`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    --------

                                    FORM 10-K

|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 2006

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________

Commission file number:  0-27378

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

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

2800 S.E. Market Place, Stuart, Florida                           34997
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                        (Zip Code)

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

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

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

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

                                      None.

         Indicate  by check  mark if the  Registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act.   Yes [ ]  No |X|

         Indicate  by  check  mark if the  Registrant  is not  required  to file
reports pursuant to Section 13 or Section 15(d) of the Act.   Yes [ ] No |X|

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

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




         Indicate by check mark whether the  Registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

   Large Accelerated Filer [ ]  Accelerated Filer |X|  Non-Accelerated Filer [ ]

         Indicate by check mark whether the  Registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act).   Yes [ ] No |X|

         The  aggregate  market  value at  December  30,  2005 of  shares of the
Registrant's  common  stock,  $.001 par value per share  (based upon the closing
price of $27.88  per share of such  stock on the  Nasdaq  Global  Market on such
date), held by non-affiliates of the Registrant was approximately  $425,006,000.
Solely for the  purposes  of this  calculation,  shares  held by  directors  and
executive  officers of the Registrant have been excluded.  Such exclusion should
not be  deemed a  determination  or an  admission  by the  Registrant  that such
individuals are, in fact, affiliates of the Registrant.

         At September 7, 2006, there were outstanding  15,694,309  shares of the
Registrant's common stock, $.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The information  required by Items 10, 11, 12, 13 and 14 of Part III is
incorporated by reference to the  Registrant's  definitive proxy statement to be
filed not later than October 30, 2006 pursuant to Regulation 14A.




                                   NUCO2 INC.

                                      INDEX
                                                                            PAGE

PART I.
Item 1.    Business.                                                              1
Item 1A.   Risk Factors                                                           8
Item 1B.   Unresolved Staff Comments                                             15
Item 2.    Properties.                                                           15
Item 3.    Legal Proceedings.                                                    15
Item 4.    Submission of Matters to a Vote of Security Holders.                  15

PART II.
Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters
           and Issuer Purchases of Equity Securities.                            15
Item 6.    Selected Financial Data.                                              17
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.                                                18
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.           35
Item 8     Financial Statements and Supplementary Data.                          35
Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure.                                                 35
Item 9A.   Controls and Procedures.                                              35
Item 9B.   Other Information.                                                    36

PART III.
Item 10.   Directors and Executive Officers of the Registrant.                   36
Item 11.   Executive Compensation.                                               36
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters.                                      36
Item 13.   Certain Relationships and Related Transactions.                       36
Item 14.   Principal Accountant Fees and Services.                               36

PART IV.
Item 15.   Exhibits and Financial Statement Schedules.                           37

Signatures                                                                       40
Index to Financial Statements                                                   F-1




         THIS ANNUAL REPORT ON FORM 10-K, INCLUDING "MANAGEMENT'S DISCUSSION AND
ANALYSIS  OF  FINANCIAL   CONDITION   AND  RESULTS  OF   OPERATIONS,"   CONTAINS
FORWARD-LOOKING  STATEMENTS  REGARDING FUTURE EVENTS AND OUR FUTURE RESULTS THAT
ARE BASED ON CURRENT EXPECTATIONS,  ESTIMATES,  FORECASTS, AND PROJECTIONS ABOUT
THE  INDUSTRY  IN  WHICH WE  OPERATE  AND THE  BELIEFS  AND  ASSUMPTIONS  OF OUR
MANAGEMENT.   WORDS  SUCH  AS  "EXPECTS,"   "ANTICIPATES,"  "TARGETS,"  "GOALS,"
"PROJECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES,"  VARIATIONS OF
SUCH   WORDS,   AND  SIMILAR   EXPRESSIONS   ARE   INTENDED  TO  IDENTIFY   SUCH
FORWARD-LOOKING   STATEMENTS.   IN  ADDITION,   ANY  STATEMENTS  THAT  REFER  TO
PROJECTIONS OF OUR FUTURE  FINANCIAL  PERFORMANCE,  OUR  ANTICIPATED  GROWTH AND
TRENDS  IN OUR  BUSINESS,  AND  OTHER  CHARACTERIZATIONS  OF  FUTURE  EVENTS  OR
CIRCUMSTANCES,  ARE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED THAT THESE
FORWARD-LOOKING  STATEMENTS  ARE ONLY  PREDICTIONS  AND ARE  SUBJECT  TO  RISKS,
UNCERTAINTIES,  AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL
RESULTS  MAY  DIFFER  MATERIALLY  AND  ADVERSELY  FROM  THOSE  EXPRESSED  IN ANY
FORWARD-LOOKING STATEMENTS.  READERS ARE REFERRED TO THE RISKS AND UNCERTAINTIES
IDENTIFIED  BELOW,  UNDER  "RISK  FACTORS,"  AND  ELSEWHERE.   WE  UNDERTAKE  NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.

1.       BUSINESS.

GENERAL

         We believe we are the leading provider of bulk CO2 systems and bulk CO2
for carbonating  fountain  beverages in the United States based on the number of
bulk CO2 systems  leased to  customers  and the only  company in our industry to
operate  a  national  network  of bulk  CO2  service  locations.  We  provide  a
comprehensive  range of services,  including  bulk CO2 system  installation  and
maintenance,  bulk CO2 delivery and dedicated  in-house  technical  support on a
nationwide basis. We are the only national provider of beverage-grade  bulk CO2,
a premium  grade  CO2,  which is  increasingly  required  by our  customers  for
carbonating  fountain  beverages.  Many of our customers are major  national and
regional restaurant and convenience store chains, movie theater operators, theme
parks,  resorts and sports venues,  including  McDonald's,  Burger King, Subway,
Taco Bell, Pizza Hut, 7-Eleven, Loews Cineplex, Six Flags, Walt Disney World and
Madison Square Garden.

         Bulk CO2  systems  store  CO2 in liquid  form and  convert  the  liquid
product to gaseous CO2 on demand.  Gaseous CO2 is the necessary  ingredient  for
beverage  carbonation,  which is a critical component of our customers' fountain
beverage  product.  We install bulk CO2 systems at the customer's  site,  refill
them on a regular basis and perform  periodic  maintenance to provide a constant
supply of bulk CO2 with consistent quality. Prior to the commercial introduction
of bulk CO2 systems in 1986, high pressure cylinders were the primary method for
carbonating  fountain beverages.  High pressure cylinders containing gaseous CO2
can weigh up to 155  pounds,  require  specialized  handling  skills and must be
returned to the supplier when empty,  although they may be less  expensive  than
bulk CO2 systems for low volume users of CO2. Bulk CO2 systems  typically  store
sufficient  CO2 to replace at least 10 high pressure  cylinders,  and have clear
advantages over high pressure cylinders, including:

       o consistent and improved beverage quality;

       o increased product yields;

       o no cylinder handling or storage requirements;

       o elimination of downtime and product waste during high pressure cylinder
         changeovers;  and

       o enhanced  safety  for  both the  supplier  and the customer.

         Today,  the majority of our growth is driven by the  conversion of high
pressure  cylinder users to bulk CO2 systems,  competitor  acquisitions  and new
outlet  openings.  Our  ability  to  grow is  dependent  on the  success  of our
marketing  efforts to acquire new  customers  and their  acceptance  of bulk CO2
systems as a replacement for high pressure cylinders.

         Since our  incorporation  in  Florida  in 1990,  we have  expanded  our
service  area from one  service  location  and 19  customers  in  Florida to 125
service  locations  supporting  approximately  113,000 customer  locations in 45
states as of June 30, 2006. Since our initial public offering of common stock in
December 1995,  this growth has been achieved,  in large part, with the proceeds
of our initial public  offering as well as a secondary  offering of common stock
in June 1996,  borrowings  under our senior credit  facilities,  the issuance in
1997  and  1999  of our  12%  senior  subordinated  notes  due  2004  and  2005,
respectively  (prepaid in August  2003),  the sale of our Series A 8% Cumulative
Convertible Preferred Stock in May 2000 (converted into 754,982 shares of common
stock in August 2004) and Series B 8% Cumulative  Convertible Preferred Stock in
November 2001  (converted into 247,420 shares of common stock in December 2004),
the private placement of our common stock in August 2002, the issuance in August


                                       1


2003 of our 16.3% senior subordinated notes due 2009 (prepaid in April 2005) and
the proceeds of a secondary offering of our common stock in March 2005.

         Our website is www.nuco2.com.  Through a link on our Investor Relations
section of our  website,  we make  available  the  following  filings as soon as
reasonably  practicable after they are electronically filed with or furnished to
the U.S. Securities and Exchange  Commission ("SEC"):  our Annual Report on Form
10-K,  Quarterly  Reports  on Form  10-Q,  Current  Reports  on Form 8-K and any
amendments  to those  reports  filed or furnished  pursuant to Section  13(a) or
15(d) of the  Securities  Exchange Act of 1934.  All such filings are  available
free of charge.

BUSINESS STRATEGY

         Our business and strategic plan focuses on the continued  growth of our
bulk CO2 business due to conversion of high pressure  cylinder users,  increased
penetration  of the  existing  bulk CO2 market  and growth in the United  States
fountain beverage market.

         ACCELERATE  PENETRATION  AND  EXPANSION  OF CUSTOMER  ACCOUNTS  THROUGH
MASTER SERVICE AGREEMENTS.  We have entered into master service agreements which
include 85 restaurant  and  convenience  store  concepts  that provide  fountain
beverages. These master service agreements generally provide for a commitment on
the part of the operator for all of its currently  owned  locations and may also
include future locations.  We currently service  approximately  52,000 chain and
franchisee locations with chains that have signed master service agreements.  We
are actively  working on expanding the number of master service  agreements with
numerous  restaurant  chains. In addition,  we are the only supplier of bulk CO2
capable  of  offering   comprehensive  master  service  agreements  due  to  our
established national distribution and service network. By negotiating terms with
the customer on a national or regional  level,  we are generally able to offer a
customer's  franchisees  more  favorable  terms than they could achieve on their
own, with the added  benefit of avoiding the expense and time spent  negotiating
contract terms and testing our capabilities.

         MAINTAIN FOCUS ON FOUNTAIN  BEVERAGE BULK CO2 MARKET.  We believe there
is  significant  potential  for growth in our  business as a result of continued
conversion from high pressure  cylinders,  competitive share capture and organic
growth in the  fountain  beverage  market.  The sale of fountain  beverages is a
business  not  subject  to  significant  fluctuations,  which  has  historically
experienced  stable growth.  We have focused our marketing  efforts on educating
fountain  beverage  providers about the improved  safety,  quality and potential
cost  benefits  of bulk  CO2  systems.  By  operating  exclusively  in bulk  CO2
distribution,  we are better equipped to focus our resources,  minimize overhead
costs and maintain high levels of customer support and service.  As a result, we
believe we have  significant  opportunity  to grow our  business  by  increasing
market share in an expanding market.

         INCREASE DENSITY AT EXISTING  OPERATIONS TO IMPROVE  PROFITABILITY.  We
maintain a highly  efficient  route structure and establish  additional  service
locations as service areas expand through  geographic growth. Our strategy is to
increase the density of our customer base for our existing service  locations in
order to lower  the  average  time and  distance  between  stops  and  allow for
increased  absorption  of  fixed  costs.  For the  year  ended  June  30,  2006,
approximately 75% of our service locations operated at over 50% gross margin.

         SELECTIVELY  PURSUE CUSTOMER ACCOUNT  ACQUISITION  OPPORTUNITIES  WHILE
MAINTAINING  HIGH LEVELS OF SERVICE.  The  fountain  beverage  CO2  distribution
market is fragmented, which provides numerous opportunities for continued growth
in our business through selective customer account acquisitions. Our competitors
range from small,  local companies in the fountain  beverage  industry to larger
companies  that  generally  consider  bulk CO2 a  non-core  business.  It may be
increasingly   difficult   for   our   competitors   to   match   the   breadth,
cost-effectiveness and quality of our nationwide services and therefore they may
be motivated to consider alternatives to continued participation in the fountain
beverage CO2  distribution  industry.  For example,  in fiscal 2005, we acquired
Pain Enterprises'  bulk CO2 beverage  carbonation  business,  in fiscal 2006, we
acquired the beverage  carbonation business of Bay Area Equipment Co., Inc., and
in both fiscal 2005 and fiscal 2006, we acquired  certain  beverage  carbonation
assets of Coca-Cola  Enterprises  Inc. We will continue to selectively  evaluate
customer  account  acquisitions  that will expand our customer base and increase
our existing route density. In addition, we believe that our superior nationwide
customer  service  capabilities  enable us to attract and retain  customers.  We
intend to continue our disciplined approach to growth while maintaining our high
level of service.


                                       2


OPERATIONS

         We offer our customers two principal services:

       o we lease, install and maintain stationery bulk CO2 systems; and

       o we routinely refill bulk CO2 systems with beverage-grade bulk CO2.

         We generally provide these services through long-term contracts of five
to six years in duration.  The following table provides a summary of our service
plans, which are tailored to individual customers' needs:

                                % of Fiscal
                                2006 Service
                                   Plan
    Service Plan                  Revenue               Description
    ------------                  -------               -----------

Budget Plan                         66%        Customer  pays a flat monthly fee
                                               for bulk CO2  system  rental  and
                                               bulk CO2

Equipment  Lease and  Product       21%        Customer  rents  bulk CO2  system
Purchase Plan                                  and  pays a per  pound  rate  for
                                               bulk CO2

Fill Plan                           13%        Customer owns bulk CO2 system and
                                               pays a per  pound  rate  for bulk
                                               CO2

         Budget Plan  customers pay a flat monthly fee for the lease of our 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 cap. If the annual cap
is exceeded,  the customer is charged for additional bulk CO2 delivered on a per
pound basis.  Customers under the Equipment Lease and Product Purchase Plan also
lease  from us a bulk CO2  system,  but the  customer  is charged on a per pound
basis for all bulk CO2  delivered.  Fill Plan  customers  own their own bulk CO2
system and purchase  bulk CO2 on a per pound basis from us. We seek to negotiate
six-year  supply  contracts  even  with  customers  that own  their own bulk CO2
systems. We believe that the use of long-term service plans provides benefits to
both our  customers and us.  Customers are able to largely  eliminate CO2 supply
interruptions  and the need to  operate  CO2  equipment  themselves,  while  the
long-term  nature of the service plan adds stability to our revenue base.  After
the expiration of the initial term of service plan,  the plan  generally  renews
automatically or a new service plan is agreed upon.

         At June 30, 2006, we operated 125 service locations (113 stationary and
12 mobile)  located in 42 states along with a dedicated fleet of 230 specialized
bulk CO2 delivery vehicles and 117 technical  service vehicles.  Each stationary
service  location is equipped  with a storage tank (up to 40 tons in size) which
receives  bulk CO2  from  large  capacity  tanker  trucks  and  from  which  our
specialized bulk CO2 delivery  vehicles are filled with bulk CO2 for delivery to
customers.

         Upon  activation  of a customer  account,  our  technicians  design the
customer's bulk CO2 system and install the bulk CO2 tank and piping systems.  In
most instances,  the bulk CO2 system at a customer's site is accessible from the
outside of the customer's  establishment and delivery of bulk CO2 does not cause
any interference with the operations of the customer.  We place a locking device
on the bulk CO2 fill port to reduce the  likelihood  of tampering and to prevent
customers from using  alternative  sources of bulk CO2 while under contract with
us.

         We maintain a highly  efficient  delivery route structure and establish
additional stationary bulk CO2 service locations as service areas expand through
geographic  growth.  Our goal is to have a service  location  centrally  located
within 75 miles of each  customer  serviced  from that service  location.  As we
increase  route  density by lowering  the  average  time and  distance  traveled
between stops, we lower the average cost per delivery.  Currently,  our bulk CO2
delivery  vehicles are each servicing an average of 450 customer  locations.  We
believe  that  optimal  route  density is  achieved  when our bulk CO2  delivery
vehicles are each servicing 500 customer locations.  Collectively,  our delivery
vehicles make more than 4,000 deliveries per day.

         We have  developed an automated  scheduling  system to achieve  maximum
route optimization. In order to ensure reliability and consistent service levels
to the customer,  CO2 deliveries are made at fixed  intervals.  Information from
our proprietary AccuRoute(R) system is used to determine the proper frequency of
deliveries.  Each account is placed into the correct frequencY grouping based on


                                       3


delivery history, seasonality and promotions reported to us by the customer. The
scheduling  system  analyzes a customer's  CO2 usage (as measured by flow meters
installed on our  specialized  bulk CO2 delivery  vehicles) and  determines  the
optimal  next  delivery  date,  considering  both maximum  payload  delivery and
remaining  bulk CO2 stock held in the  customer's  tank.  The  foundation of our
scheduling system is the delivery  information  gathered by the portable account
link,  or PAL,  system.  The PAL system  utilizes a hand-held  device to provide
field personnel with up to date delivery route and customer account  information
and  also  serves  as  an  input  source  to  record  all  delivery  transaction
information.  The scheduling system utilizes  sophisticated  computer algorithms
that consider:

       o Tank size;
       o Delivery history;
       o Seasonal factors; and
       o Safety margins.

