERI              Director                     September 24, 1998
-----------------------
    Robert Ranieri


/S/ DANIEL RAYNOR               Director                     September 24, 1998
------------------------
    Daniel Raynor


/S/ JOANN SABATINO              Chief Financial Officer      September 24, 1998
------------------------
    Joann Sabatino


                                      -20-
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                            PAGE NO.
                                                                                                            --------

                                   NUCO2 INC.

<S>                                                                                                           <C>
REPORT OF INDEPENDENT AUDITORS ...............................................................................F-2

CONSOLIDATED FINANCIAL STATEMENTS:

   CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND 1998...................................................F-3

   CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1997 AND
     1998.....................................................................................................F-4

   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JUNE 30, 1996,
     1997 AND 1998............................................................................................F-5

   CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1997 AND
     1998.....................................................................................................F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................................................................F-8

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED JUNE 30, 1996,
    1997 AND 1998............................................................................................F-22
</TABLE>





                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
NuCo2 Inc.
Stuart, Florida

We have audited the accompanying consolidated balance sheets of NuCo2 Inc. as of
June 30, 1997 and 1998, and the related  consolidated  statements of operations,
shareholders'  equity,  and cash flows for each of the three years in the period
ended June 30,  1998.  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  generally   accepted  auditing
standards.  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 consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of NuCo2
Inc.  as of June  30,  1997  and  1998,  and  the  consolidated  results  of its
operations  and its cash flows for each of the three  years in the period  ended
June 30, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion,  the related  financial  statement  schedule when  considered in
relation to the basic financial statement taken as a whole,  presents fairly, in
all material respects, the information set forth therein.


                                               MARGOLIN, WINER & EVENS LLP



Garden City, New York
September 18, 1998


                                      F-2
<PAGE>
                                   NuCo2 INC.
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                    (NOTE 6)

<TABLE>
<CAPTION>
                                                                                                              JUNE 30,
                                                                                                              --------
                                                                                                   1997*                    1998
                                                                                                   -----                    ----
Current assets:
<S>                                                                                            <C>                    <C>         
    Cash and cash equivalents                                                                  $ 11,672,506           $    336,510
    Trade accounts receivable; net of allowance for doubtful
        accounts of $113,054 and $395,491, respectively                                           2,120,880              4,457,505
    Inventories                                                                                      85,601                211,027
    Prepaid expenses and other current assets                                                       276,858                262,437
                                                                                                -----------            -----------
        Total current assets                                                                     14,155,845              5,267,479
                                                                                                -----------            -----------

Property and equipment, net (Note 4)                                                             46,803,050             85,435,933
                                                                                                -----------            -----------

Other assets:
    Goodwill, net                                                                                 7,580,763             22,891,846
    Deferred charges, net                                                                           272,608              2,004,259
    Customer lists, net                                                                           1,755,919              3,963,588
    Restrictive covenants, net                                                                    1,401,833              2,275,964
    Deferred lease acquisition costs, net                                                         1,274,577              2,475,139
    Deposits                                                                                         99,863                184,059
                                                                                                -----------            -----------
                                                                                                 12,385,563             33,794,855
                                                                                                -----------            -----------
                                                                                               $ 73,344,458           $124,498,267
                                                                                                ===========            ===========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt (Note 6)                                              $  2,180,601           $    139,251
    Accounts payable                                                                              1,514,048              6,596,722
    Accrued expenses                                                                                709,507                323,254
    Accrued interest                                                                                 19,568                844,153
    Accrued payroll                                                                                 232,469                476,458
    Other current liabilities                                                                        22,699                  7,179
                                                                                                -----------            -----------
        Total current liabilities                                                                 4,678,892              8,387,017

Long-term debt, excluding current maturities (Note 6)                                             7,365,740             29,460,614
Subordinated debt (Note 7)                                                                          -                   29,728,571
Customer deposits                                                                                   598,177              1,279,178
                                                                                                -----------            -----------
        Total Liabilities                                                                        12,642,809             68,855,380
                                                                                                -----------            -----------

Commitments and contingencies (Note 14)

Shareholders' equity (Note 8):
    Preferred Stock; no par value; 5,000,000 shares authorized;
        none issued                                                                                 -                     -
    Common Stock; par value $.001 per share; 30,000,000 shares authorized;
        issued and outstanding 7,197,718 shares at June 30, 1997 and 7,216,664
        shares at June 30, 1998                                                                       7,198                 7,217
    Additional paid-in capital                                                                   63,233,043            63,809,014
    Accumulated deficit                                                                          (2,538,592)           (8,173,344)
                                                                                               -------------         -------------
        Total shareholders' equity                                                               60,701,649            55,642,887
                                                                                                -----------           -----------
                                                                                               $ 73,344,458          $124,498,267
                                                                                                ===========           ============
</TABLE>


*  Restated to conform to current year's classifications.

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                                   NuCo2 INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                                   YEARS ENDED JUNE 30,
                                                                                                   --------------------
                                                                           1996                   1997                     1998
                                                                         --------              ----------                -------

<S>                                                                    <C>                <C>                    <C>             
 Net sales                                                             $ 11,965,999       $     18,943,569       $     35,077,361
                                                                        -----------        ---------------          -------------

 Costs and expenses:
     Cost of products sold                                                5,177,320              8,991,823             18,578,063
     Selling, general and administrative expenses                         3,066,381              5,858,934              9,396,003
     Depreciation and amortization                                        2,417,492              4,246,035              8,912,124
                                                                        -----------        ---------------         --------------
                                                                         10,661,193             19,096,792             36,886,190
                                                                        -----------        ---------------         --------------

     Operating income (loss)                                              1,304,806               (153,223)            (1,808,829)

 Other expenses (income):
     Interest expense                                                     1,402,773                884,627              3,809,138
     Interest (income)                                                     (144,789)            (1,565,289)              (170,160)
                                                                        ------------       ----------------         --------------

     Income (loss) before extraordinary item                                 46,822                527,439             (5,447,807)
                                                                        -----------        ---------------          --------------

 Extraordinary item - loss on extinguishment of debt (Note 6)               859,522                 -                     186,945
                                                                        -----------        ---------------          -------------

     Net income (loss)                                                 $   (812,700)      $        527,439       $     (5,634,752)
                                                                        ============       ===============          ==============

     Dividends on Preferred Stock                                      $   (110,917)      $         -            $        -
                                                                        ============       ===============          ==============

     Net income (loss) available to common shareholders                $   (923,617)      $        527,439       $     (5,634,752)
                                                                        ============       ===============          ==============

 Basic and Diluted EPS

     Income (loss) before extraordinary item                           $      (0.02)      $           0.07       $          (0.75)

     Extraordinary item                                                       (0.19)                   -                    (0.03)
                                                                        ------------       ----------------          -------------

     Net income (loss)                                                 $      (0.21)      $           0.07       $          (0.78)
                                                                        ============       ================          =============

     Weighted average number of common and common
       equivalent shares outstanding

           Basic                                                          4,499,989              7,164,924              7,210,350
                                                                        ============       ================          ============