         Based  on  delivered   quantities  over  time,  the  scheduling  system
determines  a daily  usage  rate.  CO2 usage,  combined  with tank size and last
delivery date, is used to determine how often a customer's  tank must be filled.
Accounts are closely monitored by our field and corporate personnel.

         Our  customer  service  and  support  complements  our bulk CO2 systems
installation and bulk CO2 deliveries.  Our bulk CO2 route drivers are trained to
fix minor technical  problems with the bulk CO2 systems and to educate customers
as to how the bulk CO2 systems  work. We operate a 24 hours a day, 7 days a week
customer  service call center.  Our in-house  customer  service  representatives
provide  access  to  experienced  technical  personnel  who are  able to  answer
customer queries,  identify problems and dispatch service personnel as required.
In addition,  our in-house  technical  expertise in maintaining and refurbishing
tanks adds to our  knowledge and  understanding  of the bulk CO2 systems that we
offer.  As a result of this expertise,  we have a sufficient  supply of bulk CO2
tanks readily  available for our customers' use and are able to minimize service
interruptions and downtime for CO2 tank maintenance.

CUSTOMERS

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

                   QUICK SERVE RESTAURANTS                                       CASUAL/DINNER HOUSES
Arby's                            McDonald's                    Applebee's                    On the Border
Boston Market                     Panera Bread Company          Bahama Breeze                 Outback Steakhouse
Bumpers Drive-In                  Papa Gino's                   Bertucci's                    Perkins Family Restaurants
Burger King                       Pizza Hut                     Cheesecake Factory            Pizzeria Uno
Captain D's                       Pizza Inn                     Chevy's                       Ponderosa Steak House
Carl's Jr.                        Quizno's Classic Subs         Chili's                       Red Lobster/Olive Garden
Checker's Drive-In                Rubios                        Corner Bakery                 Roadhouse Grill
Chick-Fil-A                       Sbarro                        Don Pablo's                   Rockfish
Chipotle Grill                    Schlotzsky's Deli             Friendly's Restaurant         Romano's Macaroni Grill
Church's Chicken                  Sonic Drive-In                Hard Rock Cafe                Ruby Tuesday
D'Angelo's Sandwich Shop          Steak'n Shake                 Hooters                       Ryan's Family Steak House
Dunkin' Donuts                    Subway                        Landry's                      Shoney's
El Pollo Loco                     Taco Bell                     Longhorn Steakhouse           Spaghetti Warehouse
Hardee's                          Wendy's                       Maggiano's Little Italy
KFC                               White Castle
Krystal                                                                           CONVENIENCE/PETROLEUM
                                                                7-Eleven                      Golden Pantry
CONTRACT FEEDERS                  WHOLESALE CLUBS               AM/PM                         Phillips 66
ARAmark                           BJ's Wholesale                BP/Amoco                      Pilot Travel
Compass Group                     Costco                        Circle K                      Racetrac Petroleum
Fine Host                         Sam's Club                    Coastal Market                Shell ETD
Host Marriott                                                   Conoco                        Spectrum Stores
Sodexho Operations                                              Cumberland Farms              Thornton Oil
                                                                Exxon                         Tom Thumb


                                       4


                     SPORTS VENUES                                                  MOVIE THEATRES
AMF Bowling Centers               Madison Square Garden         Carmike Cinemas               Regal Entertainment
Brunswick Recreation Centers      Raymond James Stadium         Loews Cineplex                Wallace Theatres
Derby Lane
Georgia Dome                                                                        THEME/AMUSEMENT
                                                                Six Flags                     Wet `n' Wild
                                                                Universal Studios Florida     White Waters
                                                                Walt Disney World

MASTER SERVICE AGREEMENTS

         We have  entered  into  master  service  agreements  which  include  85
restaurant and convenience store concepts that provide fountain beverages. These
master service agreements  generally provide for a commitment on the part of the
operator for all of its currently  owned  locations and may also include  future
locations.  We  currently  service  approximately  52,000  chain and  franchisee
locations  with  chains  that have  signed  master  service  agreements.  We are
actively  working on  expanding  the number of master  service  agreements  with
numerous restaurant chains.

COMPETITION

         We believe that our ability to compete  depends on a number of factors,
including   product  quality,   availability  and   reliability,   price,   name
recognition,  delivery time and service and support.  Despite the customer-level
advantages of bulk CO2 systems over high pressure cylinders,  we generally price
our services comparably to the price of high pressure cylinders. This has proved
an  effective  inducement  to cause  customers  to  convert  from high  pressure
cylinders to bulk CO2  systems.  We believe  that we enjoy  advantages  over our
competitors due to our hub and spoke delivery system,  overall route density and
lower average time and distance  traveled between stops. Our toll-free  customer
support  help line is  clearly  marked on each bulk CO2 system we  service.  The
experience  level of our support  personnel  aids in the resolution of equipment
failures or other service  interruptions,  regardless  of whether  caused by our
equipment.

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

         Many types of businesses  compete in the fountain beverage CO2 business
and market share is  fragmented.  High pressure  cylinders and bulk CO2 services
are  most  frequently  provided  by  distributors  of  industrial  gases.  These
companies generally provide a number of products and services in addition to CO2
and often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors  generally have been reluctant to attempt to convert
their high pressure  cylinder  customers to bulk CO2 systems for several reasons
including  the capital  outlays  required  to purchase  bulk CO2 systems and the
idling of existing  high  pressure  cylinders and  associated  equipment.  Other
competitors  in the  fountain  beverage  CO2 business  include  fountain  supply
companies and  distributors  of restaurant  supplies and  groceries,  which vary
greatly in size.  There are also a number of small  companies  that provide bulk
CO2 services that operate on a local or regional geographic scope. While many of
these  suppliers  lack the  capital  necessary  to offer  bulk  CO2  systems  to
customers on lease,  suppliers  vary widely in size and some of our  competitors
may have significantly greater financial,  technical or marketing resources than
we do.

COMPETITIVE STRENGTHS

         Our competitive  strengths position us to benefit from continued growth
in bulk CO2 usage.


                                       5


         MARKET  LEADERSHIP IN A GROWING  MARKET.  We believe we are the leading
provider  of bulk  CO2  systems  and  beverage-grade  bulk  CO2 to the  fountain
beverage market, with an estimated market share of approximately 60%. Our market
leadership  and  nationwide  service  and  distribution   capabilities  uniquely
position us to benefit from the  conversion of high  pressure  cylinders to bulk
CO2 systems.  This  conversion is primarily  driven by the numerous  benefits of
bulk CO2 systems as  compared  to high  pressure  cylinders.  We  estimate  that
approximately 650,000 of the approximately  900,000 food service  establishments
in the United States use fountain beverage carbonation systems. Of these 650,000
fountain beverage users, we estimate that approximately  460,000,  or 71% of the
market,  currently use high pressure  cylinders and represent  potential organic
growth targets.

         SOLE  NATIONAL  PROVIDER OF BULK CO2. We are the only bulk CO2 provider
with nationwide service and distribution capabilities,  enabling us to establish
service  agreements  with  multi-location  customers  such as major national and
regional  restaurant and convenience  store chains and movie theater  operators.
Increasingly,  these customers seek providers who can offer  consistent  product
quality,  high levels of local service and  centralized  support on a nationwide
basis.  As the only bulk CO2  provider  with  these  capabilities,  we expect to
achieve  increasing  market share and growth that outpaces our  competition.  In
addition, our national service and distribution  capabilities have enabled us to
negotiate master service  agreements with many restaurant and convenience  store
chains as well as agreements with franchisees who own multiple locations.  These
master service agreements  generally provide for a commitment on the part of the
customer for all of its currently  owned  locations and may also include  future
locations.

         UNIQUE AND COMPREHENSIVE  SERVICE PLATFORM.  We provide a comprehensive
range of  services  nationwide,  including  bulk  CO2  system  installation  and
maintenance,  bulk CO2 delivery and dedicated  in-house  technical  support.  We
believe our  responsiveness and the breadth and quality of our service offerings
differentiate us from our competition,  and influence our customers' decision to
choose and continue using our services. Our service platform enables us to offer
our customers a "one-stop-shop" for their bulk CO2 needs:

       o We supply and install a complete  range of bulk CO2 systems  customized
         to meet the specific needs of our customers. Complementing this service
         is our in-house  technical  expertise in maintaining  and  refurbishing
         bulk CO2 tanks.  As a result of this  expertise,  we have a  sufficient
         supply of bulk CO2 tanks readily  available for our  customers' use and
         are able to minimize  service  interruptions  and downtime for bulk CO2
         tank maintenance.

       o We provide bulk CO2 delivery  utilizing our  AccuRoute(R)  distribution
         system,  which relies on computer algorithms to analyzE our proprietary
         database  of  usage  history,  tank  size,   seasonality  and  customer
         promotions for each of our individual accounts to determine the optimal
         bulk  CO2  delivery  schedule.  Our  AccuRoute(R)  distribution  system
         minimizes servicE  interruptions and the need for customers to schedule
         bulk CO2 deliveries.

       o We  operate  a 24  hours a day,  7 days a week  customer  service  call
         center. Our in-house customer service representatives provide access to
         experienced  technical  personnel  who  are  able  to  answer  customer
         queries, identify problems and dispatch service personnel as required.

       o As of June 30,  2006,  we had a fleet  of 347  delivery  and  technical
         service  vehicles  operated  by 352  drivers  and  114  technicians  to
         maintain our installed  base of bulk CO2 systems and respond to service
         calls allowing us to provide on-site service to any customer  generally
         within  a  matter  of  hours,  minimizing  service  interruptions.   As
         carbonated fountain beverages represent a highly profitable product for
         our  customers,  our  ability to respond  quickly can  minimize  costly
         downtime due to lack of carbonation.

         SCALABLE BUSINESS MODEL WITH OPERATING LEVERAGE.  We have established a
network of service  locations  which allows us to service  virtually  all of the
fountain  beverage  providers in the continental  United States. We can leverage
our network and operating efficiencies to service incremental customer locations
with minimal incremental investment.  We are able to expand our base of customer
locations without  significantly  increasing our distribution  network,  thereby
increasing our profitability and cash flow.

         HIGHLY VISIBLE REVENUE STREAM SUPPORTED BY STRONG BACKLOG AND LONG-TERM
CUSTOMER CONTRACTS.  As of June 30, 2006, we had a signed contractual backlog of
approximately 5,700 new customer accounts awaiting activation. Our contracts are
typically five to six years in duration,  providing  stability and visibility to
our  revenue  base.  We  have  established  long-term   relationships  with  our
customers'  organizations  and have  experienced  strong renewal rates under our


                                       6


existing contracts,  with customer cancellations in fiscal 2006 of less than 2%.
In fiscal 2006, total customer  attrition was less than 5%. In addition,  we are
not overly  dependent  on the business of any one  customer.  For the year ended
June 30, 2006, no single customer accounted for more than 5% of our revenues.

         LONG-STANDING   RELATIONSHIPS   WITH  BLUE-CHIP   SUPPLIERS.   We  have
long-standing  relationships  with  our  suppliers  who  are  leaders  in  their
respective  industries  including,  The BOC Group,  Inc. which supplies our bulk
CO2; Ryder Truck Rental,  Inc.,  from whom we lease our delivery  vehicles;  and
Chart Industries, Inc. and Harsco Corporation, which provide our bulk CO2 tanks.
As one of the  largest  purchasers  of both  bulk  CO2 and bulk  CO2  tanks  for
carbonating  fountain  beverages,  we believe we are able to negotiate long-term
agreements  with  our  suppliers  at  favorable  terms  and to  secure  priority
delivery.

         STRONG  OPERATING  CASH FLOW.  Since 2000,  we have  maintained  EBITDA
(earnings before interest,  taxes,  depreciation  and  amortization)  margins in
excess of 25% on average while  generating  cash from  operations  totaling $124
million.  We have  invested  this cash in the future  growth of our  business by
purchasing  bulk CO2 tanks and  equipment  and  expanding our network of service
locations.  Since 2000, our investments have enabled us to increase our customer
locations served by 55%, to approximately 113,000 accounts currently. We plan to
use the increased cash generated by our improving profitability to invest in the
future  growth  of our  business  both  through  direct  investment  in  revenue
generating  equipment and  acquisitions,  and through debt repayment to increase
our balance sheet flexibility.

SALES AND MARKETING

         Our bulk  CO2  systems  and  services  are sold by a sales  force of 24
commission  only  independent  sales   representatives  and  59  salaried  sales
personnel.  We market our bulk CO2 systems and services to large  customers such
as restaurant  and  convenience  store chains,  movie theater  operators,  theme
parks,  resorts  and sports  venues.  Our  customers  include  many of the major
national and regional  chains  throughout the United  States.  We approach large
chains on a corporate  or regional  level for  approval to become the  exclusive
supplier  of bulk CO2  systems  and  services  on a  national  basis or within a
designated territory. We then direct our sales efforts to the managers or owners
of the individual or franchised  operating units. Our  relationships  with chain
customers in one geographic  market frequently help us to establish service with
these same chains  when we expand  into new  markets.  After  obtaining  service
relationships  for a chains'  locations  in a new market,  we attempt to rapidly
build route density by targeting independent restaurants, convenience stores and
theaters for bulk CO2 system conversion and/or service.

BACKLOG

         As of June 30, 2005 and 2006,  we had a signed  contractual  backlog of
approximately  5,300 and 5,700 new  service  locations,  respectively,  awaiting
activation.  Activations  are dependent upon a number of factors,  including the
expiration of any existing agreements the customer may have with its current CO2
supplier.

BULK CO2 SUPPLY

         Bulk CO2 is currently a readily available  commodity product,  which is
processed and sold by various sources. In May 1997, we entered into an exclusive
bulk CO2 requirements contract with The BOC Group, Inc., which currently expires
on April 30, 2012, for 100% of our bulk CO2  requirements.  Under this contract,
BOC, a multinational industrial gases company, is committed to provide us with a
stable supply of beverage  grade CO2 at  competitive  prices.  In addition,  the
agreement provides that if sufficient  quantities of bulk CO2 become unavailable
for any reason, we will receive treatment as a preferred customer.  For example,
in the event of a CO2 shortage,  many CO2 suppliers reduce  deliveries of CO2 to
all customers.  Our agreement with BOC provides that we will continue to receive
CO2  deliveries  in full,  along  with BOC's  other  large  customers,  prior to
deliveries to other customers.

         Our agreement with BOC also requires that BOC certify the purity of CO2
they supply to us. Our bulk CO2 service  locations and our delivery vehicles are
used solely for storage and  transport  of  beverage-grade  CO2 to minimize  any
possibility  of  contamination.  This supply system enables us to provide to our
customers  beverage-grade CO2 that has a known composition and is traceable from
the point of  production  to the point of use,  a  service  that many  customers
value.


                                       7


BULK CO2 SYSTEMS

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

EMPLOYEES

         At June 30, 2006, we employed 700 full-time employees, 234 of whom were
involved  in  management,  sales or  customer  support,  352 of whom were  route
drivers  and  114 of whom  were  in  technical  service  functions.  None of our
employees is subject to a collective bargaining agreement; however, employees in
Chicago, Illinois and Hampshire, Illinois have elected union representation.  We
consider our relationship with our employees to be good.

TRADEMARKS

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

SEASONALITY

         CO2 usage is subject to seasonal variations. CO2 usage fluctuates based
on factors such as weather and traditional  summer and holiday  periods.  Demand
for CO2 in times of cold or  inclement  weather  is lower  than at other  times.
Based on historical data and expected  trends,  we anticipate that revenues from
the delivery of CO2 will be highest in our first quarter and lowest in our third
quarter.

REGULATORY MATTERS

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

1A.      RISK FACTORS.

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

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

         We intend to continue to expand our operations aggressively.  We may be
unable to:

                  o manage effectively the expansion of our operations;

                  o implement and develop our systems, procedures or controls;

                  o adequately support our operations;

                  o achieve and manage the currently projected  installations of
                    bulk CO2 systems; or

                  o maintain our superior level of customer service.


                                       8


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

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

OUR FUTURE  OPERATING  RESULTS  ARE  UNCERTAIN  DESPITE  THE GROWTH  RATE IN OUR
REVENUES AND STRONG BACKLOG.

         You should not consider  growth rates in our revenues to be  indicative
of growth rates in our operating results.  In addition,  you should not consider
prior growth rates in our revenues to be  indicative  of future  growth rates in
our  revenues.  The timing  and amount of future  revenues  will  depend  almost
entirely on our ability to obtain  agreements with new customers to install bulk
CO2 systems and use our services,  and on our ability to increase the density of
our  customer  base for our  existing  service  locations  in order to allow for
increased  absorption  of our fixed  costs.  Our future  operating  results will
depend on many factors, including:

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

         As  of  June  30,  2006,  we  had  a  signed  contractual   backlog  of
approximately  5,700 new customer accounts awaiting  activation.  However,  this
backlog is not  necessarily  indicative  of future growth rates in our operating
results,  which will depend in part on our  ability to  implement  new  customer
agreements.  Additionally,  these  agreements may be subject to  modification or
termination  prior to implementation or may not be implemented for a significant
period of time due to customers' prior contractual commitments.

WE LACK  PRODUCT  DIVERSITY,  AND  OUR  BUSINESS  DEPENDS  ON  CONTINUED  MARKET
ACCEPTANCE BY THE FOUNTAIN  BEVERAGE MARKET OF OUR BULK CO2 SYSTEMS AND CONSUMER
PREFERENCE FOR CARBONATED BEVERAGES.

         We depend on continued market acceptance of our bulk CO2 systems by the
fountain beverage market,  which accounts for substantially all of our revenues.
Unlike many of our  competitors  for whom bulk CO2 is a secondary  business,  we
have no material  lines of  business  other than the leasing of bulk CO2 systems
and the sale of bulk CO2. We currently do not anticipate diversifying into other
product or service lines.  Although  conversion from high pressure  cylinders to
bulk CO2 systems  represents a continued  opportunity for growth in the bulk CO2
market,  total demand for CO2 is limited because the fountain beverage market is
mature.  Our  ability to grow is  dependent  upon the  success of our  marketing
efforts to acquire new customers  and their  acceptance of bulk CO2 systems as a
replacement for high pressure  cylinders.  While the fountain beverage market to
date has been  receptive  to bulk CO2  systems,  we cannot be  certain  that the
operating  results of our installed base of bulk CO2 systems will continue to be
favorable or that past results will be indicative of future market acceptance of
our services.  In addition,  any recession  experienced by the fountain beverage
market or any  significant  shift in consumer  preferences  away from carbonated
beverages to other types of beverages would result in a loss of revenues,  which
would adversely affect our financial condition and results of operations and our
ability to service our indebtedness.

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

         As of June 30, 2006, we had outstanding  indebtedness of  approximately
$35.5 million under our revolving credit facility.


                                       9


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

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

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

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

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

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

         Our revolving credit  agreement  requires that we comply with financial
and business covenants. If we fail to maintain these covenants, our lender could
declare us in default and demand  repayment of our  indebtedness if this default
were not cured or waived.  At various  times in the past, we have been unable to
meet certain  covenants and have had to obtain waivers or modifications of terms
from our lenders. In addition, the conditions that the revolving credit facility
places on the amount of debt we can incur,  our level of liquidity  and our cash
flows may have a negative effect on our ability to grow our business.

IMPLEMENTING  OUR  ACQUISITION   STRATEGY  INVOLVES  RISK  AND  OUR  FAILURE  TO
SUCCESSFULLY IMPLEMENT THIS STRATEGY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.

         One of our  key  strategies  is to grow  our  business  by  selectively
pursuing  acquisitions  of bulk  CO2  customer  accounts.  Since  1995,  we have
acquired more than 30,000 bulk CO2 customer  accounts,  and we are continuing to
actively  pursue   additional   customer  account   acquisition   opportunities.
Acquisitions involve risks, including those relating to:

         o identification of appropriate  acquisition  candidates or negotiation
           of acquisitions  on favorable terms and valuations;

         o integration of acquired  bulk CO2  customer  accounts;

         o implementation  of proper business and accounting controls;

         o ability to obtain financing, on favorable  terms or at all;

         o diversion of  management  attention;

         o retention of bulk CO2 customers;

         o maintaining our superior level of customer  service as we continue to
           grow; and

         o unexpected  costs, expenses and liabilities.

         Our growth  strategy may affect  short-term cash flow and net income as
we  expend  funds,  increase  indebtedness  and  incur  additional  expenses  in
connection  with  pursuing  acquisitions  of  bulk  CO2  customer  accounts.  We
experienced  some of the risk described above  following  prior  acquisitions of
bulk CO2  customer  accounts.  As a result,  we were unable to manage our growth
effectively and our customer service levels declined.  As a result, our business
suffered.  If we are not able to identify or acquire bulk CO2 customer  accounts
consistent with our growth strategy or if we fail to integrate any acquired bulk
CO2  customer  accounts  into our  operations  successfully,  we may not achieve
anticipated increases in revenue,  costs savings and economies of scale, and our
operating results may be adversely affected.


                                       10



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

         The fountain  beverage  carbonation  market is highly  competitive.  We
primarily compete on a regional and local basis with several direct competitors.
We cannot be certain  that these  competitors  will not  substantially  increase
their  installed  base of bulk CO2 systems and expand their service  nationwide,
provide  customer service superior to ours or reduce the price of their services
below our prices.  As there are no major  barriers to entry with  respect to the
delivery  of bulk CO2 on a local or regional  basis,  we also face the risk of a
well-capitalized  competitor's  entry  into  our  existing  or  future  local or
regional markets. In addition, we compete with numerous distributors of bulk and
high pressure CO2, including;

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

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

WE DEPEND ON THE CONTINUED CONTRIBUTIONS OF OUR EXECUTIVE OFFICERS AND OTHER KEY
MANAGEMENT, EACH OF WHOM WOULD BE DIFFICULT TO REPLACE.

         Our future success  depends to a significant  degree upon the continued
contributions  of our senior  management  and our  ability to attract and retain
other highly qualified management personnel.  We face competition for management
from other companies and organizations.  Therefore, we may not be able to retain
our existing management  personnel or fill new management positions or vacancies
created by expansion or turnover at our existing  compensation  levels.  We have
entered  into  executive  employment  agreements  with  key  members  of  senior
management.  The employment  agreements with our chief executive officer,  chief
financial officer,  chief operating officer and chief customer officer expire in
June 2007,  October 2008, May 2007 and June 2009,  respectively.  We do not have
"key-person"  insurance  on the lives of any of our key  officers or  management
personnel  to mitigate  the impact to our  company  that the loss of any of them
would  cause.  Specifically,  the loss of any of our  executive  officers  would
disrupt  our  operations  and divert  the time and  attention  of our  remaining
officers.   Additionally,   failure  to  attract  and  retain  highly  qualified
management personnel would damage our business prospects.

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

         We do  not  conduct  manufacturing  operations  and  depend,  and  will
continue to depend,  on outside  parties for the manufacture of bulk CO2 systems
and components. We intend to significantly expand our installed base of bulk CO2
systems.  Our  expansion  may be limited by the  manufacturing  capacity  of our
third-party   manufacturers.   Manufacturers   may  not  be  able  to  meet  our
manufacturing  needs  in a  satisfactory  and  timely  manner.  If  there  is an
unanticipated  increase in demand for bulk CO2 systems, we may be unable to meet
such demand due to manufacturing constraints.  We purchase bulk CO2 systems from
Chart Industries,  Inc. and Harsco  Corporation,  the two major manufacturers of
bulk CO2  systems.  Should  either  manufacturer  cease  manufacturing  bulk CO2
systems, we would be required to locate additional  suppliers.  We may be unable
to locate alternate manufacturers on a timely basis or negotiate the purchase of
bulk CO2 systems on favorable  terms.  A delay in the supply of bulk CO2 systems
could cause potential customers to delay their decision to purchase our services
or to choose not to purchase  our  services.  This would  result in delays in or
loss of future revenues.

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


                                       11


WE ARE  DEPENDENT  ON THE  PRICING  AND  AVAILABILITY  OF CO2 AND  SHORTAGES  OR
INCREASES IN THE PRICE OF CO2 OR OTHER RAW MATERIALS COULD INCREASE OUR COSTS OF
GOODS SOLD, REDUCE OUR PROFITS AND MARGINS AND ADVERSELY AFFECT OUR OPERATIONS.

         Our principal  raw material is CO2,  which is a commodity  product.  We
purchase  our CO2 for  resale  from  The BOC  Group,  Inc.  under  an  exclusive
requirements  contract expiring in 2012 which provides for annual adjustments in
the purchase  price for bulk CO2 based upon changes in the Producer  Price Index
for Chemical and Allied Products or increases in the price of bulk CO2 purchased
by  BOC's  large,  multi-location  beverage  customers  in  the  United  States,
whichever is less.

         Steel is used in the manufacture of our bulk CO2 tanks. We purchase our
tanks from manufacturers  under agreements,  the terms of which are renegotiated
on an annual  basis.  Hot rolled steel  prices  increased  significantly  during
fiscal 2006.  Future  increases in steel prices may result in higher  prices for
the CO2 tanks we must purchase.

         Our  business  also  depends  on  our  ability  to  deliver  CO2 to our
customers through specialized CO2 delivery vehicles. There have been significant
increases in fuel costs in recent  years.  Continued  high fuel costs or further
increases and our  inability to pass on increases to our customers  could reduce
our profits and margins.

         Increases  in the  prices of CO2,  bulk CO2  tanks and fuel,  including
increases that may occur as a result of shortages, duties or other restrictions,
could  increase  our cost of sales and reduce  profits  and  margins.  We cannot
assure you that  shortages or  increases  in the prices of our raw  materials or
fuel will not have an adverse  effect on our financial  condition and results of
operations.

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

         Demand for CO2 in times of cold or  inclement  weather is lower than at
other times.  Based on historical data and expected  trends,  we anticipate that
revenues  from the  delivery  of CO2 will be  highest in our first  quarter  and
lowest in our third  quarter.  As a result,  we expect our quarterly  results of
operations to continue to experience  variability from quarter to quarter in the
future.

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

         The interest  rate on our revolving  credit  facility  fluctuates  with
market  interest rates,  resulting in greater  interest costs in times of rising
interest rates.  Consequently,  our earnings,  cash flows and  profitability are
sensitive to changes in interest  rates.  High interest  rates could also affect
our ability to service our  indebtedness.  To the extent that we cannot generate
sufficient  cash flows to make  interest  payments  on time,  our  lender  could
declare us in default and demand repayment of our indebtedness, which could have
a negative effect on our financial condition.

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

         Our  operations  are subject to all of the operating  hazards and risks
normally incidental to handling, storing and transporting CO2. CO2 is classified
as a hazardous  material and can cause  serious  injuries  such as frostbite and
asphyxiation  that may  result  in, and have in the past  resulted  in,  serious
injury  or death to our  employees  and other  persons.  We  maintain  insurance
policies in such amounts and with such coverages and deductibles that we believe
are  reasonable  and prudent.  However,  we cannot assure you that our insurance
will be adequate to protect us from all  liabilities and expenses that may arise
from  claims for  personal  injury or death or  property  damage  arising in the
ordinary  course  of  business  or that  current  levels  of  insurance  will be
maintained or available at economical  prices. If a significant  liability claim
is brought  against us that is not covered by insurance,  we may have to pay the
claim with our own funds and our financial  condition and ability to service our
indebtedness could be seriously harmed.

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

         Our business  and  facilities  are subject to federal,  state and local
laws and  regulations  adopted  for the use,  storage and  handling of CO2,  the
protection of the environment,  the health and safety of our employees and users
of our products and services.  Among these environmental laws are rules by which


                                       12


a current  or  previous  lessee  may be liable  for the costs of  investigation,
removal or  remediation of hazardous  materials at such  property.  In addition,
these laws typically impose liability  regardless of whether the lessee knew, or
was  responsible  for,  the  presence of any  hazardous  materials.  Persons who
arrange for the disposal or treatment of hazardous  materials  may be liable for
the costs of  investigation,  removal or remediation  of such  substances at the
disposal or treatment  site,  regardless  of whether the affected site is owned,
leased or operated by them.

         As we lease a number of service  locations  that may  store,  handle or
arrange for the disposal of various hazardous materials,  we may incur costs for
investigation,  removal and  remediation,  as well as capital costs,  associated
with compliance with environmental laws.  Although  environmental costs have not
been  material  in the past,  we cannot be certain  that these  matters,  or any
similar liabilities that arise in the future, will not exceed our resources, nor
can we completely eliminate the risk of accidental  contamination or injury from
these materials. The transportation of bulk CO2 is also subject to regulation by
various  federal,  state and local  agencies,  including the U.S.  Department of
Transportation.  These  regulatory  authorities  have broad  powers,  and we are
subject to regulatory and  legislative  changes that can affect the economics of
our industry by  requiring  changes in operating  practices or  influencing  the
demand for and the cost of providing  services.  A  significant  increase in the
cost of our operations  resulting from changing  governmental  regulations could
adversely affect our profitability.

WE MAY BE LIMITED IN OUR ABILITY TO OFFSET  FUTURE  TAXABLE  INCOME WITH OUR NET
OPERATING LOSS CARRYFORWARDS.

         We have net operating loss  carryforwards  for federal and state income
tax  purposes.  If we undergo an ownership  change in the future as described in
Section 382 of the Internal Revenue Code, our ability to use those net operating
losses to offset future taxable income may be limited.  This may have the effect
of reducing our after-tax cash flow in future years.

THE MARKET  PRICE OF OUR COMMON  STOCK HAS BEEN AND MAY  CONTINUE TO BE VOLATILE
AND MAY DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE.

         Our common stock price has fluctuated  substantially  since our initial
public offering in December 1995. Our common stock closing sales price reached a
52-week high of $32.17 on January 27, 2006.  There can be no assurance  that the
market  price  for our  common  stock  will  remain at its  current  level and a
decrease in the market price could result in substantial loses for investors.

         The market price of our common stock may be  significantly  affected by
the following factors:

         o announcements  of  technological   innovations  or  new  products  or
           services by us or our competitors;

         o trends and fluctuations in the use of bulk CO2 systems;

         o timing  of bulk  CO2  systems  installations  relative  to  financial
           reporting periods;

         o release of securities analysts' reports;

         o operating results below expectations;

         o changes in, or our failure to meet, financial estimates by securities
           analysts;

         o our business prospects as perceived by others;

         o market  reaction  to  any  acquisitions,  joint  ventures,  strategic
           investments or alliances announced by us or our competitors;

         o industry developments;

         o market acceptance of bulk CO2 systems;

         o decrease in the safety record in the use of bulk CO2 systems;

         o economic and other external factors; and

         o period-to-period fluctuations in our financial results.

         The  volatility  in our share  price as a result of any of the  factors
described  above,  many of  which  are  beyond  our  control,  could  result  in
substantial or total losses for investors.

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


                                       13


WE DO NOT INTEND TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.

         We have never  declared or paid any cash dividends on our common stock.
We currently intend to retain any future earnings for funding growth.

WE MAY ISSUE PREFERRED STOCK WHICH COULD LIMIT INVESTORS' ABILITY TO ACQUIRE OUR
COMMON STOCK AND AFFECT OUR MARKET PRICE.

         Our  board of  directors  has the  authority  to issue up to  5,000,000
shares of preferred  stock. Our articles of  incorporation  currently  authorize
5,000 shares of Series A 8% cumulative convertible preferred stock, 2,500 shares
on Series B 8%  cumulative  convertible  preferred  stock and 200,000  shares of
Series C  participating  preferred  stock.  No  shares  of  preferred  stock are
currently issued and outstanding. If we designate or issue a series of preferred
stock,  it will  create  additional  securities  that  will  have  dividend  and
liquidation  preferences  over  the  common  shares.  If  we  issue  convertible
preferred  stock, a subsequent  conversion may dilute the current  shareholders'
interest.  Without any further  vote or action on the part of the  shareholders,
our board of directors  will have the authority to determine the price,  rights,
preferences,  privileges  and  restrictions  of the  preferred  stock.  Although
issuing  preferred  stock could provide us with  flexibility in connection  with
possible  acquisitions  and other corporate  purposes,  the issuance may make it
more difficult for a third party to acquire a majority of our outstanding voting
stock,  which could limit the price  investors are willing to pay for our common
stock.

OUR  CHARTER'S  ANTI-TAKEOVER  PROVISIONS  AND  FLORIDA  LAW COULD  RESTRICT  AN
INVESTOR'S  ABILITY TO PURCHASE OUR COMMON STOCK AT A FAVORABLE PRICE AND AFFECT
OUR MARKET VALUE.

         We have adopted a shareholder  rights plan that may prevent a change in
control  or sale of us in a manner  or on terms  not  approved  by the  board of
directors.  In addition,  our articles of incorporation provide for a classified
board of directors. This structure may significantly extend the time required to
effect a change in control of the board of directors and may discourage  hostile
takeover  bids for us. It could  take at least two  annual  meetings  for even a
majority of  shareholders  to make a change in control of the board of directors
because  only a minority of the  directors  is  scheduled  to be elected at each
meeting.  Without the ability to easily obtain immediate control of the board of
directors,  a  takeover  bidder may not be able to take  action to remove  other
impediments to acquiring us.

         We are also subject to several  anti-takeover  provisions that apply to
public  corporations  organized  under Florida law. These  provisions  generally
require that certain  transactions  between a  corporation  and a holder of more
than 10% of its outstanding  voting securities must be approved by a majority of
disinterested  directors or the holders of  two-thirds  of the voting shares not
beneficially  owned  by  an  "interested  shareholder."  Additionally,  "control
shares" (shares acquired in excess of certain specified  thresholds) acquired in
specified  control  share  acquisitions  have  voting  rights only to the extent
conferred by resolution  approved by shareholders,  excluding  holders of shares
defined as "interested shares."

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

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

         If our shareholders sell substantial amounts of our common stock in the
public  market,  the market  price of our common  stock could fall.  These sales
could be due to shares issued upon exercise of outstanding options.  These sales
also  might  make it more  difficult  for us to sell  equity  or  equity-related
securities in the future at a time and price that we deem  appropriate.  At June
30, 2006, we had granted options to purchase an aggregate of 2,351,940 shares of
common stock at a weighted-average exercise price of $19.52 per share. We cannot
assure  you  that  substantial  sales of our  common  stock  resulting  from the
exercise of stock  options  will not dilute our common  stock or lower our share
price.


                                       14


COMPLIANCE  WITH  CHANGING   REGULATION  OF  CORPORATE   GOVERNANCE  AND  PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.