           Diluted                                                        4,499,989              7,317,926              7,210,350
                                                                        ============       ================          ============
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
                                   NuCo2 INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                  Series A               Series B              Series C               Series D      
                                            ---------------------    ------------------    -----------------     -------------------
                                            Shares        Amount     Shares     Amount     Shares     Amount     Shares      Amount 
                                            ------        ------     ------     ------     ------     ------     ------      ------

<S>                                           <C>      <C>             <C>     <C>           <C>     <C>         <C>     <C>        
Balance, June 30, 1995                        485      $ 485,000       500     $500,000      500     $ 500,000   1,500   $1,500,000 
Redemption of Series A                       (485)      (485,000)       -          -          -          -         -           -    
Redemption of Series B                          -           -         (500)    (500,000)      -          -         -           -    
Conversion of Series C                          -           -           -          -        (500)     (500,000)    -           -    
Conversion of Series D                          -           -           -          -          -          -                   (1,500)
Conversion of subordinated debt
     and exercise of warrants and
     options                                    -           -           -          -          -          -         -           -    
Issuance of 2,022,576 shares of com-
     mon stock - Initial Public Offering        -           -           -          -          -          -         -           -    
Issuance of 1,761,165 shares of com-
     mon stock - secondary offering             -           -           -          -          -          -         -           -    
Net (loss)                                      -           -           -          -          -          -         -           -    
Dividends declared on
preferred stock                                 -           -           -          -          -          -         -           -    
                                           ---------- ----------     -------   ---------   --------  ---------   -------   --------
Balance, June 30, 1996                          -           -           -          -          -          -         -           -    
Issuance of 34,289 shares of
     common stock - exercise of options         -           -           -          -          -          -         -           -    
Redemption of warrant                           -           -           -          -          -          -         -           -    
Additional expense - secondary
     offering                                   -           -           -          -          -          -         -           -    
Issuance of 33,962 shares of common
     stock - asset acquisition                  -           -           -          -          -          -         -           -    
Net income                                      -           -           -          -          -          -         -           -    
                                           ---------- ----------     -------   ---------   --------  ---------   -------   ---------
Balance, June 30, 1997                          -           -           -          -          -          -         -           -    
Issuance of 18,835 shares of common
     stock - asset acquisition                  -           -           -          -          -          -         -           -    
Issuance of 111 shares of common
     stock - exercise of options                -           -           -          -          -          -         -           -    
Issuance of warrants                            -           -           -          -          -          -         -           -    
Net (loss)                                      -           -           -          -          -           -         -          -    
                                           ---------- ----------     -------   ---------   --------  ---------   -------   ---------
Balance, June 30, 1998                          -           -           -          -          -          -         -           -    
                                           ========== ==========     =======   =========   ========  =========   =======   =========
</TABLE>

<TABLE>
<CAPTION>
                                                         Common Stock            Additional
                                                  -------------------------        Paid-in      Accumulated           Shareholders'
                                                   Shares           Amount         Capital        Deficit                Equity
                                                  --------          ------     -------------    -----------           ------------

<S>                                              <C>              <C>              <C>         <C>                  <C>
Balance, June 30, 1995                           1,932,953        $ 1,933          $9,317      $ (2,253,331)        $    742,919
Redemption of Series A                                -               -              -                 -                (485,000)
Redemption of Series B                                -               -           499,500              -                    (500)
Conversion of Series C                             155,164            155         499,845              -                       0
Conversion of Series D                          (1,500,000)       300,266             300         1,499,700                    0
Conversion of subordinated debt
     and exercise of warrants and
     options                                       957,343            957         805,400              -                 806,357
Issuance of 2,022,576 shares of com-
     mon stock - Initial Public Offering         2,022,576          2,023      16,149,341              -              16,151,364
Issuance of 1,761,165 shares of com-
     mon stock - secondary offering              1,761,165          1,761      44,641,484              -              44,643,245
Net (loss)                                            -               -              -             (812,700)            (812,700)
Dividends declared on
preferred stock                                       -               -          (361,275)                              (361,275)
                                                ------------     ---------   -------------    --------------      --------------
Balance, June 30, 1996                           7,129,467          7,129      63,743,312        (3,066,031)          60,684,410
Issuance of 34,289 shares of
     common stock - exercise of options             34,289             34         152,319              -                 152,353
Redemption of warrant                                 -               -        (1,143,450)             -              (1,143,450)
Additional expense - secondary
     offering                                         -               -           (59,100)             -                 (59,100)
Issuance of 33,962 shares of common
     stock - asset acquisition                      33,962             35         539,962              -                 539,997
Net income                                            -               -              -              527,439              527,439
                                                ------------     ---------   -------------    -------------        -------------
Balance, June 30, 1997                            7,197,718          7,198     63,233,043        (2,538,592)          60,701,649
Issuance of 18,835 shares of common
     stock - asset acquisition                       18,835             19        274,972              -                 274,991
Issuance of 111 shares of common
     stock - exercise of options                        111           -               999              -                     999
Issuance of warrants                                   -              -           300,000              -                 300,000
Net (loss)                                             -              -              -           (5,634,752)          (5,634,752)
                                                ------------     ---------   ------------   ---------------      ---------------
Balance, June 30, 1998                            7,216,664      $   7,217   $ 63,809,014   $    (8,173,344)     $    55,642,887
                                                ============     =========   ============   ===============      ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>
                                   NuCo2 INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            YEARS ENDED JUNE 30,
                                                                                   1996*             1997*            1998
                                                                               -----------        ----------         -------

<S>                                                                          <C>                 <C>              <C>          
Net income (loss) before extraordinary item                                  $      46,822       $    527,439     $ (5,447,807)
Extraordinary item - loss on extinguishment of debt                                859,522             -                186,945
                                                                             -------------       ------------     -------------
Net income (loss)                                                                 (812,700)           527,439       (5,634,752)
Cash flows from operating activities:
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
          Depreciation and amortization of property and equipment                1,609,063          3,130,022        6,045,652
          Amortization of other assets                                             808,429          1,116,013        2,866,471
          Loss on disposal of property and equipment                               155,592            294,411          499,704
          Write-off of deferred financing costs                                    784,069             -               186,945
          Changes in operating assets and liabilities:
          Decrease (increase) in:
              Trade accounts receivable                                           (646,224)          (735,238)      (2,189,832)
              Inventories                                                          (11,441)           (33,176)        (115,968)
              Prepaid expenses and other current assets                           (356,368)           108,090           14,421
          Increase (decrease) in:
              Accounts payable                                                     278,794           (712,747)       4,542,532
              Accrued expenses                                                     (42,347)           363,361         (395,794)
              Accrued payroll                                                       22,954            (93,592)         243,989
              Accrued interest                                                     (84,517)           193,800          824,585
              Other current liabilities                                             39,064            (50,830)         (41,061)
              Customer deposits                                                    100,463            236,392          591,296
                                                                           ---------------       ------------     ------------

              Net cash provided by operating activities                          1,844,831          4,343,945        7,438,188
                                                                           ---------------       ------------     ------------

Cash flows from investing activities:
   Proceeds from disposal of property and equipment                                126,850          2,133,776          410,868
   Purchase of property and equipment                                           (6,971,472)       (16,945,522)     (23,456,104)
   Acquisition of businesses                                                    (1,767,460)       (17,692,662)     (12,406,907)
   Increase in deferred lease acquisition costs                                   (514,258)          (914,999)      (1,805,874)
   (Increase) decrease in deposits                                                (238,364)           160,500          (79,661)
                                                                           ----------------      ------------     -------------

              Net cash used in investing activities                        $    (9,364,704)      $(33,258,907)    $(37,337,678)
                                                                           ----------------      -------------    -------------
</TABLE>


* Restated to conform to current year's classifications.