         Keeping abreast of, and in compliance with, changing laws,  regulations
and standards relating to corporate governance and public disclosure,  including
the  Sarbanes-Oxley  Act of 2002, new SEC  regulations  and Nasdaq Global Market
rules,  will require an increased  amount of  management  attention and external
resources. We intend to continue to invest all reasonably necessary resources to
comply  with  evolving  standards,  which may result in  increased  general  and
administrative  expenses and a diversion of management  time and attention  from
revenue-generating activities to compliance activities.

SECURITIES ANALYSTS MAY NOT CONTINUE OR INITIATE COVERAGE OF OUR COMMON STOCK OR
MAY ISSUE NEGATIVE  REPORTS,  AND THIS MAY HAVE A NEGATIVE  IMPACT ON OUR COMMON
STOCK'S MARKET PRICE.

         There is no assurance that securities analysts will continue to publish
research  reports on us. If  securities  analysts do not,  this lack of research
coverage may  adversely  affect the market price of our common  stock.  Recently
adopted  rules  mandated  by  the  Sarbanes-Oxley  Act  of  2002,  and a  global
settlement  reached between the SEC, other  regulatory  agencies and a number of
investment  banks in April 2003, has led to a number of  fundamental  changes in
how analysts  are  reviewed and  compensated.  In  particular,  many  investment
banking firms are now required to contract with independent  financial  analysts
for their stock research.  It may be difficult for companies with smaller market
capitalizations,  including us, to attract  independent  financial  analysts who
will cover our common  stock,  which could have a negative  effect on our market
price.

         The  trading  market  for our  common  stock  will  rely in part on the
research and reports that industry or financial analysts publish about us or our
business.  If one or more of the analysts who cover us downgrades our stock, our
stock price  could  decline  rapidly.  If one or more of these  analysts  ceases
coverage  of us, we could lose  visibility  in the  market,  which in turn could
cause our stock price to decline.

1B.      UNRESOLVED STAFF COMMENTS.

         None.

2.       PROPERTIES.

         Our corporate  headquarters  are located in a 32,000 square foot leased
facility  in  Stuart,  Florida  that  accommodates  corporate,   administrative,
customer  service,  marketing,  and sales.  At June 30, 2006, we also leased 113
stationary  service  locations.  These facilities are rented on terms consistent
with market  conditions  prevailing  in the area.  We believe  that our existing
facilities are suitable for our current needs and that additional or replacement
facilities, if needed, are available to meet future needs.

3.       LEGAL PROCEEDINGS.

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

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

         Not applicable.

5.       MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES.

         Our common  stock trades on the Nasdaq  Global  Market under the symbol
"NUCO".  The  following  table  indicates  the high and low sale  prices for our
common stock for each quarterly  period during fiscal 2005 and 2006, as reported
by the Nasdaq Global Market.


                                       15


                                    High          Low
                                    ----          ---
Calendar 2004
-------------
Third Quarter                   $   20.58     $   15.28
Fourth Quarter                      25.00         18.58

Calendar 2005
-------------
First Quarter                   $   26.62     $   20.70
Second Quarter                      27.87         22.73
Third Quarter                       27.34         23.42
Fourth Quarter                      28.77         21.24

Calendar 2006
-------------
First Quarter                   $   32.57     $   27.60
Second Quarter                      32.46         23.81

         At September 10, 2006, there were  approximately  200 holders of record
of our  common  stock,  although  there is a much  larger  number of  beneficial
owners.

         We have never  paid cash  dividends  on our common  stock and we do not
anticipate  declaring any cash dividends on our common stock in the  foreseeable
future.  We intend to retain all future  earnings for use in the  development of
our business.

         The following  table sets forth certain  information  regarding  equity
compensation plans as of June 30, 2006.

                      EQUITY COMPENSATION PLAN INFORMATION

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

Equity compensation plans            2,351,940                   $19.52                         857,000
approved by security          shares of common stock                                     shares of common stock
holders ...

Equity compensation plans                0                         0                                  0
not approved by security
holders ...

          Total ...                    2,351,940                 $19.52                         857,000
                              shares of common stock                                     shares of common stock


                                       16


6.       SELECTED FINANCIAL DATA.

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


                                                                       Fiscal Year Ended June 30,
                                                                       --------------------------
                                                    2006           2005*          2004*         2003*          2002*
                                                    ----           -----          -----         -----          -----
                                                      (in thousands, except per share amounts and Operating Data)
INCOME STATEMENT DATA:
Product sales                                     $  75,959      $  60,518      $  49,115     $  45,027      $  45,267
Equipment rentals                                    40,237         36,822         31,721        29,382         27,045
                                                  ---------      ---------      ---------     ---------      ---------

Total revenues                                      116,196         97,340         80,836        74,409         72,312
                                                  ---------      ---------      ---------     ---------      ---------

Cost of products sold, excluding depreciation
and amortization                                     49,397         41,278         33,883        32,047         31,903
Cost of equipment rentals, excluding
depreciation and amortization                         3,086          2,391          2,345         3,513          3,595
Selling, general and administrative expenses         24,146         17,020         15,722        17,484         17,614
Depreciation and amortization                        18,333         16,484         15,234        17,167         16,319
Loss on asset disposal                                1,733          1,332          1,242         1,650          4,654
                                                  ---------      ---------      ---------     ---------      ---------

Operating income (loss)                              19,501         18,835         12,410         2,548         (1,773)
Loss on early extinguishment of debt                   --            5,817          1,964          --              796
Unrealized loss on financial instrument                (177)          --              177          --             --
Interest expense                                      1,989          6,985          7,947         7,487          8,402
                                                  ---------      ---------      ---------     ---------      ---------

Net income (loss) before income taxes                17,689          6,033          2,322        (4,939)       (10,971)
Provision for (benefit from) income taxes             7,341        (19,558)           142          --             --
                                                  ---------      ---------      ---------     ---------      ---------
Net income (loss)                                 $  10,348      $  25,591      $   2,180     $  (4,939)     $ (10,971)
                                                  =========      =========      =========     =========      =========

Net income (loss) per basic common share          $    0.67      $    1.98      $    0.13     $   (0.54)     $   (1.32)
Net income (loss) per diluted common share        $    0.65      $    1.79      $    0.12     $   (0.54)     $   (1.32)

Weighted average shares outstanding - basic          15,427         12,808         10,689        10,396          8,742
Weighted average shares outstanding - diluted        15,997         14,295         11,822        10,396          8,742

OTHER DATA:
EBITDA (1)                                        $  37,834      $  35,319      $  27,644     $  19,715      $  14,546

Total company owned bulk CO2 systems serviced        93,000         82,000         68,000        63,000         61,000
Customer owned bulk CO2 systems serviced             18,000         16,000         12,000        11,000          9,000
                                                  ---------      ---------      ---------     ---------      ---------
Total bulk CO2 systems serviced                     111,000         98,000         80,000        74,000         70,000
Total high pressure CO2 customers                     2,000          1,000          1,000         1,000          1,000
                                                  ---------      ---------      ---------     ---------      ---------
Total customers                                     113,000         99,000         81,000        75,000         71,000
Stationary depots                                       113            103             97            91             76
Mobile depots                                            12             14             11            10             22
Bulk CO2 trucks                                         230            203            173           168            161
Technical service vehicles                              117             92             83            73             76
High pressure cylinder delivery trucks                    3           --             --            --             --

BALANCE SHEET DATA:
Cash and cash equivalents                         $     341      $     968      $     505     $     455      $   1,562
Total assets                                        199,007        173,132        128,502       125,846        132,638
Total debt (including short-term debt)               35,450         32,000         66,173        70,529         87,660
Redeemable preferred stock                             --             --           10,021         9,258          8,552
Total shareholders' equity                          146,924        129,184         40,756        34,936         25,219

*Restated to conform to current year presentation.


                                       17


(1) RECONCILIATION OF GAAP AND EBITDA

                                                                 Fiscal Year Ended June 30,
                                                                 --------------------------
                                                2006          2005          2004          2003          2002
                                                ----          ----          ----          ----          ----
Net Income (loss)                             $ 10,348      $ 25,591      $  2,180      $ (4,939)     $(10,971)
Interest expense                                 1,989         6,985         7,947         7,487         8,402
Depreciation and amortization                   18,333        16,484        15,234        17,167        16,319
Provision for (benefit from) income taxes        7,341       (19,558)          142          --            --
Unrealized loss on financial instrument           (177)         --             177          --            --
Loss on early extinguishment of debt              --           5,817         1,964          --             796
                                              --------      --------      --------      --------      --------

EBITDA                                        $ 37,834      $ 35,319      $ 27,644      $ 19,715      $ 14,546
                                              ========      ========      ========      ========      ========

Cash flows provided by (used in):
    Operating activities                      $ 33,578      $ 29,651      $ 21,657      $ 15,826      $ 10,858
    Investing activities                      $(41,682)     $(38,781)     $(16,595)     $(13,891)     $(12,817)
    Financing activities                      $  7,477      $  9,593      $ (5,012)     $ (3,042)     $  2,895

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

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

OVERVIEW

         We believe we are the leading supplier of bulk CO2 systems and bulk CO2
for carbonating  fountain  beverages in the United States based on the number of
bulk CO2 systems  leased to  customers  and the only  company in our industry to
operate a national network of bulk CO2 service  locations.  As of June 30, 2006,
we operated a national network of 125 service locations servicing  approximately
113,000  customer  locations  in 45 states.  Currently,  virtually  all fountain
beverage users in the  continental  United States are within our present service
area.  On  October 1,  2004,  we  purchased  the bulk CO2  beverage  carbonation
business of Pain Enterprises,  Inc. The transaction  involved the acquisition of
approximately  9,000 customer accounts,  including  approximately 6,300 tanks in
service,  vehicles, parts, and supplies. On September 30, 2005, we purchased the
beverage  carbonation business in northern California of Bay Area Equipment Co.,
Inc. We acquired approximately 2,500 customer accounts, including 1,000 tanks in
service,  vehicles,  parts,  and  supplies.  In addition,  on June 30, 2006,  we
acquired  the  bulk  CO2  beverage  carbonation  business  in 18  states  in the
southwest  and  midwest,  as  well  as  parts  of the  southeast,  of  Coca-Cola
Enterprises Inc. We acquired approximately 3,000 accounts, including 2,400 tanks
in  service.  These  acquisitions  provide  further  penetration  and  operating
efficiencies in markets in which we operate.

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


                                       18


         We have  entered  into  master  service  agreements  which  include  85
restaurant and convenience store concepts that provide fountain beverages. These
master service agreements  generally provide for a commitment on the part of the
operator for all of its currently  owned  locations and may also include  future
locations.  We  currently  service  approximately  52,000  chain and  franchisee
locations  with  chains  that have  signed  master  service  agreements.  We are
actively  working on  expanding  the number of master  service  agreements  with
numerous restaurant chains.

         We believe that our future  revenue  growth,  gains in gross margin and
profitability  will be  dependent  upon (1)  increases  in route  density in our
existing   markets  and  the  expansion  and  penetration  of  bulk  CO2  system
installations  in new market  regions,  both resulting from  successful  ongoing
marketing,  (2) improved  operating  efficiencies and (3) price  increases.  New
multi-unit placement agreements combined with single-unit  placements will drive
improvements  in achieving route density.  We maintain a highly  efficient route
structure and  establish  additional  service  locations as service areas expand
through geographic  growth. Our entry into many states was accomplished  largely
through the acquisition of businesses having thinly developed route networks. We
expect to benefit  from route  efficiencies  and other  economies of scale as we
build our customer  base in these states  through  intensive  regional and local
marketing initiatives.  Greater density should also lead to enhanced utilization
of vehicles and other fixed assets and the ability to spread fixed marketing and
administrative costs over a broader revenue base.

         Generally, our experience has been that as our service locations mature
their gross profit margins  improve as a result of business  volume growth while
fixed  costs  remain  essentially  unchanged.  New service  locations  typically
operate at low or negative  gross  margins in the early  stages and detract from
our highly profitable service locations in more mature markets.  Accordingly, we
believe that we are in position to build our customer base while maintaining and
improving upon our superior  levels of customer  service,  with minimal  changes
required  to support  our  infrastructure.  We  continue  to focus on  improving
operating  effectiveness,  increasing  prices for our services and strengthening
our workforce,  and anticipate that these initiatives will contribute positively
to all areas of our company.

GENERAL

         Substantially  all of our revenues have been derived from the rental of
bulk CO2 systems  installed at customers'  sites,  the sale of bulk CO2 and high
pressure  cylinder  revenues.  Revenues  have grown from $72.3 million in fiscal
2002 to $116.2  million in fiscal  2006.  We believe  that our  revenue  base is
stable due to the existence of long-term  contracts  with our  customers,  which
generally  rollover with a limited number  expiring  without  renewal in any one
year. Revenue growth is largely dependent on (1) the rate of new bulk CO2 system
installations, (2) the growth in bulk CO2 sales and (3) price increases.

         Cost of products  sold is comprised  of  purchased  CO2 and vehicle and
service  location costs  associated  with the storage and delivery of CO2. As of
June 30, 2006, we operated a total of 347 specialized bulk CO2 delivery vehicles
and technical  service  vehicles that logged  approximately  14 million miles in
fiscal 2006.  While  significant  increases in fuel prices  impact our operating
costs,  such impact is largely offset by fuel surcharges  billed to the majority
of our  customers.  Consequently,  while  the  impact on our  gross  profit  and
operating  income is  substantially  mitigated,  rising fuel prices do result in
lower gross  profit  margins.  Cost of  equipment  rentals is comprised of costs
associated with customer equipment leases.  Selling,  general and administrative
expenses consist of wages and benefits,  dispatch and  communications  costs, as
well as expenses  associated  with  marketing,  administration,  accounting  and
employee training. Consistent with the capital intensive nature of our business,
we incur significant depreciation and amortization expenses. These stem from the
depreciation   of  our  bulk  CO2  systems  and  related   installation   costs,
amortization of deferred lease  acquisition  costs, and amortization of deferred
financing costs and other intangible assets.  With respect to company-owned bulk
CO2 systems,  we capitalize  installation  costs based on a standard  amount per
installation that is associated with specific installations of such systems with
customers under non-cancelable contracts and which would not be incurred but for
a successful  placement.  All other service,  marketing and administrative costs
are expensed as incurred.

         Since 1990, we have devoted  significant  resources to building a sales
and marketing  organization,  adding  administrative  personnel and developing a
national  infrastructure  to  support  the  rapid  growth  in the  number of our
installed  base of bulk  CO2  systems.  The  costs  of  this  expansion  and the
significant  depreciation  expense  recognized  on our  installed  network  have
resulted in accumulated net losses of $19.8 million at June 30, 2006.


                                       19


RESULTS OF OPERATIONS

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

                                                       Fiscal Year Ended June 30,
                                                       --------------------------
Income Statement Data:                                2006        2005        2004
                                                      ----        ----        ----

Product sales                                         65.4%       62.2%       60.8%
Equipment rentals                                     34.6        37.8        39.2
                                                     -----       -----       -----
Total revenues                                       100.0       100.0       100.0

Cost of products sold, excluding
    depreciation and amortization                     42.5        42.4        41.9
Cost of equipment rentals, excluding
    depreciation and amortization                      2.7         2.5         2.9
Selling, general and administrative expenses          20.8        17.5        19.4
Depreciation and amortization                         15.8        16.9        18.8
Loss on asset disposal                                 1.5         1.4         1.6
                                                     -----       -----       -----
Operating income                                      16.8        19.3        15.4
Loss on early extinguishment of debt                   --          6.0         2.5
Unrealized (gain) loss on financial instrument        (0.2)        --          0.2
Interest expense                                       1.7         7.1         9.8
                                                     -----       -----       -----

Income before income taxes                            15.2         6.2         2.9
Provision for (benefit from) income taxes              6.3       (20.1)        0.2
                                                     -----       -----       -----
Net income                                             8.9%       26.3%        2.7%
                                                     =====       =====       =====

FISCAL YEAR ENDED JUNE 30, 2006 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2005

TOTAL REVENUES

         Total revenues increased by $18.9 million, or 19.4%, from $97.3 million
in 2005 to $116.2  million in 2006.  Revenues  derived from our bulk CO2 service
plans increased by $12.6 million,  primarily due to an increase in the number of
customer  locations,  while  revenues  derived  from the  sale of high  pressure
cylinder products, fuel surcharges, equipment sales and other revenues increased
by $6.3  million.  In addition,  the Bay Area  Equipment  transaction  generated
revenues  of $1.8  million  in fiscal  2006.  The number of  customer  locations
utilizing  our  products  and  services  increased  from  approximately   99,000
customers at June 30, 2005 to approximately  113,000 customers at June 30, 2006,
due  primarily to organic  growth and the  acquisition  of  approximately  2,500
customer  accounts  from Bay Area  Equipment  on  September  30,  2005 and 3,000
customer accounts from Coca-Cola Enterprises Inc. on June 30, 2006.