                                      F-6
<PAGE>
                                   NuCo2 INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Continued)
<TABLE>
<CAPTION>

                                                                                            YEARS ENDED JUNE 30,
                                                                                   1996              1997           1998
                                                                                  -------         ----------       -------

Cash flows from financing activities:
<S>                                                                          <C>               <C>              <C>     
   Proceeds from issuance of Common Stock                                    $  60,794,609     $    (59,100)    $      -
   Net proceeds from issuance of long-term debt
      and subordinated debt                                                     10,551,728           -             21,610,820
   Repayment of long-term debt                                                 (19,943,243)      (1,309,704)         (831,409)
   Increase in loan payable to shareholder                                         200,000           -                 -
   Repayment of loan payable to shareholder                                       (200,000)          -                 -
   Increase in deferred charges                                                   (694,457)         (53,307)       (2,216,916)
   Decrease in deferred interest payable                                          (306,535)          -                 -
   Exercise of warrants and options                                                403,444          152,353               999
   Preferred stock dividends                                                      (361,275)          -                 -
   Redemption of Series A preferred stock                                         (485,000)          -                 -
   Redemption of Series B preferred stock                                             (500)          -                 -
   Redemption of warrant                                                           -             (1,143,450)           -
                                                                            --------------     -------------    -------------

              Net cash provided by (used in) financing activities               49,958,771       (2,413,208)       18,563,494
                                                                            --------------     -------------    -------------

Increase (decrease) in cash and cash equivalents                                42,438,898     (31,328,170)       (11,335,996)
Cash and cash equivalents, beginning of year                                       561,778       43,000,676        11,672,506
                                                                            --------------     ------------     -------------

Cash and cash equivalents, end of year                                       $  43,000,676     $ 11,672,506     $     336,510
                                                                            ==============     ============     =============

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

      Interest                                                               $  1,661,645      $   903,729      $   2,966,659
                                                                            =============      ===========      =============

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

Supplemental schedule of noncash investing and financing activities:
   Acquisition of businesses:
      Fair value of assets acquired                                          $  4,269,535      $ 1,098,718      $  26,426,234
      Cost in excess of net assets of businesses acquired                         746,910          244,000         16,256,879
      Liabilities assumed or incurred                                          (3,248,985)         (56,250)       (30,001,215)
      Issuance of Common Stock                                                                    (539,996)          (274,991)
                                                                            -------------      -----------      -------------
             Cash paid                                                          1,767,460      $   746,472      $  12,406,907
                                                                            =============      ===========      =============
</TABLE>

            In connection  with the IPO in December 1995, the Company  converted
$2.0  million of Series C and Series D  Preferred  Stock into Common  Stock.  In
addition,  the Company  converted  $406,707 of subordinated debt and $499,500 of
Series B Preferred  Stock into  shares of Common  Stock and  additional  paid-in
capital, respectively.

            In 1996 and 1997 the Company  purchased  equipment and incurred debt
in the amount of $89,570 and $11,604, respectively.

            In 1998,  the  Company  wrote-off  a  restrictive  covenant  and the
related liability in the amount of $19,231 due to the employee resigning.

            In  1998,  the  Company  repaid  long-term  debt  in the  amount  of
$20,782,995  with  the  proceeds  of  the  issuance  of  subordinated  debt.  In
connection  therewith,  detachable  warrants  were  issued  and  original  issue
discount in the amount of $300,000 was recorded.


See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1     -   Description  of Business  and Summary of  Significant  Accounting
               Policies


           (a)     Basis of Presentation

           The consolidated  financial  statements include the accounts of NuCo2
Inc. and its wholly-owned  subsidiary,  NuCo2 Acquisition Corp. which was formed
during  the year ended June 30,  1998 to  acquire  the stock of Koch  Compressed
Gases,  Inc. (see Note 3). 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 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 charged to cost of products sold. 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-8
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 -   Description  of  Business  and  Summary  of  Significant   Accounting
           Policies - (Continued)

               (f)      Other Assets

               Goodwill, Net

               Goodwill,  net,  represents  costs in  excess  of net  assets  of
businesses  acquired and is being amortized on a straight-line basis over twenty
years.  Accumulated amortization of goodwill was $390,603 and $1,370,779 at June
30,  1997  and  1998,  respectively.   The  Company  periodically  assesses  the
recoverability  of the cost of its goodwill,  as well as of its other intangible
assets,  based on a review of projected  undiscounted  cash flows of the related
operating  assets.  These cash flows are prepared and reviewed by  management in
connection with the Company's annual long range planning process.

               Deferred Charges, Net

               Deferred  charges,  net,  consist of the  unamortized  portion of
financing  costs  which  are  being  amortized  over  the  term  of the  related
indebtedness,   ranging  from  thirty-six  to  eighty-four  months.  Accumulated
amortization of deferred  charges was $368,238 and $417,646 at June 30, 1997 and
1998,  respectively.  Included in the consolidated  statements of operations for
the years ended June 30, 1996 and 1998 are extraordinary  write-offs of deferred
financing fees in connection with the reduction of certain indebtedness.

               Customer Lists, Net

               Customer  lists,  net,  consist  of the  unamortized  portion  of
customer lists acquired in connection  with asset  acquisitions  which are being
amortized  over five years,  the average  life of customer  leases.  Accumulated
amortization  of customer lists was $565,090 and $1,380,411 at June 30, 1997 and
1998, respectively. The Company's policy is to value customer lists based on the
estimated value of future cash flows over the life of the customer lease.

               Restrictive Covenants, Net

               Restrictive  covenants,  net, consist of covenants not to compete
arising in connection  with asset  acquisitions  which are being  amortized over
their  contractual  lives ranging from thirty to one hundred and twenty  months.
Accumulated  amortization of restrictive  covenants was $173,167 and $353,993 at
June  30,  1997  and  1998,  respectively.  The  Company's  policy  is to  value
restrictive  covenants  based  on  the  negotiated   contractual  value  of  the
restrictive covenant or a third party appraisal.

               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 years.  Accumulated  amortization of
deferred  lease  acquisition  costs was $709,830 and $1,197,756 at June 30, 1997
and 1998, respectively.  Upon early service termination, the unamortized portion
of  deferred  lease  acquisition  costs are  charged  to  selling,  general  and
administrative expenses.

               (g) 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.


                                      F-9
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 -   Description  of  Business  and  Summary  of  Significant   Accounting
           Policies - (Continued)

               (h) 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.

               (i)      Net Income or Loss Per Common Share

               Net income or loss per common share is  presented  in  accordance
with SFAS No. 128, "Earnings per Share."   Basic  earnings  per common share are
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.