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


                                       20


                                                     Fiscal Year Ended June 30,
                                                     --------------------------
Service Plan                                             2006        2005
                                                         ----        ----
      Bulk budget plan(1)                                52.8%       57.0%
      Equipment lease/product purchase plan(2)           16.5        15.4
      Product purchase plan(3)                           10.3         9.7
      High pressure cylinder(4)                           5.3         5.7
      Other revenues(5)                                  15.1        12.2
                                                         -----      -----
                                                         100.0 %    100.0 %
                                                         =====      =====


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

         PRODUCT SALES - Revenues  derived from the product sales portion of our
service plans increased by $15.4 million,  or 25.5%,  from $60.5 million in 2005
to $76.0  million in 2006.  The increase in revenues is primarily due to a 14.3%
increase in the average number of customer  locations  serviced  combined with a
4.8%  increase in the quantity of CO2 sold to the average  customer due in large
part to the customers acquired in the Pain Enterprises transaction on October 1,
2004, the Bay Area  Equipment  transaction on September 30, 2005, and the impact
of  new  customer  locations  activated  under  master  service  agreements.  In
addition,  sales of products and services  other than bulk CO2 increased by $6.3
million  due in large part to an  increase in  revenues  derived  from  cylinder
products, fuel surcharges, equipment sales and other revenues.

         EQUIPMENT  RENTALS -  Revenues  derived  from the lease  portion of our
service plans increased by $3.4 million,  or 9.3%, from $36.8 million in 2005 to
$40.2 million in 2006,  primarily due to a 13.6%  increase in the average number
of  customer  locations  leasing  equipment  from  us,  the  impact  of the Pain
Enterprises  and Bay Area  Equipment  transactions,  and  price  increases  to a
significant  number of our customers  consistent  with the Consumer Price Index,
offset  by  incentive   pricing   provided  to  multiple   national   restaurant
organizations  utilizing our equipment  under the bulk budget plan and equipment
lease/product  purchase plans pursuant to master service agreements.  The number
of customer  locations  renting  equipment from us increased from  approximately
82,000 at June 30, 2005 to approximately 93,000 at June 30, 2006.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost  of  products  sold,  excluding   depreciation  and  amortization,
increased from $41.3 million in 2005 to $49.4 million in 2006,  while decreasing
as a percentage of product sales revenue from 68.2% to 65.0%.

         Product  costs  increased by $3.9 million from $15.5 million in 2005 to
$19.4 million in 2006. The base price with our primary supplier of CO2 increased
by the Producer Price Index, while the volume of CO2 sold by us increased 19.0%,
primarily  due to a 14.3%  increase  in our  average  customer  base  and a 4.8%
increase in CO2 sold to these  customers.  The  increase in the  quantity of CO2
sold to the  average  customer  is due in large  part to the  impact of the Pain
Enterprises  transaction on October 1, 2004, the Bay Area Equipment  transaction
on September 30, 2005, and master service agreements.

         Operational  costs,  primarily  wages and  benefits  related to cost of
products  sold,  increased  from $16.0 million in 2005 to $18.6 million in 2006,
primarily due to a $1.9 million  increase in route driver costs  associated with
an increased  customer base. As of June 30, 2006, we had 352 drivers as compared
to 332 at the  same  point  last  year  and  270  at  the  end of  fiscal  2004.
Operational  related costs also included costs directly related to the two major
hurricanes to hit the southeastern  United States in the first quarter of fiscal
2005.

         Truck  delivery  expenses  increased  from $6.4 million in 2005 to $7.7
million in 2006 primarily due to the increased  customer base and fuel costs. We
have been able to continue to minimize  the impact of  increased  fuel costs and
variable  lease  costs  associated  with truck  usage by  continuing  to improve
efficiencies in the timing and routing of deliveries.


                                       21


         Occupancy  and shop costs  related to cost of products  sold  increased
from $3.4 million in 2005 to $3.7 million in 2006.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost of equipment  rentals,  excluding  depreciation and  amortization,
increased from $2.4 million in 2005 to $3.1 million in 2006 while  increasing as
a percentage of equipment rentals revenue from 6.5% to 7.7%. The increase in the
cost  of  equipment  rentals  is  primarily  related  to  additional  wages  and
transportation costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling,  general and administrative expenses increased by $7.1 million
from $17.0  million  in 2005 to $24.1  million in 2006,  while  increasing  as a
percentage of total revenues from 17.5% in 2005 to 20.8% in 2006.

         Selling related expenses  increased by $1.3 million,  from $3.6 million
in 2005 to $4.9 million in 2006,  primarily the result of the planned conversion
of select  independent sales  representatives to salaried employees and expenses
directed towards training, marketing and growth opportunities.

         General and  administrative  expenses  increased  by $5.9  million,  or
43.7%,  from $13.4 million in 2005 to $19.3 million in 2006. We adopted SFAS No.
123-R,  "Share-Based  Payments"  (SFAS  123-R)  on  July  1,  2005  (see  Recent
Accounting  Pronouncements).  As a result,  share-based compensation expense was
$3.3 million in 2006 with no  comparable  expense  recorded in our  statement of
operations  prior to the date of adoption.  In addition,  this  increase was the
result  of the  addition  of our new Chief  Customer  Officer,  wage  increases,
hurricane related expenses, public company related expenses,  including expenses
related to the Sarbanes-Oxley Act.

DEPRECIATION AND AMORTIZATION

         Depreciation and  amortization  increased from $16.5 million in 2005 to
$18.3  million in 2006.  As a percentage  of total  revenues,  depreciation  and
amortization expense decreased from 16.9% in 2005 to 15.8% in 2006.

         Depreciation  expense  increased  from  $13.8  million in 2005 to $15.3
million  in  2006.  The  increase  was due in  large  part to the  purchase  and
placement of bulk CO2 tanks at customer sites and equipment from acquisitions.

         Amortization  expense  increased from $2.7 million 2005 to $3.0 million
2006. The decrease in the amortization of certain deferred charges was offset by
the increased  amortization  of  intangible  assets  related to our  acquisition
activities over the last year, and deferred lease acquisition costs.

LOSS ON ASSET DISPOSAL

         Loss on asset  disposal  increased  from $1.3  million  in 2005 to $1.7
million in 2006, increasing as a percentage of total revenues from 1.4% to 1.5%.
The increase in expense is primarily related to the impact of Hurricane Katrina,
a major  hurricane,  which  directly or indirectly  impacted our  operations and
assets  in  northwest  Florida  and  in  portions  of  Alabama,   Louisiana  and
Mississippi.

OPERATING INCOME

         For the reasons  previously  discussed,  operating  income increased by
$0.7  million  from  $18.8  million  in 2005 to  $19.5  million  in  2006.  As a
percentage of total revenues, operating income decreased from 19.3% to 16.8%.

LOSS ON EARLY EXTINGUISHMENT OF DEBT

         In the fourth quarter of fiscal 2005, we accelerated the recognition of
$2.4 million in deferred  financing costs associated with the refinancing of our
long-term  debt.  In addition,  in  connection  with the  repayment of our 16.3%


                                       22


Senior  Subordinated  Promissory Notes we incurred a prepayment  penalty of $1.8
million  and  accelerated  the  recognition  of the  unamortized  portion of the
original issue discount associated with those notes, $1.6 million.

         See "Liquidity and Capital Resources."

GAIN ON FINANCIAL INSTRUMENT

         We use  derivative  instruments  to manage  exposure to  interest  rate
risks.  Our objectives for holding  derivatives  are to minimize the risks using
the most  effective  methods to eliminate or reduce the impact of this exposure.
In  order  to  reduce  our  exposure  to  increases  in  Eurodollar  rates,  and
consequently to increases in interest payments, we entered into an interest rate
swap  transaction  (the "Prior Swap") on October 2, 2003, in the amount of $20.0
million  with an  effective  date of  March  15,  2004  and a  maturity  date of
September 15, 2005. As the Prior Swap was not effective until March 15, 2004 and
no cash flows were exchanged prior to that date, the Prior Swap did not meet the
requirements  to be designated as a cash flow hedge. As such, an unrealized loss
of $0.2 million was  recognized in our  statement of  operations  for the fiscal
year ended June 30, 2004,  reflecting the change in fair value of the Prior Swap
from  inception to the effective  date. As of March 15, 2004, the Prior Swap met
the  requirements  to be designated as a cash flow hedge and was deemed a highly
effective transaction.  Accordingly, we recorded the change in fair value of the
Prior  Swap  from  March  15,  2004  through   September   15,  2005,  as  other
comprehensive  income, which was reversed upon the termination of the Prior Swap
in September 2005. In addition,  upon termination of the Prior Swap, we reversed
the unrealized  loss of $0.2 million  previously  recognized in our statement of
operations.

INTEREST EXPENSE

         Interest expense decreased from $7.0 million in 2005 to $2.0 million in
2006,  while the effective  interest rate of our debt  decreased  from 10.4% per
annum  in 2005  to  5.9%  per  annum  in  2006.  This  reduction  was due to the
redemption of our 16.3% Senior  Subordinated  Promissory Notes in April 2005 and
the  refinancing  of our senior credit  facility in May 2005. See "Liquidity and
Capital Resources."

INCOME BEFORE PROVISION FOR INCOME TAXES

         Primarily for the reasons  described  above under interest  expense and
the loss on early  extinguishment  of debt,  income before  provision for income
taxes increased by 192.2%, from $6.0 million in 2005 to $17.7 million in 2006.

PROVISION FOR INCOME TAXES

         During 2005 we recorded a $19.6 million  income tax benefit as compared
to a provision  for income taxes of $7.3  million in 2006.  As of June 30, 2005,
after  consideration  of  all  available  positive  and  negative  evidence,  we
concluded  that the  deferred  tax  asset  relating  to our net  operating  loss
carryforwards  will more likely than not be  realized in the future.  Thus,  the
entire  valuation  allowance  previously  recorded was reversed as of that date.
Accordingly,  during the fiscal year ended June 30,  2006,  we  recognized a tax
provision  consistent with our effective tax rate. However,  while we anticipate
continuing to recognize a full tax provision in future periods, we expect to pay
only AMT and  state/local  taxes  until  such time that our net  operating  loss
carryforwards are fully utilized.

         As of June  30,  2006,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $102 million and for state purposes
in varying amounts. The net operating loss carryforwards are available to offset
future taxable income,  if any, through June 2025. If an "ownership  change" for
federal income tax purposes were to occur in the future,  our ability to use our
pre-ownership  change  federal and state net operating loss  carryforwards  (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under  certain  circumstances  may prevent us from being able to utilize a
portion  of such loss  carryforwards  in future tax  periods  and may reduce our
after-tax cash flow.

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


                                       23


the  carryforwards.  In order to utilize the entire  deferred  tax asset will we
need to generate taxable income of approximately $111 million.  We will continue
to evaluate  whether or not our net deferred  tax assets will be fully  realized
prior to expiration. Should it become more likely than not that all or a portion
of the net deferred tax assets will not be realized a valuation  allowance  will
be recorded.

NET INCOME

         For the  reasons  described  above,  net  income  decreased  from $25.6
million 2005 to $10.3 million in 2006.

EBITDA

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

         EBITDA,  as set forth in the table below (in  thousands),  increased by
$2.5  million,  from  $35.3  million  in 2006 to $37.8  million  in 2006,  while
decreasing as a percentage of total revenues from 36.3% to 32.6%. EBITDA in 2006
includes the $3.3 million impact of the adoption of SFAS 123-R in July 2005.

                                             Fiscal Year Ended June 30,
                                             --------------------------
                                                 2006          2005
                                                 ----          ----
Net income                                    $ 10,348      $ 25,591
Interest expense                                 1,989         6,985
Depreciation and amortization                   18,333        16,484
Provision for (benefit from) income taxes        7,341       (19,558)
Gain on financial instrument                      (177)         --
Loss on early extinguishment of debt              --           5,817
                                              --------      --------
EBITDA                                        $ 37,834      $ 35,319
                                              ========      ========

Cash flows provided by (used in):
  Operating activities                        $ 33,578      $ 29,651
  Investing activities                        $(41,682)     $(38,781)
  Financing activities                        $  7,477      $  9,593

FISCAL YEAR ENDED JUNE 30, 2005 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2004

TOTAL REVENUES

         Total revenues increased by $16.5 million, or 20.4%, from $80.8 million
in 2004 to $97.3  million in 2005.  Revenues  derived  from our bulk CO2 service
plans increased by $13.9 million,  primarily due to an increase in the number of
customer locations.  During the year, the number of customer locations utilizing
our bulk CO2 services increased from 80,000 customers at June 30, 2004 to 98,000
at June 30, 2005, due to strong organic growth and the purchase of approximately
9,000 customer  locations from Pain  Enterprises,  Inc. on October 1, 2004 which
generated  revenues of $7.3 million in 2005. In addition,  revenues derived from
the sale of high pressure cylinder products, fuel surcharges, and other revenues
increased by $2.6 million.

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


                                       24


                                                      Fiscal Year Ended June 30,
                                                      --------------------------
    Service Plan                                          2005        2004
                                                          ----        ----
          Bulk budget plan(1)                             57.0%      61.5%
          Equipment lease/product purchase plan(2)        15.4       12.0
          Product purchase plan(3)                         9.7        8.8
          High pressure cylinder(4)                        5.7        6.0
          Other revenues(5)                               12.2       11.7
                                                         -----      -----
                                                         100.0%     100.0%
                                                         =====      =====

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

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

         PRODUCT SALES - Revenues  derived from the product sales portion of our
service plans increased by $11.4 million,  or 23.2%,  from $49.1 million in 2004
to $60.5  million in 2005.  The increase in revenues is primarily due to a 17.7%
increase in the average number of customer  locations  serviced combined with an
increase in CO2 sold to the average customer. In addition, the sales of products
and services  other than bulk CO2 increased by $2.6 million due in large part to
an increase in revenues  derived from cylinder  products,  fuel  surcharges  and
other revenues.

         EQUIPMENT  RENTALS -  Revenues  derived  from the lease  portion of our
service plans increased by $5.1 million, or 16.1%, from $31.7 million in 2004 to
$36.8 million in 2005,  primarily due to a 16.8%  increase in the average number
of  customer  locations  leasing  equipment  from us and  price  increases  to a
significant  number of our customers  consistent  with the Consumer Price Index,
offset  by  incentive   pricing   provided  to  multiple   national   restaurant
organizations  utilizing our equipment  under the bulk budget plan and equipment
lease/product  purchase plans pursuant to master service agreements.  The number
of customer  locations  renting  equipment from us increased from 68,000 at June
30,  2004 to  82,000 at June 30,  2005,  due to strong  organic  growth  and the
purchase of approximately  6,300 customer locations  utilizing  equipment rental
plans from Pain Enterprises, Inc. on October 1, 2004.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost  of  products  sold,  excluding   depreciation  and  amortization,
increased from $33.9 million in 2004 to $41.3 million in 2005,  while decreasing
as a percentage of product sales revenue from 69.0% to 68.2%.

         Product  costs  increased by $3.1 million from $12.3 million in 2004 to
$15.5 million in 2005. The base price with our primary supplier of CO2 increased
by the Producer Price Index, while the volume of CO2 sold by us increased 25.2%,
primarily  due to a 17.7%  increase  in our  average  customer  base  and a 6.1%
increase in CO2 sold to these customers.

         Operational  costs,  primarily  wages and  benefits  related to cost of
products  sold,  increased  from $13.3 million in 2004 to $16.0 million in 2005,
primarily due to a $2.4 million  increase in route driver costs  associated with
an increased  customer base. As of June 30, 2005, we had 332 drivers as compared
to 270 at the same point last year.

         Truck  delivery  expenses  increased  from $5.2 million in 2004 to $6.4
million in 2005 primarily due to the increased  customer base and fuel costs. We
have been able to minimize the impact of increased fuel costs and variable lease


                                       25


costs  associated with truck usage by continuing to improve  efficiencies in the
timing and routing of deliveries. While total miles driven increased by 12.8% on
an average  customer  base that  increased  by 17.7%,  miles  driven per average
customer decreased 5.1%

         Occupancy  and shop costs  related to cost of products  sold  increased
from $3.1 million in 2004 to $3.3 million in 2005.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

         Cost of equipment  rentals,  excluding  depreciation and  amortization,
increased from $2.3 million in 2004 to $2.4 million in 2005 while  decreasing as
a percentage of equipment rentals revenue from 7.4% to 6.5%. The increase in the
cost  of  equipment   rental   expense  is  primarily   related  to   additional
refurbishment expense associated with tanks acquired from Pain Enterprises, Inc.
in October 2004, and the rental of bulk CO2 equipment from third parties.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling,  general and administrative expenses increased by $1.3 million
from $15.7  million  in 2004 to $17.0  million in 2005,  while  decreasing  as a
percentage of total revenues from 19.4% in 2004 to 17.5% in 2005.

         Selling related expenses  increased by $0.3 million,  from $3.3 million
in 2004 to $3.6  million  in 2005,  primarily  the result of  expenses  directed
towards training, marketing and growth opportunities.

         General and administrative expenses increased by $1.0 million, or 7.9%,
from $12.4  million  in 2004 to $13.4  million in 2005.  This  increase  was the
result of  acquisition  integration,  wage  increases,  provision  for  doubtful
accounts,  public company related  expenses,  including  expenses related to the
Sarbanes-Oxley  Act of 2002, and expenses  associated  with the four  hurricanes
that  impacted the  southeastern  United  States in during the first  quarter of
fiscal 2005.

DEPRECIATION AND AMORTIZATION

         Depreciation and  amortization  increased from $15.2 million in 2004 to
$16.5  million in 2005.  As a percentage  of total  revenues,  depreciation  and
amortization expense decreased from 18.8% in 2004 to 16.9% in 2005.

         Depreciation  expense  increased  from  $13.2  million in 2004 to $13.8
million in 2005. An increase of  approximately  $0.5 million due to the purchase
of tanks and equipment from Pain Enterprises, Inc., was offset by a $0.3 million
decrease in  depreciation  associated  with the shortened lives of certain small
tanks that were  partially  impaired and scheduled to be phased out over a three
to four year period commencing June 30, 2002.

         Amortization  expense  increased  from  $2.0  million  in  2004 to $2.7
million in 2005.  This increase is due in large part to a $0.6 million  increase
in amortization  associated with the acquisition of customer  accounts and other
intangible assets associated with the Pain Enterprises, Inc. transaction.

LOSS ON ASSET DISPOSAL

         Loss on asset  disposal  increased  from $1.2  million  in 2004 to $1.3
million in 2005, decreasing as a percentage of total revenues from 1.6% to 1.4%.

OPERATING INCOME

         For the reasons  previously  discussed,  operating  income increased by
$6.4  million  from  $12.4  million  in 2004 to  $18.8  million  in  2005.  As a
percentage of total  revenues,  operating  income improved from 15.4% in 2004 to
19.3% in 2005.

LOSS ON EARLY EXTINGUISHMENT OF DEBT

         In the first quarter of fiscal 2004, we accelerated  the recognition of
$1.5 million in deferred  financing costs associated with the refinancing of our
long-term  debt. In addition,  we accelerated the recognition of the unamortized


                                       26


portion  of  the  original  issue  discount   associated  with  our  12%  Senior
Subordinated   Promissory  Notes,  $0.4  million,   and  paid  $0.1  million  in
conjunction with the early termination of an interest rate swap agreement.

         In the fourth quarter of fiscal 2005, we accelerated the recognition of
$2.4 million in deferred  financing costs associated with the refinancing of our
long-term  debt.  In addition,  in  connection  with the  repayment of our 16.3%
Senior  Subordinated  Promissory Notes we incurred a prepayment  penalty of $1.8
million  and  accelerated  the  recognition  of the  unamortized  portion of the
original issue discount associated with those notes, $1.6 million.

         See "Liquidity and Capital Resources."

UNREALIZED LOSS ON FINANCIAL INSTRUMENT

         In order to reduce our  exposure to increases  in  Eurodollar  interest
rates, and consequently to increases in interest  payments,  on October 2, 2003,
we entered into an interest rate swap  transaction (the "Swap") in the amount of
$20.0 million (the "Notional  Amount") with an effective date of March 15, 2004.
Pursuant  to the  Swap,  we pay a fixed  interest  rate of 2.12%  per  annum and
receive  a  Eurodollar-based  floating  rate.  The  effect  of  the  Swap  is to
neutralize any changes in Eurodollar rates on the Notional  Amount.  As the Swap
was not effective until March 15, 2004 and no cash flows were exchanged prior to
that date,  the Swap did not meet the  requirements  to be  designated as a cash
flow hedge.  As such, an unrealized  loss of $0.2 million was  recognized in our
results of operations for the three months ended March 31, 2004,  reflecting the
change in fair value of the Swap from  inception to the  effective  date.  As of
March 31, 2004,  the Swap met the  requirements  to be designated as a cash flow
hedge and is deemed a highly effective transaction.

INTEREST EXPENSE

         Interest expense decreased from $7.9 million in 2004 to $7.0 million in
2005,  while  decreasing as a percentage of total  revenues from 9.8% in 2004 to
7.1% in 2005.  This  reduction  in expense was due in large part to repayment of
our  16.3%  Senior   Subordinated   Promissory  Notes  in  April  2005  and  the
modification of our former senior  borrowing  facilities at more favorable rates
in October 2004 in conjunction with the Pain Enterprises,  Inc. transaction. See
"Liquidity and Capital Resources."

         The effective interest rate of our debt decreased from 11.4% in 2004 to
10.4% in 2005, with the weighted cost of borrowing on our outstanding debt as of
June 30, 2005 being 4.8%.

INCOME BEFORE INCOME TAXES

         For the reasons  described above,  income before income taxes increased
from $2.3 million 2004 to $6.0 million in 2005.

PROVISION FOR INCOME TAXES

         As of June 30, 2005, after  consideration of all available positive and
negative evidence,  we concluded that the deferred tax asset relating to our net
operating  loss  carryforwards  will more  likely  than not be  realized  in the
future.  Thus,  the entire  valuation  allowance  was reversed and reported as a
component  of the fiscal 2005 income tax  provision.  See  "Critical  Accounting
Policies and Significant Estimates."  Accordingly,  we recognized a $19.6 income
tax benefit in fiscal 2005.  During fiscal 2004, we recognized  $0.1 million for
AMT and state/local taxes.

         As of June  30,  2005,  we had net  operating  loss  carryforwards  for
federal income tax purposes of approximately $114 million and for state purposes
in varying  amounts,  which are available to offset federal taxable  income,  if
any, in varying amounts through June 2025. If an "ownership  change" for federal
income  tax  purposes  were to  occur  in the  future,  our  ability  to use our
pre-ownership  change  federal and state net operating loss  carryforwards  (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under  certain  circumstances  may prevent us from being able to utilize a
portion  of such loss  carryforwards  in future tax  periods  and may reduce our
after-tax cash flow. In addition,  a portion of our future taxable income may be
subject to the alternative minimum tax ("AMT").


                                       27


NET INCOME

         For the reasons described above, net income increased from $2.2 million
2004 to $25.6 million in 2005.

EBITDA

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

         EBITDA,  as set forth in the table below (in  thousands),  increased by
$7.7 million,  or 27.8%, from $27.6 million in 2004 to $35.3 million in 2005 and
increased as a percentage of total revenues from 34.2 % to 36.3%.

                                             Fiscal Year Ended June 30,
                                             --------------------------
                                                2005           2004
                                                ----           ----
Net income                                    $ 25,591      $  2,180
Interest expense                                 6,985         7,947
Depreciation and amortization                   16,484        15,234
Provision for (benefit from) income taxes      (19,558)          142
Unrealized loss on financial instrument           --             177
Loss on early extinguishment of debt             5,817         1,964
                                              --------      --------
EBITDA                                        $ 35,319      $ 27,644
                                              ========      ========

Cash flows provided by (used in):
  Operating activities                        $ 29,651      $ 21,657
  Investing activities                        $(38,781)     $(16,595)
  Financing activities                        $  9,593      $ (5,012)

RECENT ACCOUNTING PRONOUNCEMENTS

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

         In March 2005, the FASB issued  Interpretation  No. 47, "ACCOUNTING FOR
CONDITIONAL  ASSET RETIREMENT  OBLIGATIONS - AN  INTERPRETATION OF SFAS NO. 143"
("FIN  47"),  effective  no later  than the end of  fiscal  years  ending  after
December 15, 2005. This Interpretation clarifies that the term conditional asset
retirement  obligation as used in SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS"  ("SFAS  143"),  refers to a legal  obligation  to perform an asset
retirement  activity  in which the  timing  and (or)  method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though  uncertainty  exists about the timing and (or) method of settlement.
Thus,  the timing and (or) method of settlement  may be  conditional on a future
event. Accordingly,  an entity is required to recognize a liability for the fair
value of a  conditional  asset  retirement  obligation  if the fair value of the
liability  can be  reasonably  estimated.  The fair value of a liability for the
conditional   asset   retirement    obligation   should   be   recognized   when
incurred--generally  upon  acquisition,  construction,  or development  and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement  of a conditional  asset  retirement  obligation  should be
factored into the  measurement  of the  liability  when  sufficient  information
exists. The adoption of FIN 47 had no material impact on our financial position,
results of operations or cash flows.

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

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

         The  modified  prospective  application  applies  to new  awards and to
awards  modified,  repurchased,  or cancelled on or after the effective  date of
July 1,  2005.  Additionally,  compensation  cost for the  portion of awards for
which the requisite service has not been rendered that are outstanding as of the
effective  date shall be recognized  as the requisite  service is rendered on or
after the required  effective  date. The  compensation  cost for that portion of
awards shall be based on the grant-date fair value of those awards as calculated
for either  recognition or pro forma  disclosures under SFAS 123. Changes to the
grant-date  fair value of equity awards  granted  before the required  effective
date of this Statement are precluded.  In addition,  the  compensation  cost for
those earlier  awards shall be  attributed to periods  beginning on or after the


                                       28


required effective date of SFAS 123-R using the attribution method that was used
under SFAS 123 except that the method of  recognizing  forfeitures  only as they
occur shall not be continued.

            In  November  2005,  the FASB  issued  FSP FAS  123R-3,  "TRANSITION
ELECTION  RELATED  TO  ACCOUNTING  FOR THE TAX  EFFECTS OF  SHARE-BASED  PAYMENT
AWARDS",  to provide an alternate  transition  method for the  implementation of
SFAS 123.  Because some entities do not have,  and may not be able to re-create,
information  about the net excess tax benefits that would have qualified as such
had those entities adopted SFAS 123 for recognition purposes,  this FSP provides
an  elective  alternative   transition  method.  This  method  comprises  (a)  a
computational  component that establishes a beginning  balance of the additional
paid-in  capital pool ("APIC pool") related to employee  compensation  and (b) a
simplified  method  to  determine  the  subsequent  impact  on the APIC  pool of
employee awards that are fully vested and outstanding  upon the adoption of SFAS
123-R.  We adopted the simplified  method set forth in this FSP to determine its
APIC pool.

         On July 1, 2003, we adopted EITF Issue No. 00-21, "REVENUE ARRANGEMENTS
WITH MULTIPLE DELIVERABLES" ("EITF 00-21"). EITF 00-21 addresses certain aspects
of the  accounting  by a vendor for  arrangements  under  which the vendor  will
perform  multiple  revenue   generating   activities.   As  of  June  30,  2006,
approximately  70,000 of our customer  locations  utilized a plan agreement that
provides for a fixed monthly payment to cover the use of a bulk CO2 system and a
predetermined maximum quantity of CO2 ("budget plan"). Prior to July 1, 2003, as
lessor,  we  recognized  revenue from leasing CO2 systems  under our budget plan
agreements on a straight-line basis over the life of the related leases. We have
developed a  methodology  for the purpose of separating  the  aggregate  revenue
stream  between the rental of the equipment  and the sale of the CO2.  Effective
July  1,  2003,  revenue  attributable  to the  lease  of  equipment,  including
equipment  leased under the budget plan,  is recorded on a  straight-line  basis
over the term of the lease and  revenue  attributable  to the  supply of CO2 and
other gases,  including  CO2 provided  under the budget plan,  is recorded  upon
delivery to the customer.  See  "Critical  Accounting  Policies and  Significant
Estimates."

         We  elected  to apply  EITF  00-21  retroactively  to all  budget  plan
agreements in existence as of July 1, 2003. Based on our analysis, the aggregate
amount of CO2 actually  delivered  under  budget plans during the quarter  ended
June 30, 2003 was not materially different than the corresponding portion of the
fixed charges attributable to CO2. Accordingly, we believe the cumulative effect
of the adoption of EITF 00-21 as of July 1, 2003 was not significant.

LIQUIDITY AND CAPITAL RESOURCES

         Our cash requirements  consist principally of (1) capital  expenditures
associated  with  purchasing  and placing new bulk CO2 systems  into  service at
customers'  sites;  (2)  payments  of  principal  and  interest  on  outstanding
indebtedness;  and (3) working capital. Whenever possible, we seek to obtain the
use of vehicles,  land, buildings,  and other office and service equipment under
operating  leases as a means of conserving  capital.  We anticipate  making cash
capital expenditures of approximately $30.0 million for internal growth over the
next  twelve  months,  primarily  for  purchases  of bulk  CO2  systems  for new
customers.

         In addition to capital  expenditures  related to  internal  growth,  we
review opportunities to acquire bulk CO2 service accounts,  and may require cash
in an  amount  dictated  by the scale  and  terms of any such  transactions.  On
October 1, 2004,  we  purchased  the bulk CO2 beverage  carbonation  business of
privately-owned Pain Enterprises, Inc., of Bloomington,  Indiana, for total cash
consideration  of $15.7 million.  The  transaction  involved the  acquisition of
approximately  9,000 customer accounts,  including  approximately 6,300 tanks in
service,  vehicles, parts, and supplies. On September 30, 2005, we purchased the
beverage  carbonation  business  of Bay Area  Equipment  Co.,  Inc.,  for  total
consideration  of $5.2 million.  The  transaction  involved the  acquisition  of
approximately  2,500  customer  accounts,  including  1,000  tanks  in  service,
vehicles,  parts,  and  supplies.  In addition,  on June 30, 2006, we acquired a
portion of the beverage carbonation business of Coca-Cola  Enterprises Inc., for
total  consideration  of $5.0 million.  The acquisition  involved  approximately
3,000 accounts, including 2,400 tanks in service.

LONG TERM DEBT

         On August 25,  2003,  we  terminated  our former  credit  facility  and
entered into a $50.0 million  senior  credit  facility with a syndicate of banks
(the "Senior Credit Facility").  The Senior Credit Facility initially  consisted
of a $30.0 million A term loan  facility (the "A Term Loan"),  a $10.0 million B
term loan  facility  (the "B Term Loan"),  and a $10.0  million  revolving  loan
facility (the  "Revolving  Loan  Facility").  On October 1, 2004, in conjunction
with the Pain  Enterprises,  Inc.  transaction,  the Senior Credit  Facility was
amended to, among other things, increase the B Term Loan to $23.0 million and to
modify certain financial covenants.  The A Term Loan and Revolving Loan Facility


                                       29


were due to mature on August 25,  2007,  while the B Term Loan was due to mature
on August 25,  2008.  We were  entitled to select  either  Eurodollar  Loans (as
defined) or Base Rate Loans (as defined),  plus applicable margin, for principal
borrowings under the Senior Credit Facility. Applicable margin was determined by
a pricing grid based on our Consolidated Total Leverage Ratio (as defined).  The
Senior Credit Facility was collateralized by all of our assets. Additionally, we
were precluded from declaring or paying any cash dividends.

         We  were  also  required  to  meet  certain  affirmative  and  negative
covenants, including but not limited to financial covenants. We were required to
assess our compliance  with these  financial  covenants  under the Senior Credit
Facility on a quarterly basis. These financial covenants were based on a measure
that is not consistent  with  accounting  principles  generally  accepted in the
United States of America. Such measure is EBITDA (as defined),  which represents
earnings before  interest,  taxes,  depreciation  and  amortization,  as further
modified by certain defined  adjustments.  The failure to meet these  covenants,
absent a waiver or amendment, would have placed us in default and cause the debt
outstanding  under the Senior  Credit  Facility  to  immediately  become due and
payable.  We were in  compliance  with all  covenants  under the  Senior  Credit
Facility  as of  September  30,  2003  and  all  subsequent  quarters  up to and
including March 31, 2005.

         On May 27, 2005, we terminated  the Senior Credit  Facility and entered
into a $60.0 million  revolving credit facility with Bank of America,  N.A. (the
"2005 Credit  Facility").  The 2005 Credit Facility  matures on May 27, 2010. We
are entitled to select  either Base Rate Loans (as defined) or  Eurodollar  Rate
Loans (as defined),  plus applicable margin, for principal  borrowings under the
2005 Credit  Facility.  Applicable  margin is  determined  by a pricing grid, as
amended March 2006,  based on our  Consolidated  Leverage  Ratio (as defined) as
follows:


            Pricing      Consolidated Leverage      Eurodollar Rate   Base Rate
             Level               Ratio                   Loans          Loans
            -------------------------------------------------------------------
               I      Greater than or equal to          2.000%          0.500%
                      2.50x

              II      Less than 2.50x but greater       1.750%          0.250%
                      than or equal to 2.00x

              III     Less than 2.00x but greater       1.500%          0.000%
                      than or equal to 1.50x

              IV      Less than 1.50x but greater       1.250%          0.000%
                      than or equal to 0.50x

               V      Less than 0.50x                   1.000%          0.000%

         Interest is payable  periodically  on borrowings  under the 2005 Credit
Facility. The 2005 Credit Facility is uncollateralized.  We are required to meet
certain affirmative and negative covenants,  including financial  covenants.  We
are required to assess our compliance with these  financial  covenants under the
2005 Credit Facility on a quarterly basis.  These financial  covenants are based
on a  measure  that  is not  consistent  with  accounting  principles  generally
accepted in the United  States of America.  Such measure is EBITDA (as defined),
which represents earnings before interest, taxes, depreciation and amortization,
as further  modified by certain defined  adjustments.  The failure to meet these
covenants, absent a waiver or amendment, would place us in default and cause the
debt outstanding  under the 2005 Credit Agreement to immediately  become due and
payable. We were in compliance with all covenants under the 2005 Credit Facility
as of June 30, 2005 and through June 30, 2006.

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

         As of June 30, 2006, a total of $35.5 million was outstanding  pursuant
to the 2005 Credit  Facility with a weighted  average  interest rate of 6.7% per
annum.