               In connection with the Initial Public Offering (IPO), 155,164 and
300,266  shares of Common  Stock were issued upon  conversion  of the  Company's
Series C convertible  preferred stock and Series D convertible  preferred stock,
respectively.  An additional 805,209 shares of Common Stock were issued upon the
conversion  of the  convertible  portion  of the Senior  Subordinated  Notes and
118,167 shares of Common Stock upon exercise of warrants and options.  The above
shares have been treated as  outstanding  since July 1, 1995.  Stock options and
warrants to purchase an additional 152,851 shares of Common Stock granted during
1995 have  also been  treated  as  outstanding  since  July 1,  1995,  using the
treasury stock method.

               (j)      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. Actual results could differ from those estimates.

               (k) 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.

NOTE 2     -   Public Offerings

               (a) Initial Public Offering (IPO)

               In  connection  with  the  Company's   Initial  Public  Offering,
2,022,576  shares of Common  Stock  were sold in  December  1995.  In  addition,
representatives of the Underwriters  acquired warrants to purchase up to 110,000
shares of Common  Stock.  Such  warrants  are  exercisable  for a period of five
years,  at an exercise price of $10.80.  In July 1996, the Company  redeemed and
canceled a warrant to purchase 77,000 shares of its Common Stock for $1,143,450.
This amount represented the approximate market value of such warrant on the date
of redemption.


                                      F-10
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 -   Public Offerings - (Continued)

               The gross  proceeds  the  Company  received  from the sale of the
2,022,576  shares  of  Common  Stock  were  $18,203,184.   After  deducting  the
underwriters'  discounts and  commissions and other offering  expenses,  the net
proceeds were $16,151,364.

               Prior to the IPO, the Company had outstanding  approximately $2.9
million in principal amount of Senior Subordinated Notes, a portion of which was
convertible at the option of the holders thereof into Common Stock.  The holders
of the Senior  Subordinated  Notes converted,  effective upon the closing of the
IPO,  approximately  $407,000 of the principal amount of the Senior Subordinated
Notes into an aggregate of 805,209  shares of Common Stock.  The Company  repaid
the remaining  principal of the Senior  Subordinated  Notes and accrued interest
thereon  with a portion of the net  proceeds of the IPO.  The  Company  also had
outstanding  485  shares of Series A  Preferred  Stock,  500  shares of Series B
Preferred  Stock,  500 shares of Series C  Preferred  Stock and 1,500  shares of
Series D Preferred  Stock.  Effective  upon  closing of the IPO, (i) the Company
redeemed  with a portion of the net  proceeds of the IPO all of the  outstanding
Series A  Preferred  Stock and  Series B  Preferred  Stock for an  aggregate  of
$485,500  plus  approximately   $243,000  of  dividends  and  (ii)  all  of  the
outstanding Series C Preferred Stock and Series D Preferred Stock  automatically
converted into an aggregate of 455,430 shares of Common Stock.  The Company used
a portion  of the net  proceeds  of the IPO to pay  dividends  of  approximately
118,000  on the  Series C  Preferred  Stock and  Series D  Preferred  Stock.  In
addition,  the holders of warrants to purchase an aggregate of 118,167 shares of
Common Stock exercised such warrants effective upon the closing of the IPO.

               Prior to the IPO,  the board of directors  approved,  among other
things,  an increase in the number of shares  authorized  of Common Stock of the
Company to  20,000,000  shares,  reduced the par value to $ .001 per share,  and
increased  the  number of  authorized  shares of  preferred  stock to  5,000,000
shares.

               The Company's  board of directors  also  declared an  approximate
3,866-for-1 stock split of the Company's Common Stock. This stock split resulted
in the  issuance  of an  additional  1,932,453  shares  of  Common  Stock of the
Company.  All share, per share and conversion  amounts relating to Common Stock,
stock options and warrants,  included in the accompanying consolidated financial
statements have been restated to reflect this stock split.

               In December 1996,  the  shareholders  voted and approved  another
increase in the number of shares  authorized  of the  Company's  Common Stock to
30,000,000 shares.

               (b) Secondary Public Offering

               In  connection  with the  Company's  Secondary  Public  Offering,
1,425,165  shares of  Common  Stock  were sold in June  1996.  In  addition,  an
over-allotment  option  for an  additional  336,000  shares of Common  Stock was
exercised.

               The net  proceeds  the  Company  received  from  the  sale of the
1,761,165 shares of Common Stock,  after deducting the  underwriters'  discounts
and commissions and other offering expenses was $44,584,145.  The Company repaid
$1,963,486  of  indebtedness  outstanding  under its  credit  facility  with the
proceeds.  The Company utilized the remaining  proceeds to fund internal growth,
for the acquisition of additional  bulk CO2 systems  leasing  businesses and for
general corporate purposes.

NOTE 3 -   Acquisitions

               Effective May 15 1996, the Company acquired  substantially all of
the  assets  associated  with the  bulk CO2  operating  segment  of the  BevServ
Division of The  Coca-Cola  Bottling  Company of New York,  Inc.  (BevServ)  for
$2,914,374.  The Company financed the acquisition  through available  borrowings
under its NationsBank credit facility (see Note 6).

               In August 1996,  the Company  acquired the bulk CO2 operations of
two  affiliated  companies  operating  in  Ohio,  Kentucky  and  Indiana  for an
aggregate purchase of approximately $1,350,000.  The Company paid cash for these
transactions.



                                      F-11
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3 -       Acquisitions - (Continued)

               In March  1997,  the  Company  acquired  certain  assets of three
unrelated  companies  operating  in Texas  for an  aggregate  purchase  price of
approximately $2,875,000. The Company paid cash for these transactions.

               In April  1997,  the  Company  acquired  certain  assets of Texas
Oxygen,  Inc./Texas CO2, Inc. for an aggregate  purchase price of  approximately
$3,925,000. The Company paid cash for these transactions.

               In May  1997,  the  Company  acquired  certain  assets  from  two
companies,  City Carbonic Company,  Inc. and the BOC Group,  Inc.  City Carbonic
Company, Inc. operating in Oklahoma, Kansas, Texas and Arkansas, sold assets for
an aggregate  purchase price of approximately  $3,290,000.  The BOC Group,  Inc.
beverage bulk CO2 operations  were located in  Massachusetts,  Pennsylvania  and
Tennessee and were  acquired for an aggregate  purchase  price of  approximately
$5,233,000. The Company paid cash for these transactions.

               In June 1997, the Company  acquired  certain assets of a business
operating  in Georgia  for a purchase  price of  $1,350,000.  The  Company  paid
approximately  $750,000 cash, incurred  liabilities of $60,000 and issued 33,962
shares of Common Stock at market, for a value of $540,000.

               Effective July 15, 1997, the Company purchased  substantially all
of the assets of a bulk CO2 company  operating in Colorado for a purchase  price
of  $675,000.  The  purchase  price was  funded  through a  borrowing  under the
Company's NationsBank credit facility (see Note 6).

               Effective  July 31, 1997,  the Company  purchased  certain assets
from CC  Acquisition  Corp.  (Carbo  Co.)  for an  aggregate  purchase  price of
$11,000,000.  Carbo Co. had  operations  in Nebraska,  Kansas,  Oklahoma,  Iowa,
Missouri,  Arkansas and South Dakota.  The Company funded  $5,000,000  through a
borrowing  under its $30 million  NationsBank  credit  facility (see Note 6) and
paid cash for the balance.