SUBORDINATED DEBT

         On August 25, 2003,  concurrently with the closing of the Senior Credit
Facility,  we issued $30.0  million of our 16.3% Senior  Subordinated  Notes Due
February  27, 2009 (the "New  Notes") with  interest  only payable  quarterly in


                                       30


arrears  on  February  28,  May 31,  August  31 and  November  30 of each  year,
commencing  November  30,  2003.  Interest  on the New  Notes  was 12% per annum
payable  in cash and 4.3% per annum  payable  "in kind" by adding  the amount of
such interest to the  principal  amount of the New Notes then  outstanding.  The
weighted  average  effective  interest  rate of the  New  Notes,  including  the
amortization of deferred financing costs and original issue discount,  was 18.0%
per annum.  Ten year warrants to purchase an aggregate of 425,000  shares of our
common stock at an exercise  price of $8.79 per share were issued in  connection
with the New Notes.  Utilizing the  Black-Scholes  Model, the warrants issued in
connection with the New Notes were valued at $3.70 per warrant,  or an aggregate
value  of  $1,573,000.  In  addition,  the  maturity  date of  665,403  existing
warrants,  335,101 due to expire in 2004 and 330,302 due to expire in 2005,  was
extended to February 2009,  resulting in additional value of $1.31 and $0.97 per
warrant,  respectively,  or an  aggregate  value  of  $760,090.  At the  date of
issuance,  in accordance with APB 14,  "ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT
ISSUED WITH PURCHASE  WARRANTS,"  we allocated  proceeds of $27.7 million to the
debt and $2.3 million to the warrants,  with the resulting  discount on the debt
referred to as the Original  Issue  Discount.  The Original  Issue  Discount was
being  amortized  as  interest  expense  over the life of the debt.  As with the
Senior  Credit  Facility,  we were  required  to meet  certain  affirmative  and
negative  covenants under the New Notes,  including but not limited to financial
covenants.  We were in compliance  with all covenants  under the New Notes as of
September 30, 2003 and all  subsequent  quarters up to and  including  March 31,
2005.

         On April 4, 2005,  we used $34.3  million of the net proceeds  from the
sale of 2,041,713 shares of our common stock in an underwritten  public offering
in March 2005 to redeem the New Notes at 106% of the original  principal  amount
plus accrued interest.  In addition,  during the quarter ended June 30, 2005, we
recognized a loss on the early termination of debt associated with the New Notes
of  approximately   $4.1  million,   which  includes  the  prepayment   penalty,
unamortized fees and the amortized portion of the original issue discount.

SHAREHOLDERS' EQUITY

         On March 30, 2005, we sold  2,041,713  shares of our common stock in an
underwritten  public offering.  Based on the public offering price of $24.17 per
share and after deducting underwriting  discounts and commissions,  net proceeds
were approximately  $46.6 million. On March 31, 2005, we reduced the outstanding
principal  amount of the Senior Credit Facility by $11.2 million and on April 4,
2005, we used approximately  $34.3 million of the net proceeds from the offering
to redeem all of the New Notes.

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

OTHER

         During the  fiscal  year ended June 30,  2006,  our  capital  resources
included cash flows from operations and available  borrowing  capacity under the
2005 Credit  Facility.  We believe that cash flows from operations and available
borrowings  under the 2005 Credit  Facility  will be sufficient to fund proposed
operations for at least the next twelve months.

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


                                       31


                                         Less than
Contractual obligations         Total      1 Year     2-3 Years   4-5 Years  Thereafter
                                -----      ------     ---------   ---------  ----------
2005 Credit Facility
   Principal                   $35,450     $  --       $  --       $35,450     $  --
   Interest                      9,025       2,304       4,609       2,112        --
                               -------     -------     -------     -------     -------
Total 2005 Credit Facility      44,475       2,304       4,609      37,562        --
                               -------     -------     -------     -------     -------

Employment agreements            2,299       1,195       1,064          40        --
Operating leases                18,016       5,529       8,322       4,045         120
                               -------     -------     -------     -------     -------
Total obligations              $64,790     $ 9,028     $13,995     $41,647     $   120
                               =======     =======     =======     =======     =======


         In  addition,  in May  1997,  we  entered  into an  exclusive  bulk CO2
requirements contract with The BOC Group, Inc., which expires in April 2012.

         WORKING  CAPITAL.  As of June 30, 2006 and 2005, we had working capital
of $16.7 million and $11.2 million, respectively.

         CASH FLOWS FROM  INVESTING  ACTIVITIES.  During 2005 and 2006, net cash
used in investing activities was $41.7 million and $38.8 million,  respectively.
Investing  activities in 2006 included $4.7 million paid for the  acquisition of
the beverage  carbonation  business of Bay Area Equipment Co., Inc. ("BAE"), and
related acquisition expenses on September 30, 2005 and $5.0 million paid for the
acquisition  of a portion of the  beverage  carbonation  business  of  Coca-Cola
Enterprises  Inc.,  ("CCE") and related  acquisition  expenses on June 30, 2006.
Investing  activities in 2004 included $15.7 million paid for the acquisition of
the bulk CO2 beverage  carbonation  business of Pain Enterprises,  Inc. ("Pain")
and related acquisition expenses. Exclusive of acquisition purchases,  investing
activities  are primarily  attributable  to the  acquisition,  installation  and
direct placement costs of bulk CO2 systems.

         CASH FLOWS FROM FINANCING  ACTIVITIES.  During 2006 cash flows provided
by  financing  activities  was $7.5  million,  compared to $9.6 million in 2005.
During 2006, we borrowed $9.7 million to fund the purchase of BAE and CCE and in
2005 we borrowed approximately $13.0 million to fund the Pain transaction,  much
of which was repaid from cash generated by operations.

         During fiscal 2005, concurrent with the acquisition of Pain, the B Term
Loan of our Senior  Credit  Facility was  increased by $13.0  million from $10.0
million to $23.0  million.  In addition,  on March 30, 2005,  we sold  2,041,713
shares of our common  stock in an  underwritten  public  offering.  Based on the
public  offering  price of $24.17  per share  and after  deducting  underwriting
discounts and commissions,  net proceeds were  approximately  $46.6 million.  On
March 31, 2005, we reduced the outstanding principal amount of the Senior Credit
Facility by $11.2  million  and on April 4, 2005,  we used  approximately  $34.3
million of the net proceeds from the offering to redeem all of the New Notes.

INFLATION

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

         Our bulk CO2 exclusive  requirements  contract with The BOC Group, Inc.
("BOC") provides for annual adjustments in the purchase price for bulk CO2 based
upon  increases or decreases in the Producer Price Index for Chemical and Allied
Products  or the  average  percentage  increase  in the  selling  price  of bulk
merchant  carbon  dioxide  purchased  by BOC's  large,  multi-location  beverage
customers in the United States, whichever is less.

         As of June 30, 2006,  we operated a total of 347  specialized  bulk CO2
delivery  vehicles and technical  service vehicles that logged  approximately 14
million miles in fiscal 2006. While significant  increases in fuel prices impact
our operating costs,  such impact is largely offset by fuel surcharges billed to
the majority of our customers.


                                       32


CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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

REVENUE RECOGNITION

         Effective July 1, 2003, revenue attributable to the lease of equipment,
including  equipment leased under the budget plan, is recorded on a staight-line
basis over the term of the lease and revenue  attributable  to the supply of CO2
and other gasses, including CO2 provided under the budget plan, is recorded upon
delivery to the customer.  Under the budget plan,  customers are billed an equal
monthly  amount  which  includes  CO2 up to an annual  allowance.  The  contract
arrangement  for budget plan  customers is analogous to a "take-or pay" contract
as defined  in SFAS No. 47 as the  budget  plan  purchaser  must make  specified
minimum payments even if it does not take delivery of the contracted products or
services. Each budget plan customer has a maximum CO2 allowance that is measured
and reset on the contract anniversary date. On the contract anniversary date, we
record  revenue in excess of actual  deliveries of CO2 for budget plan customers
that have not used their entire  annual CO2  allowance  equal to the  difference
between their annual CO2 allowance and actual CO2 delivered.

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

 VALUATION OF LONG-LIVED ASSETS

         We review our long-lived  assets for impairment,  principally  property
and equipment,  whenever  events or changes in  circumstances  indicate that the
carrying  amount  of the  assets  may not be  fully  recoverable.  To  determine
recoverability of our long-lived assets, we evaluate the probability that future
undiscounted  net cash  flows will be greater  than the  carrying  amount of our
assets.  Impairment  is measured  based on the  difference  between the carrying
amount of our assets and their estimated fair value.

         Certain events may occur that would materially affect our estimates and
assumptions  related  to  depreciation.  Unforeseen  changes  in  operations  or
technology could  substantially  alter  management's  assumptions  regarding our
ability  to  realize  the  return of our  investment  in  operating  assets  and
therefore  affect the amount of  depreciation  expense  to charge  against  both
current  and future  revenues.  Because  depreciation  expense is a function  of
historical  experiences,  analytical studies and professional  judgments made of
property,  plant and  equipment,  subsequent  studies  could result in different
estimates of useful lives and net salvage values. If future depreciation studies
yield  results  indicating  that our assets  have  shorter  lives as a result of
obsolescence,  physical  condition,  changes  in  technology  or  changes in net
salvage values, the estimate of depreciation  expense could increase.  Likewise,
if studies  indicate that assets have longer lives, the estimate of depreciation
expense could decrease.  For the year ended June 30, 2006,  depreciation expense
was $15.3 million  representing  15.9% of operating  expenses.  If the estimated
lives of all assets being  depreciated were increased by one year,  depreciation
expense would have decreased by approximately $1.0 million or 6.5%.  Conversely,
if the estimated lives of all assets decreased by one year, depreciation expense
would have increased by $1.2 million or 7.5%.

         Goodwill  represents  the  cost in  excess  of the  fair  value  of the
tangible and  identifiable  intangible  net assets of  businesses  acquired and,
prior to July 1, 2001,  was amortized on a  straight-line  method over 20 years.
Effective July 1, 2001, we adopted Statement of Financial  Accounting  Standards
No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," pursuant to which, goodwill and
indefinite  life  intangible  assets are no longer  amortized but are subject to
annual impairment  tests.  Other intangible assets with finite lives continue to
be amortized  on a  straight-line  method over the periods of expected  benefit.
Other   intangible   assets  consist  of  customer  lists  and   non-competition
agreements,  principally acquired in connection with certain asset acquisitions.
Customer  lists are being  amortized on a straight  line method over five to ten


                                       33


years, and non-competition agreements,  which generally preclude the other party
from competing with us in a designated  geographical area for a stated period of
time, are being amortized on a straight line method over their contractual lives
which range from thirty to one hundred and twenty months.

RESERVES FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE

         We make  ongoing  assumptions  relating  to the  collectability  of our
accounts  receivable.  The  accounts  receivable  amount  on our  balance  sheet
includes  a reserve  for  accounts  that  might  not be paid.  Such  reserve  is
evaluated and adjusted on a monthly basis by examining our historical losses and
collections experience,  aging of our trade receivables, the creditworthiness of
significant customers based on ongoing evaluations,  and current economic trends
that might impact the level of credit losses in the future.  The  composition of
receivables consists of on-time payers,  "slow" payers, and at risk receivables,
such as  receivables  from  customers  who no longer do  business  with us,  are
bankrupt, or are out of business. While we believe that our current reserves are
adequate to cover potential  credit losses,  we cannot predict future changes in
the  financial  stability  of our  customers  and we cannot  guarantee  that our
reserves will continue to be adequate. If actual credit losses are significantly
greater than the reserve we have  established,  that would  increase our general
and administrative expenses and reduce our reported net income.  Conversely,  if
actual  credit  losses  are  significantly  less than our  reserve,  this  would
eventually  decrease  our general and  administrative  expenses and increase our
reported net income.

DEFERRED INCOME TAXES

         Deferred income taxes reflect the net tax effects of net operating loss
carryforwards and temporary  differences  between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes.  Our deferred tax assets include the benefit of net operating loss
carryforwards  incurred through June 30, 2005.  While we attained  profitability
during  fiscal year 2004,  based on the  consideration  of all of the  available
evidence including the recent history of losses, management concluded as of June
30, 2004 that it was more likely than not that the net deferred tax assets would
not be realized.  Accordingly,  we recorded a valuation  allowance  equal to the
amount of our net deferred tax assets at that time.

         However,  as of June 30, 2005,  after  consideration  of all  available
positive  and  negative  evidence,  we  concluded  that the  deferred  tax asset
relating to our net operating  loss  carryforwards  will more likely than not be
realized in the future.  Thus, the entire  valuation  allowance was reversed and
reported as a component of the fiscal 2005 income tax provision.  In considering
whether or not a valuation  allowance was appropriate at June 30, 2006 and 2005,
we  considered  several  aspects,  including,  but not limited to the  following
items:

       o Cumulative  pretax  book  income  during the three years ended June 30,
         2006 and 2005

       o Both  positive and  negative  evidence as to our ability to utilize our
         federal net operating loss carry forwards prior to expiration,  such as
         current and projected generation of taxable income, our position in the
         market  place  (servicing  approximately  70%  of  customers  currently
         utilizing  bulk  CO2),   existence  of  long  term  customer  contracts
         (generally for five to six years in duration), growth opportunities and
         conversion of  restaurants  currently  utilizing  high-pressure  CO2 to
         beverage grade bulk CO2

       o Future reversals of taxable temporary differences

       o Tax planning strategies,  including the option of an alternative method
         of depreciating assets for tax purposes

       o The  refinancing of our senior  borrowing  facilities at more favorable
         terms  and   conditions   and  the   retirement  of  our  16.3%  Senior
         Subordinated Notes, lowering our cost of borrowing from 10.5% to 4.8%

         In order to  utilize  the  entire  deferred  tax asset  will we need to
generate  taxable income of approximately  $111 million.  As of June 30, 2006 we
evaluated  and will  continue to evaluate  whether or not our net  deferred  tax
assets will be fully realized prior to expiration.  Should it become more likely
than  not that all or a  portion  of the net  deferred  tax  assets  will not be
realized a valuation allowance will be recorded.


                                       34


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, 2006, a total of $35.5 million was outstanding under the 2005 Credit
Facility with a weighted  average  interest  rate of 6.7% per annum.  Based upon
$35.5 million  outstanding  under the 2005 Credit Facility at June 30, 2006, our
annual  interest  cost under the 2005  Credit  Facility  would  increase by $0.4
million for each 1% increase in Eurodollar interest rates.

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

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

8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See page F-1.

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

         None.

9A.      CONTROLS AND PROCEDURES.

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

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


                                       35


         MANAGEMENT'S   ANNUAL  REPORT  ON  INTERNAL   CONTROL  OVER   FINANCIAL
REPORTING.  Under Section 404 of the  Sarbanes-Oxley Act of 2002, our management
is required to assess the  effectiveness of the Company's  internal control over
financial reporting as of the end of each fiscal year and report,  based on that
assessment,  whether the Company's internal control over financial  reporting is
effective.

         Management  of  the  Company  is  responsible  for   establishing   and
maintaining  adequate internal control over financial  reporting.  The Company's
internal  control over  financial  reporting  is designed to provide  reasonable
assurance as to the  reliability  of the Company's  financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
generally accepted accounting principles.

         Internal control over financial reporting, no matter how well designed,
has inherent limitations.  Therefore,  internal control over financial reporting
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and may not prevent or detect all misstatements.
Moreover,  projections of any evaluation of  effectiveness to future periods are
subject to the risk that  controls may become  inadequate  because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

         The  Company's   management  has  assessed  the  effectiveness  of  the
Company's  internal  control over  financial  reporting as of June 30, 2006.  In
making  this  assessment,  the  Company  used  the  criteria  of the  Integrated
Framework  adopted by the Committee of Sponsoring  Organizations of the Treadway
Commission (COSO). These criteria are in the areas of control environment,  risk
assessment,  control  activities,  information and communication and monitoring.
The Company's assessment included extensive documenting,  evaluating and testing
the design and operating  effectiveness  of its internal  control over financial
reporting.

         Based on the Company's  processes and assessment,  as described  above,
management  has  concluded  that, as of June 30, 2006,  the  Company's  internal
control over financial reporting was effective.

         Margolin, Winer & Evens LLP, the registered public accounting firm that
has audited the Company's  financial  statements  included in this annual report
has issued their attestation report on management's  assessment of the Company's
internal control over financial reporting, which is included herein.

9B.      OTHER INFORMATION.

         Not applicable.

10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by Item 10 is incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 30,
2006 pursuant to Regulation 14A.

11.      EXECUTIVE COMPENSATION.

         The information required by Item 11 is incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 30,
2006 pursuant to Regulation 14A.

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

         The information required by Item 12 is incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 30,
2006 pursuant to Regulation 14A.

13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by Item 13 is incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 30,
2006 pursuant to Regulation 14A.

14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         The information required by Item 14 is incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 30,
2006 pursuant to Regulation 14A.


                                       36


15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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

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

         (2)      Financial Statement Schedules

                  II - Valuation and Qualifying Accounts.