               In September 1997, the Company purchased certain assets of a bulk
CO2 company  with  operations  in Arizona  for an  aggregate  purchase  price of
$1,084,250.  The  Company  funded  $1,075,000  through  a  borrowing  under  its
NationsBank credit facility (see Note 6) and paid cash for the balance.

               Effective October 1, 1997, a newly formed wholly-owned subsidiary
of the  Company  purchased  all of the issued and  outstanding  shares of Common
Stock of Koch Compressed Gases, Inc. ("Koch") for an aggregate purchase price of
approximately $5,000,000.  Koch operated a bulk CO2 business as well as provided
carbon  dioxide  and  other  gases in  high-pressure  cylinders  throughout  the
tri-state New York  metropolitan  area.  The purchase price was funded through a
borrowing under the Company's NationsBank credit facility (see Note 6).

               In November 1997, the Company purchased  substantially all of the
assets  of a bulk  CO2  company  operating  in  Texas  for a  purchase  price of
$949,240.  The Company paid  $674,249  cash and issued  18,835  shares of Common
Stock at market, for a value of $274,991.

               Effective  December 2, 1997, the Company purchased certain assets
from four related carbonic gas  distributors,  Miller Carbonic Systems Co. Inc.,
Miller  Carbonic,  Inc.,  Carbonic  National  Systems,  Inc.,  and  Carbonic Gas
Service, Inc., operating primarily in Illinois,  Indiana, Wisconsin and Michigan
for an aggregate  purchase price of $11,150,000.  The Company paid approximately
$4,650,000  cash and funded  $6,500,000  through a borrowing under the Company's
SunTrust Facility (see Note 6).

               Effective  December 2, 1997, the Company purchased certain assets
of a bulk  CO2  company  with  operations  in  Kansas  for a  purchase  price of
approximately  $990,000. The purchase price was funded through a borrowing under
the Company's SunTrust Facility (see Note 6).


                                      F-12
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 -       Acquisitions - (Continued)

               Effective January 23, 1998, the Company  purchased  substantially
all of the assets of a bulk CO2 company  operating in California  for a purchase
price of $4,500,000. The purchase price was funded through a borrowing under the
Company's SunTrust Facility (see Note 6).

               Effective  March 2, 1998,  the Company  purchased  certain assets
from Florida Carbonic Distributor, Inc., a carbonic gas distributor operating in
Florida  for a  purchase  price of  $6,300,000.  The  purchase  price was funded
through a borrowing under the Company's SunTrust Facility (see Note 6).

               In March 1998,  the Company  purchased  certain assets from three
unrelated  carbonic gas distributors with operations in Texas, Maine and Alabama
for an aggregate  purchase  price of  $406,000.  The Company paid cash for these
transactions.

               These  acquisitions  were accounted for by the purchase method of
accounting  and,  accordingly,  the  purchase  prices  and  direct  costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired  companies based upon their estimated fair market values at the date of
acquisition. This resulted in goodwill of approximately $775,000, $4,732,000 and
$16,257,000 in the three years ended June 30, 1998, respectively, which is being
amortized on a straight-line  basis over twenty years. The results of operations
of the acquired companies are included in the Company's  consolidated  financial
statements since the effective date of the acquisitions.

               The  following  summarized,   unaudited,  pro  forma  results  of
operations  assume  that the  acquisitions  described  above  occurred as of the
beginning of the fiscal year preceding the date of acquisition:

<TABLE>
<CAPTION>

                                                             YEAR ENDED JUNE 30,
                                                             -------------------
                                                   1996                1997                  1998
                                                   ----                ----                  ----

<S>                                           <C>                  <C>                   <C>        
Net sales                                     $ 18,923,657         $33,104,161           $39,078,542
Income (loss) before extraordinary item           (681,264)         (1,751,557)           (6,133,862)
Net (loss)                                      (1,540,786)         (1,751,557)           (6,320,807)
Net (loss) per common share                          (0.34)              (0.24)                (0.88)
</TABLE>

NOTE 4 - Property and Equipment, Net

         Property and equipment, net consists of the following:

<TABLE>
<CAPTION>

                                                                         JUNE 30,
                                                                         --------
                                                                   1997              1998
                                                                   ----              ----
<S>                                                            <C>               <C>         
           Leased equipment                                    $42,207,142       $ 77,378,765
           Equipment and cylinders                               6,114,340         12,126,813
           Systems held for installation                         2,028,937          3,925,539
           Vehicles                                                209,190            622,092
           Computer equipment                                      798,421          1,516,153
           Office furniture and fixtures                           766,901            997,142
           Leasehold improvements                                1,005,173          1,039,442
           Construction in progress                                    -              221,999
                                                                ----------       ------------
                                                                53,130,104         97,827,945
           Less accumulated depreciation and amortization        6,327,054         12,392,012
                                                                ----------       ------------

                                                               $46,803,050       $ 85,435,933
                                                                ==========       ============
</TABLE>

               Capitalized  component  parts and direct  costs  associated  with
installation  of equipment  leased to others  included in leased  equipment  was
$6,335,593 and $12,429,913 at June 30, 1997 and 1998, respectively.  Accumulated
depreciation  and  amortization of these costs were $1,934,704 and $3,525,574 at
June 30, 1997 and 1998, respectively.

               Depreciation  and  amortization  of property  and  equipment  was
$1,609,063,  $3,130,022 and  $6,045,652 for the years ended June 30, 1996,  1997
and 1998, respectively.



                                      F-13
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 -   Leases

               The Company leases equipment to its customers  generally pursuant
to  five-year  noncancelable  operating  leases  which  expire on varying  dates
through June 2004. At June 30, 1998,  future minimum  rentals due from customers
which includes,  where  applicable,  a continuous supply of CO2 (see Note 1(g)),
are as follows:

                  YEAR ENDING JUNE 30,

                  1999                          $  18,809,633
                  2000                             17,439,211
                  2001                             14,839,213
                  2002                             10,853,434
                  2003                              4,324,464
                  Thereafter                            1,194
                                                  -----------
                                                $  66,267,149
                                                  ===========

NOTE 6 -   Long-Term Debt

               Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                                                         JUNE 30,
                                                                                                         --------
                                                                                                     1997              1998
                                                                                                     ----              ----
<S>                                                                                               <C>              <C>
Note payable issued in connection with a 1995 asset acquisition of $479,000, principal
    and interest (at 7%) payments of  $9,485 payable monthly,  maturing January 2000
    and  collateralized by the purchased assets with a net book value of $440,638 at June
    30, 1998.                                                                                    $   268,263       $   170,114
Note payable to bank of $6,000,000, interest only for 12 months and principal  payments
    of $100,000 plus interest at a fixed rate of 8.51% payable monthly for twenty-three
    months commencing January 1997 (repaid October 1997).                                          5,400,000                 -
Note  payable to bank of $10,000,000,  interest  only for 12 months at two hundred
    seventy-five basis points above the 30-day London  InterBank  Offering Rate
    ("LIBOR"),  with the principal  amount  outstanding at the end of 12 months
    (December 1996) and 24 months (December 1997) converted to term loans
    calculated on a 60 month amortization schedule. The first converted, acquisition
    facility, term loan of $3,248,010 is due in monthly  installments of approximately
    $54,144 (repaid October 1997).                                                                 2,977,343                 -
Note payable to bank of  $13,000,000,  interest  only for 12 months at two hundred
    seventy-five basis points above LIBOR with the principal amount outstanding at the
    end of 12 months  (December  1996) and 24 months  (December  1997) converted to
    term loans calculated on a 60 month amortization schedule. The first converted,
    tank facility, term loan of $908,455 is due in monthly installments of
    approximately $15,141 (repaid October 1997).                                                     832,750                 -
Note payable to bank of $29,000,000 under a $50 million facility, interest only through
    October 2000.  Drawings at June 30, 1998 are at 6 month LIBOR rates plus 2.25%.
    (7.875% to 8.00%) (a)                                                                                  -        29,000,000
Note payable assumed in connection with the acquisition of the stock of Koch of
    $388,082, principal and interest (9%) payments of $4,413 through April 2003 and
    $5,405 from May 2003 through April 2008.                                                               -           375,741
Various notes payable                                                                                 67,985            54,010
                                                                                                   ---------        ----------
                                                                                                   9,546,341        29,599,865
Less current maturities of long-term debt                                                          2,180,601           139,251
                                                                                                   ---------        -----------

       Long-term debt, excluding current maturities                                               $7,365,740       $29,460,614
                                                                                                  ==========       ============
</TABLE>


                                      F-14
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 -   Long-Term Debt - (Continued)

               (a)  The  $50.0  million  syndicated  bank  facility   ("SunTrust
Facility")  replaced the Company's  prior facility with  NationsBank of Florida,
N.A. ("NationsBank"). Pursuant to the SunTrust Facility, upon the achievement of
$15.0 million  annualized one quarter EBITDA  pro-formaed for acquisitions,  the
Company shall  automatically  request that the SunTrust Facility be increased by
an additional  $50.0 million to a total of $100.0 million.  As of June 30, 1998,
$21.0 million is currently  available under the initial facility.  Additionally,
the SunTrust  Facility  contains interest rates and an unused facility fee based
on a pricing  grid  calculated  quarterly  on senior  funded debt to  annualized
EBITDA.  The  applicable  LIBOR margin  pursuant to the pricing grid ranges from
1.25% to 2.75%, the applicable  unused facility fee pursuant to the pricing grid
ranges from 0.1875% to 0.50% and the applicable base rate margin pursuant to the
pricing grid ranges from 0.00% to 0.50%.

               The Company is  entitled  to select the Base Rate or LIBOR,  plus
applicable margin, for principal drawings under the SunTrust Facility. Base Rate
is defined as the higher of the prime  lending  rate of  SunTrust or the Federal
Funds rate plus  one-half  of one  percent  (1/2%) per annum.  Interest  only is
payable periodically until the expiration of the SunTrust Facility at which time
all outstanding  principal and interest is due. The SunTrust Facility expires on
October 31,  2000;  however,  it contains a two year renewal  option  subject to
approval.  Additionally, it is collateralized by substantially all of the assets
of the Company.  The Company is precluded from declaring or paying any dividends
and is required to meet certain  affirmative and negative  covenants  including,
but not limited to financial covenants.

               On June 9, 1998,  the Company  entered into an interest rate swap
transaction  (the "Swap") with SunTrust  Bank,  Atlanta,  in the amount of $10.0
million (the "Notional Amount").  The effective date of the Swap is September 2,
1998 and terminates on September 5, 2000. Pursuant to the Swap, the Company pays
a fixed interest rate of 6% per annum and receives a LIBOR-based floating rate.

               The aggregate  maturities of long-term  debt for each of the five
years subsequent to June 30, 1998 are as follows:

                   YEAR ENDING JUNE 30,
                               1999                            $   139, 251
                               2000                                  96,977
                               2001                              29,033,495
                               2002                                  36,638
                               2003                                  40,073
                               Thereafter                           253,431
                                                                -----------
                                                               $ 29,599,865

Extraordinary item - loss on extinguishment of debt

               For the years ended June 30, 1996 and 1998, the Company  incurred
an  extraordinary  charge  of  $859,522  and  $186,945,  respectively,  for  the
write-off of deferred  financing  costs and  prepayment  penalties in connection
with the early repayment of debt.

NOTE 7 -    SUBORDINATED DEBT

               Represents   unsecured  Senior   Subordinated   Promissory  Notes
("Notes") with interest only at 12% per annum payable  semi-annually on April 30
and October 31, due October 31, 2004. The Notes were sold with detachable  seven
year warrants to purchase an aggregate of 655,738 shares of the Company's Common
Stock at an exercise price of $16.40 per share (see Note 16). The face amount of
the Notes is  $30,000,000.  The  effective  rate of the notes is 12.1% per annum
after giving effect to the  amortization  of the original  issue  discount.  The
Company is required to meet certain affirmative and negative covenants including
financial covenants. Additionally,  NationsBanc Montgomery Securities, Inc., the
placement agent, received a warrant to purchase an aggregate of 30,000 shares of
the  Company's  Common  Stock at an  exercise  price of $14.64  per share  which
expires on October 31, 2004.


                                      F-15
<PAGE>
                                   NuCo2, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8  -   Shareholders' Equity

                See  Note  2 for  discussion  of  conversion  and  repayment  of
preferred stock and dividends declared and paid.

                (a)      Stock Option Plans

                The board of  directors  adopted the 1995 Option Plan (the "1995
Plan").  Under the 1995 Plan, the Company has reserved  850,000 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, or
both. 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 10 years.  Options
granted to date vest in three or four installments  commencing one year from the
date of grant.  As of June 30,  1997 and 1998,  options  for  41,437  shares and
105,900 shares are  exercisable,  respectively.  As of June 30, 1996, no options
were exercisable.  The weighted-average fair value of options granted during the
years June 30, 1996, 1997 and 1998 were $5.67, $2.93 and $2.81, respectively. As
of June 30, 1998,  the  weighted-average  remaining life of the options was 7.04
years.

                The following table summarizes the transactions  pursuant to the
1995 Plan.

<TABLE>
<CAPTION>

                                                                                          WEIGHTED-AVERAGE
                                                 SHARES          EXERCISE PRICE            EXERCISE PRICE
                                                 ------          --------------           ----------------
<S>                                             <C>                 <C>                       <C>   
        Outstanding at June 30, 1995                -0-                   -0-                    -0-
        Granted                                 130,991             $9-$17.50                 $13.87
        Expired or canceled                         340                    $9                     $9
        Exercised                                   -0-                   -0-                    -0-
                                                -------             ---------                 -------
        Outstanding at June 30, 1996            130,651             $9-$17.50                 $13.88
        Granted                                 222,500                $11.25                 $11.25
        Expired or canceled                       6,225              $9-11.25                  $9.31
        Exercised                                   322                    $9                     $9
                                                -------             ---------                 ------
        Outstanding at June 30, 1997            346,604             $9-$17.50                 $12.28
        Granted                                 343,000         $10.25-$11.28                 $10.43
        Expired or canceled                      77,067             $9-$17.50                 $17.29
        Exercised                                   111                    $9                     $9
                                                -------             ---------                 ------
        Outstanding at June 30, 1998            612,426             $9-$11.28                 $10.61
                                                =======             =========                 ======
</TABLE>

                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.
As of June 30,  1998,  options to  purchase  a total of 16,000  shares of Common
Stock at an exercise price of $9 per share and a total of 6,000 shares of Common
Stock at an  exercise  price of  $12.50  per  share  had  been  issued  and were
outstanding.  As of June 30, 1997 and 1998,  options for 8,000 shares and 14,000
shares  were  currently  exercisable.  As of June  30,  1996,  no  options  were
exercisable.  No options have been  exercised  under the  Directors'  Plan.  The
weighted-average  fair value of options  granted during the years ended June 30,
1996 and 1998 were $3.07 and $4.11, respectively. No options were granted during
the  year  ended  June  30,  1997.  As of June 30,  1998,  the  weighted-average
remaining life of the options was 8.05 years.

                (b)      Warrants

                In August  1994,  the  Company  granted a five year  warrant  to
purchase  73,042 shares of Common Stock at $3.22 per share to a  shareholder  of
the Company in  connection  with the  guarantee  of certain  indebtedness.  This
warrant was exercised in 1996.  Proceeds to the Company for the exercise of this
warrant aggregated $235,195.

                In May 1997, the Company granted a warrant to purchase 1,000,000
shares of Common Stock to BOC pursuant to the supply  agreement  (see Note 14c).
The warrant is exercisable  from May 1, 1999 to May 1, 2002 at an exercise price
of $17 per share and from May 1, 2002 until April 30, 2007 at an exercise  price
of $20 per share.  The option may be exercised  earlier for a material breach in
the supply contract or a change in control of the Company.  As of June 30, 1998,
the warrant was not exercisable.

                                      F-16
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 -        Shareholders' Equity - (Continued)

                (c)      Non-Qualified Stock Options

                During  1995,  the Company  granted  options to purchase  67,934
shares of Common  Stock at $4.40 per share to certain  officers  and  employees.
These  options  vest one year  after  date of grant and are  exercisable  for 10
years. In June and July 1996, these options were exercised. In 1992, the Company
also granted  options to purchase  45,125 shares of Common Stock to a company in
connection with the issuance of the senior subordinated convertible notes. These
options were also exercised in 1996. Proceeds to the Company for the exercise of
non qualified stock options in 1996 and 1997  aggregated  $164,455 and $149,455,
respectively.

                    Statement  of  Financial   Accounting   Standards  No.  123,
Accounting for  Stock-Based  Compensation,  defines a fair value based method of
accounting for stock options.  It is effective for fiscal years  beginning after
December 15, 1995.  The  Statement  allows an entity to continue to measure cost
using the  accounting  method  prescribed by APB Opinion No. 25,  Accounting for
Stock Issued to Employees,  and to make pro forma  disclosures of net income and
earnings  per share as if the fair value  based  method of  accounting  had been
applied.  The fair value of each option  grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1996, 1997 and 1998;  expected  volatility
of 40%, risk-free  interest rate of 5.4% to 6.5%,  expected dividend yield of 0%
and expected lives of one to five years.  The Company adopted SFAS 123 in fiscal
year ended June 30, 1997 and presents the following pro forma disclosures rather
than change its present method of accounting for employee stock options:

<TABLE>
<CAPTION>

                                                                          YEAR ENDED JUNE 30,
                                                                          -------------------
                                                                        1996             1997                1998
                                                                        ----             ----                ----

<S>                                                                  <C>             <C>                 <C>           
                Net income (loss) available to common shareholders   $ (993,617)     $   27,439          $  (5,974,752)

                Net income (loss) per common share                   $    (0.22)     $     0.01          $       (0.83)
                                                                     ==========       =========          ==============

                Weighted average number of common and
                    common equivalent shares outstanding              4,499,989       7,302,662              7,210,350
                                                                     ==========       =========          ==============
</TABLE>

               The pro forma adjustment for stock based compensation costs under
SFAS 123 for the years  ending  1996,  1997 and 1998 is  approximately  $70,000,
$500,000 and $340,000, respectively.  No stock based compensation was recognized
in the financial statements pursuant to APB Opinion No. 25.

NOTE 9 -    Earnings per Share

                In February 1997, the FASB issued  Statement 128,  "Earnings Per
Share".  Statement 128 supersedes  APB Opinion No. 15,  "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share  ("EPS") for  entities  with  publicly  held Common Stock or potential
Common Stock. It replaces the  presentation of primary EPS with the presentation
of basic EPS and replaces  fully  diluted EPS with diluted EPS. It also requires
dual  presentation  of basic and  diluted  EPS on the face of the  statement  of
operations  for all entities  with  complex  capital  structures  and requires a
reconciliation  of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS  computation.  Statement 128 is
effective for financial statements for periods ending after December 15, 1997.

                Earnings  per share of Common Stock for the years ended June 30,
1996 and 1997 have been restated to conform to the guidelines of Statement 128.


                                      F-17
<PAGE>
                                   NuCo2 INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 -        Earnings Per Share - (Continued)

                Incremental  shares for stock  options and warrants  pursuant to
the treasury  stock method for the year ended June 30, 1996 were 179,197.  These
shares were not included in diluted EPS because after giving effect to preferred
stock  dividends their  inclusion  would have been  antidilutive.  Additionally,
options to purchase  75,000 shares at $17.50 were  outstanding  for a portion of
1996 but were not  included  in the  computation  of  diluted  EPS  because  the
exercise price was greater than the average market price of common shares.

                Following is a  reconciliation  of the numerator and denominator
of the basic and  diluted  per share  computations  for income  from  continuing
operations for the year ended June 30, 1997.

<TABLE>
<CAPTION>

                                                                 Weighted          Per-Share
                                               Net Income      Average Shares       Amount

Basic EPS

<S>                                            <C>             <C>             <C>         
Income available to common shareholders        $ 527,439       7,164,924       $       0.07
Effect of dilutive options and warrants            -             153,002                 -
                                                --------      ----------           --------

Diluted EPS                                    $ 527,439       7,317,926       $       0.07
                                                ========      ==========           ========
</TABLE>

                Incremental  shares for stock  options and  warrants  calculated
pursuant  to the  treasury  stock  method for the year ended June 30,  1998 were
136,972.  These  shares were not included in diluted EPS because they would have
been antidilutive. Additionally, options and warrants to purchase 75,000 shares,
1,000,000  shares,  655,738  shares,  30,000 shares and 6,000 shares for $17.50,
$17.00, $16.40, $14.64 and $12.50, respectively,  were outstanding during all or
a  portion  of the year  ended  June 30,  1998  but  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.

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:

<TABLE>
<CAPTION>

                                                                                           JUNE 30,
                                                                                           --------
                                                                                  1997                  1998
                                                                                  ----                  ----
                 Deferred tax assets:
<S>                                                                         <C>                     <C>        
                        Allowance for doubtful accounts                     $      42,500           $   111,000
                        Amortization expense                                      137,800               269,900
                        Other                                                       3,700                 4,200
                        Net operating loss carryforwards                        4,696,200             9,862,700
                                                                              -----------            ----------
                              Total gross deferred tax assets                   4,880,200            10,247,800
                 Less valuation allowance                                        (636,400)           (2,766,200)
                                                                              -----------            ----------
                        Net deferred tax assets                                 4,243,800             7,481,600
                                                                              -----------            ----------
                 Deferred tax liabilities:
                        Depreciation expense                                   (4,243,800)           (7,481,600)
                                                                              -----------            ----------
                              Total gross deferred tax liabilities             (4,243,800)           (7,481,600)
                                                                              -----------            ----------
                              Net deferred taxes                            $    -                  $  -
                                                                              ===========            ==========
</TABLE>

            At June 30, 1998, the Company had net operating  loss  carryforwards
for  Federal  income  tax  purposes  of  approximately  $26,230,000,  which  are
available to offset future Federal  taxable  income,  if any, in varying amounts
through June 2013. The net change in the total valuation allowance for the years
ended June 30,  1997 and 1998 was a decrease  of  $206,100  and an  increase  of
$2,129,800, respectively.



                                      F-18
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 -   Related Party Transactions

                The Company  entered  into leases with the chairman of the board
and chief executive officer for certain  warehouse/depots  and office facilities
with annual rentals of approximately:

                 YEAR ENDING JUNE 30,
                          1999                           $       274,000
                          2000                                   274,000
                          2001                                   233,000
                          2002                                   109,000
                          2003                                    60,000
                                                            ------------
                                                         $       950,000

                Rental expense was $87,081,  $166,549 and $246,551 in 1996, 1997
and 1998, respectively, under these leases.

NOTE 12 -   Lease Commitments

                The Company leases office equipment,  trucks and warehouse/depot
and office  facilities under operating leases  (including  related party leases,
see Note 11) that expire at various dates through  December 2004.  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,
                         1999                          $         3,543,000
                         2000                                    3,101,000
                         2001                                    2,767,000
                         2002                                    2,392,000
                         2003                                    1,503,000
                         Thereafter                                694,000
                                                          ----------------
                                                       $        14,000,000

                Total rental expense under  noncancelable  operating  leases was
approximately  $763,900,  $1,413,000  and  $3,284,000  in 1996,  1997 and  1998,
respectively.

NOTE 13 -   Concentration of Credit and Business Risks

                The Company's business activity is with customers located within
the United States.  As of June 30, 1996,  1997 and 1998, the Company's  sales to
customers in the food and beverage industry were approximately 97%, 98% and 99%,
respectively.

               There were no  customers  that  accounted  for greater than 5% of
total  sales  for the  three  years  ended  June 30,  1998,  nor were  there any
customers  that  accounted for greater than 5% of total  accounts  receivable at
June 30, 1997 or 1998.

               The Company  purchases  new bulk CO2  systems  from the two major
manufacturers  of  such  systems.  The  inability  of both or  either  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 affect operating results adversely.

NOTE 14 -   Commitments and Contingencies

                (a)      Employment Agreement

                The Company has an employment  agreement  with an officer of the
Company that currently provides minimum annual compensation of $150,000 per year
through October 1999. The contract  provides for additional  compensation in the
form of bonuses to be  determined  by the board of directors  and  incentive and
non-qualified  stock options  pursuant to the Company's 1995 Plan to purchase up
to 100,000 shares of the Company's  Common Stock. The agreement also calls for a
covenant against  competition which extends one year beyond  termination for any
reason.


                                      F-19
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 14 -   Commitments and Contingencies - (Continued)

                (b)      Consulting Agreement

                Effective  April 13, 1998, the Company entered into a three year
consulting  agreement with the former president of the Company.  Pursuant to the
terms of the agreement, the former president shall receive $50,000 per annum and
shall  not  compete  with  the  Company  for a period  of two  years  after  the
expiration of the contract. Simultaneously, options to purchase 75,000 shares of
Common Stock were canceled.

                (c)      Supply Agreement

                In May 1997,  the Company  entered  into an  exclusive  ten-year
carbon dioxide supply agreement with The BOC Group, Inc. ("BOC").  The agreement
ensures readily  available high quality CO2 as well as relatively  stable liquid
carbon dioxide prices. Pursuant to the agreement,  the Company must purchase 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.  However,  such increases shall not exceed 3% per year in the first five
contract years.

                (d)      Other

               Carbonic  Designs,  Inc.  ("CDI") had asserted claims against the
Company and three other  defendants  for violation of the Texas Free  Enterprise
and AntiTrust Act of 1983, business  disparagement,  tortious  interference with
contract and prospective  business relations.  CDI sought damages in unspecified
amounts.  The Company  settled this lawsuit in December  1997 for an  immaterial
amount.

                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 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

                The  carrying  amount  approximates  fair value due to the short
maturity of these instruments.

                (b)      Long-term debt

               The fair value of the Company's long-term 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:
<TABLE>
<CAPTION>

                                                                          June 30,
                                                                1997                          1998
                                                               -------                        ----

                                                           Carrying Amount                 Carrying Amount
                                                            and Fair Value                  and Fair Value
                                                            --------------                  --------------

<S>                                                         <C>                              <C>        
         Cash and cash equivalents                          $  11,672,506                    $   336,510
         Long-term debt, including current maturities           9,546,341                     29,599,865
         Subordinated debt                                             -                      29,728,571
</TABLE>

As of June 30, 1998,  the fair value of the  Company's  interest  rate swap (see
Note 6) was not material.


                                      F-20
<PAGE>
                                   NuCo2 Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 -   Subsequent Events

               In July and August 1998, the 12% Senior  Subordinated  Promissory
Note Agreement and the SunTrust Facility,  respectively,  were amended to adjust
certain financial  covenants as of June 30, 1998 and prospectively.  In exchange
for the amendment to the 12% Senior Subordinated Promissory Note Agreement,  the
exercise  price for 612,023  warrants  was reduced from $16.40 per stock unit to
$12.40 per stock unit.



                                      F-21

<PAGE>
                                   NuCo2 Inc.
                                  Schedule II
                       Valuation and Qualifying Accounts

<TABLE>
<CAPTION>

                                        Column B              Column C - Additions                       Column E
                                        --------              --------------------                      ----------
                                        Balance at       Charged to     Charged to      Column D        Balance at
                                        beginning         costs and       other         --------          end of
                                        of period         expenses       accounts      Deductions         period
                                        ---------         --------       --------      ----------         ------
<S>                                     <C>              <C>            <C>             <C>             <C>       
Year ended June 30, 1996
  Allowance for doubtful accounts       $172,468         $122,129       $     -         $  83,968       $  210,629
Year ended June 30, 1997
  Allowance for doubtful accounts       $210,629         $143,210       $     -         $ 240,785       $  113,054
Year ended June 30, 1996
  Allowance for doubtful accounts       $113,054         $450,871       $43,276(1)      $ 211,710       $  395,491
</TABLE>

(1)  Initial reserve of acquired company



                                      F-22