         (3)      Exhibits:

         Exhibit No.          Exhibit
         -----------          -------

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

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

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

         3.4          --      Articles   of   Amendment   to  the   Articles  of
                              Incorporation of the Company,  dated May 10, 2000.
                              (4)

         3.5          --      Articles   of   Amendment   to  the   Articles  of
                              Incorporation  of the Company,  dated  November 1,
                              2001. (5)

         3.6          --      Articles   of   Amendment   to  the   Articles  of
                              Incorporation  of the  Company,  dated  March  31,
                              2003. (9)

         3.7          --      Articles   of   Amendment   to  the   Articles  of
                              Incorporation  of the Company,  dated December 10,
                              2003. (10)

         3.8          --      Bylaws of the Company. (10)

         4            --      Rights  Agreement,  dated  as of March  27,  2003,
                              between the Company and Continental Stock Transfer
                              & Trust Company, as Rights Agent. (8)

         10.1*        --      1995 Stock Option Plan of the Company. (10)

         10.2*        --      Directors' Stock Option Plan of the Company. (11)

         10.3*        --      2005 Executive Management Stock Option Plan of the
                              Company. (16)

         10.4*        --      2005  Non-Employee  Directors Stock Option Plan of
                              the Company. (16)

         10.5*        --      2005  Employee  Stock  Option Plan of the Company.
                              (16)

         10.6         --      Credit  Agreement dated as of May 27, 2005,  among
                              the  Company,  each lender from time to time party
                              thereto   and   Bank   of   America,    N.A.,   as
                              Administrative  Agent,  Swing Line  Lender and L/C
                              Issuer. (12)

         10.7         --      First  Amendment to Credit  Agreement  dated as of
                              March 24, 2006. (17)

         10.8         --      Asset Purchase Agreement dated October 1, 2004, by
                              and between the Company and Pain Enterprises, Inc.
                              (13)


                                       37


         10.9         --      Stock Purchase  Agreement,  dated as of August 22,
                              2002,   by  and   between   the  Company  and  the
                              purchasers named therein. (7)

         10.10        --      Registration  Right Agreement,  dated as of August
                              22,  2002,  by and  between  the  Company  and the
                              selling shareholders named therein. (6)

         10.11*       --      Amended and Restated Employment  Agreement between
                              the Company and Michael  DeDomenico,  effective as
                              of August 10, 2004. (11)

         10.12*       --      Employment   Agreement  between  the  Company  and
                              William Scott Wade, dated as of May 13, 2002. (7)

         10.13*       --      Amendment  dated  December  9, 2004 to  Employment
                              Agreement  by and  between the Company and William
                              Scott Wade. (14)

         10.14*       --      Amendment   No.  2  dated   January  23,  2006  to
                              Employment  Agreement  by and  between the Company
                              and William Scott Wade. (18)

         10.15*       --      Employment   Agreement  between  the  Company  and
                              Robert R.  Galvin,  dated as of October 21,  2002.
                              (9)

         10.16*       --      Amendment  dated  December  9, 2004 to  Employment
                              Agreement by and between the Company and Robert R.
                              Galvin. (14)

         10.17*       --      Amendment   No.  2  dated   January  23,  2006  to
                              Employment  Agreement  by and  between the Company
                              and Robert R. Galvin. (18)

         10.18*       --      Letter  Agreement  dated  December  9, 2004 by and
                              between the Company and Eric M. Wechsler. (14)

         10.19*       --      Employment  Agreement between the Company and John
                              E. Wilson, dated as of June 6, 2005. (15)

         10.20*       --      Stock  Option  Agreement  between  the Company and
                              Robert L. Frome dated March 21, 2003. (9)

         10.21*       --      Stock  Option  Agreement  between  the Company and
                              Daniel Raynor dated March 21, 2003. (9)

         10.22*       --      Stock  Option  Agreement  between  the Company and
                              Robert L. Frome dated March 21, 2003. (9)

         10.23*       --      Stock  Option  Agreement  between  the Company and
                              Daniel Raynor dated March 21, 2003. (9)

         10.24*       --      Stock  Option  Agreement  between  the Company and
                              Daniel Raynor dated September 11, 2003. (11)

         10.25*       --      Stock  Option  Agreement  between  the Company and
                              Robert L. Frome dated September 11, 2003. (11)

         10.26*       --      Stock Option Agreement  between the Company and J.
                              Robert Vipond dated April 5, 2004. (11)

         10.27*       --      Stock Option Agreement  between the Company and J.
                              Robert Vipond dated December 19, 2005. (1)


                                       38


         10.28*       --      Stock Option Agreement  between the Company and J.
                              Robert Vipond dated December 19, 2005. (1)

         10.29*       --      Stock  Option  Agreement  between  the Company and
                              Daniel Raynor dated December 19, 2005. (1)

         14           --      Code of Ethics. (9)

         23           --      Consent  of  Margolin,  Winer &  Evens  LLP to the
                              incorporation   by  reference  to  the   Company's
                              Registration   Statements   on  Form   S-8   (Nos.
                              333-06705,  333-30042,  333-89096 and  333-114898)
                              and Form S-3 (No.  333-99201)  of the  independent
                              registered   public   accounting   firm's   report
                              included herein. (1)

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

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

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

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

         * Indicates a management contract or compensation plan or arrangement.

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

   (1)   Included herein.

   (2)   Incorporated  by reference to the Company's  Registration  Statement on
         Form SB-2,  filed with the  Commission on November 7, 1995  (Commission
         File No. 33-99078), as amended.

   (3)   Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 1998.

   (4)   Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2000.

   (5)   Incorporated  by reference to the  Company's  Form 10-Q for the quarter
         ended December 31, 2001.

   (6)   Incorporated  by reference to the Company's  Registration  Statement on
         From S-3,  filed with the  Commission on September 5, 2002  (Commission
         File No. 333- 99201).

   (7)   Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2002.

   (8)   Incorporated  by reference to the Company's  Registration  Statement on
         Form 8-A, filed on March 31, 2003.

   (9)   Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2003.

  (10)   Incorporated  by reference to the  Company's  Form 10-Q for the quarter
         ended December 31, 2003.

  (11)   Incorporated by reference to the Company's Form 10-K for the year ended
         June 30, 2004.

  (12)   Incorporated by reference to the Company's Form 8-K dated May 27, 2005.

  (13)   Incorporated  by reference to the  Company's  Form 8-K dated October 1,
         2004.

  (14)   Incorporated  by reference to the Company's  Form 8-K dated December 8,
         2004.

  (15)   Incorporated by reference to the Company's Form 8-K dated June 6, 2005.

  (16)   Incorporated  by reference to the Company's  Form 8-K dated December 7,
         2005.

  (17)   Incorporated  by  reference to the  Company's  Form 8-K dated March 24,
         2006.

  (18)   Incorporated  by reference to the Company's  From 8-K dated January 23,
         2006.


                                       39


                                   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 13, 2006                            /s/ Michael E. DeDomenico
                                                      --------------------------
                                                      Michael E. DeDomenico
                                                      Chief Executive Officer

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

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

 /s/ Michael E. DeDomenico       Director,                   September 13, 2006
 ---------------------------     Chief Executive Officer
 Michael E. DeDomenico


 /s/ Robert L. Frome             Director                    September 13, 2006
 ---------------------------
 Robert L. Frome


 /s/ Steven J. Landwehr          Director                    September 13, 2006
 ---------------------------
 Steven J. Landwehr


 /s/ Daniel Raynor               Director                    September 13, 2006
 ---------------------------
 Daniel Raynor


 /s/ J. Robert Vipond            Director                    September 13, 2006
 ---------------------------
 J. Robert Vipond


 /s/ Christopher White           Director                    September 13, 2006
 ---------------------------
 Christopher White


 /s/ Robert R. Galvin            Chief Financial Officer     September 13, 2006
 ---------------------------
 Robert R. Galvin


                                       40


                          INDEX TO FINANCIAL STATEMENTS

                                                                        Page No.
                                                                        --------
                                   NUCO2 INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................     F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
      CONTROLS.........................................................     F-3

FINANCIAL STATEMENTS:

      BALANCE SHEETS AS OF JUNE 30, 2006 AND 2005......................     F-4

      STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30,
      2006, 2005 AND 2004      ........................................     F-5

      STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED
      JUNE 30, 2006, 2005 AND 2004.....................................     F-6

      STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30,
      2006, 2005 AND 2004      ........................................     F-8

NOTES TO FINANCIAL STATEMENTS..........................................     F-10

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS
      ENDED JUNE 30, 2006, 2005 AND 2004...............................     F-32


                                      F-1


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have  audited the  accompanying  balance  sheets of NuCO2 Inc. as of June 30,
2006 and 2005, and the related  statements of operations,  shareholders'  equity
and cash flows for each of the three years in the period ended June 30, 2006. 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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of NuCO2 Inc. as of June 30, 2006
and 2005,  and the results of its  operations and its cash flows for each of the
three years in the period ended June 30, 2006, in conformity with U.S. generally
accepted  accounting  principles.  Also, in our opinion,  the related  financial
statement schedule when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.

As discussed in Note 9 to the financial statements,  effective July 1, 2005, the
Company  changed  its method of  accounting  for stock based  compensation  as a
result of the adoption of Statement of Financial  Accounting  Standards  No. 123
(revised  2004),  "Share-Based  Payment."  Also  as  discussed  in Note 1 to the
financial statements,  effective July 1, 2003, the Company changed the manner in
which it accounts for multiple  deliverable revenue  arrangements as a result of
the adoption of Emerging Issues Task Force Issue No. 00-21.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial reporting as of June 30, 2006, based on criteria
established in INTERNAL CONTROL--INTEGRATED FRAMEWORK ISSUED BY THE COMMITTEE OF
SPONSORING  ORGANIZATIONS OF THE TREADWAY COMMISSION and our report dated August
16, 2006 expressed an unqualified opinion thereon.

                                                     MARGOLIN, WINER & EVENS LLP

Garden City, New York
August 16, 2006


                                      F-2


  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS

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

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal Controls over Financial  Reporting,  that NuCO2
Inc.  maintained  effective internal control over financial reporting as of June
30,  2006,  based  on  criteria  established  in  INTERNAL   CONTROL--INTEGRATED
FRAMEWORK  ISSUED BY THE COMMITTEE OF SPONSORING  ORGANIZATIONS  OF THE TREADWAY
COMMISSION  (COSO).  The Company's  management is  responsible  for  maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to  express  an opinion  on  management's  assessment  and an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  management's  assessment that NuCO2 Inc.  maintained  effective
internal control over financial reporting as of June 30, 2006, is fairly stated,
in all material respects, based on the COSO criteria. Also in our opinion, NuCO2
Inc.  maintained,  in all material  respects,  effective  internal  control over
financial reporting as of June 30, 2006, based on the COSO criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the balance sheet of NuCO2 Inc. as
of June 30, 2006, and the related statements of operations, shareholders' equity
and cash  flows for the year then  ended and our report  dated  August 16,  2006
expressed an unqualified opinion thereon.

                                                     MARGOLIN, WINER & EVENS LLP

Garden City, New York
August 16, 2006


                                      F-3


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

                                             ASSETS
                                             ------
                                                                                JUNE 30,
                                                                       -----------------------
                                                                         2006           2005
                                                                         ----           ----
Current assets:
   Cash and cash equivalents                                           $     341     $     968
   Trade accounts receivable; net of allowance for doubtful
      accounts of $2,538 and $1,850, respectively                         12,955         8,568
   Inventories                                                               302           259
   Prepaid insurance expense and deposits                                  5,846         1,281
   Prepaid expenses and other current assets                               1,465           854
   Deferred tax assets - current portion                                   8,598         7,596
                                                                       ---------     ---------
      Total current assets                                                29,507        19,526
                                                                       ---------     ---------

Property and equipment, net                                              119,603       104,787
                                                                       ---------     ---------

Other assets:
   Goodwill, net                                                          25,794        22,094
   Deferred financing costs, net                                             333           402
   Customer lists, net                                                     8,372         5,760
   Non-competition agreements, net                                         1,181           836
   Deferred lease acquisition costs, net                                   5,225         4,429
   Deferred tax assets                                                     8,807        15,123
   Other assets - noncurrent                                                 185           175
                                                                       ---------     ---------
                                                                          49,897        48,819
                                                                       ---------     ---------
      Total assets                                                     $ 199,007     $ 173,132
                                                                       =========     =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
   Accounts payable                                                    $   6,883     $   5,178
   Accrued expenses                                                        1,208           608
   Accrued insurance                                                       3,543           596
   Accrued interest                                                          165           112
   Accrued payroll                                                           652         1,464
   Other current liabilities                                                 377           366
                                                                       ---------     ---------
      Total current liabilities                                           12,828         8,324

Long-term debt                                                            35,450        32,000
Customer deposits                                                          3,805         3,624
                                                                       ---------     ---------
      Total liabilities                                                   52,083        43,948
                                                                       ---------     ---------

Shareholders' equity:
   Common stock; par value $.001 per share; 30,000,000 shares
      authorized; issued 15,654,042 shares at June 30, 2006 and
      15,300,905 shares at June 30, 2005                                      16            15
   Additional paid-in capital                                            166,617       159,040
   Less treasury stock at cost; 8,500 shares at June 30, 2006
      and 0 shares at June 30, 2005                                         (235)         --

   Accumulated deficit                                                   (19,765)      (30,113)
   Accumulated other comprehensive income                                    291           242
                                                                       ---------     ---------
      Total shareholders' equity                                         146,924       129,184
                                                                       ---------     ---------
        Total liabilities and shareholders' equity                     $ 199,007     $ 173,132
                                                                       =========     =========

See accompanying notes to financial statements.


                                              F-4


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

                                                                        Fiscal Year Ended June 30,
                                                             -----------------------------------------------
                                                               2006               2005*             2004*
                                                               ----               -----             -----
Revenues:
      Product sales                                          $  75,959          $  60,518          $  49,115
      Equipment rentals                                         40,237             36,822             31,721
                                                             ---------          ---------          ---------
Total revenues                                                 116,196             97,340             80,836
                                                             ---------          ---------          ---------

Costs and expenses:
      Cost of products sold, excluding depreciation
           and amortization                                     49,397             41,278             33,883
      Cost of equipment rentals, excluding depreciation
           and amortization                                      3,086              2,391              2,345
      Selling, general and administrative expenses              24,146             17,020             15,722
      Depreciation and amortization                             18,333             16,484             15,234
      Loss on asset disposal                                     1,733              1,332              1,242
                                                             ---------          ---------          ---------
                                                                96,695             78,505             68,426
                                                             ---------          ---------          ---------

Operating income                                                19,501             18,835             12,410

Loss on early extinguishment of debt                              --                5,817              1,964
Unrealized (gain) loss on financial instrument                    (177)              --                  177
Interest expense                                                 1,989              6,985              7,947
                                                             ---------          ---------          ---------

Income before income taxes                                      17,689              6,033              2,322
Provision for (benefit from) income taxes                        7,341            (19,558)               142
                                                             ---------          ---------          ---------
Net income                                                   $  10,348          $  25,591          $   2,180
                                                             =========          =========          =========

Weighted average number of common and common
  equivalent shares outstanding
      Basic                                                     15,427             12,808             10,689
                                                             =========          =========          =========
      Diluted                                                   15,997             14,295             11,822
                                                             =========          =========          =========

Net income per basic share                                   $    0.67          $    1.98          $    0.13
                                                             =========          =========          =========
Net income per diluted share                                 $    0.65          $    1.79          $    0.12
                                                             =========          =========          =========

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


                                                     F-5


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

                                                      Common Stock Issued     Additional         Treasury Stock
                                                    -----------------------    Paid-In      -----------------------
                                                      Shares      Amount       Capital        Shares      Amount
                                                      ------      ------       -------        ------      ------

Balance, June 30, 2003                              10,633,405   $       11   $   92,938          --     $     --
Comprehensive income:
        Net income                                        --           --           --            --           --
        Other comprehensive income:
             Interest rate swap transaction,
including reclassification adjustment of $86              --           --           --            --           --
Total comprehensive income
Redeemable preferred stock dividend                       --           --           (763)         --           --
Issuance of 425,000 warrants to purchase
        shares of common stock                            --           --          1,573          --           --
Extension of 665,403 warrants to purchase                 --           --
        shares of common stock                            --           --            760          --           --
Issuance of 107,331 shares of common stock -
      exercise of warrants warrants                    107,331         --            675          --           --
Issuance of 100,095 shares of common stock -
      exercise of options                              100,095         --          1,002          --           --
                                                    ----------   ----------   ----------    ----------   ----------
Balance, June 30, 2004                              10,840,831           11       96,185          --           --
Comprehensive income:
  Net income                                              --           --           --            --           --
  Other comprehensive (loss):
    Interest rate swap transaction                        --           --           --            --           --
Total comprehensive income
Conversion of 5,000 shares of Redeemable
        Preferred Stock                                754,982            1        7,006          --           --
Conversion of 2,500 shares of Redeemable
        Preferred Stock                                247,420         --          3,196          --           --
Issuance of 953,285 shares of common stock -
exercise of warrants                                   953,285            1          742          --           --
Issuance of 462,674 shares of common stock -
      exercise of options                              462,674         --          3,500          --           --
Tax effect of disqualifying dispositions -
      exercise of options                                 --           --          3,080          --           --
Issuance of 2,041,713 shares of common stock         2,041,713            2       45,513          --           --
Redeemable preferred stock dividend                       --           --           (182)         --           --
                                                    ----------   ----------   ----------    ----------   ----------
Balance, June 30, 2005                              15,300,905           15      159,040          --           --
Comprehensive income:                                     --
  Net income                                              --           --           --            --           --
  Other comprehensive income:
    Interest rate swap transaction (net of
      reclassification adjustment)                        --           --           --            --           --
Total comprehensive income                                --           --
Share-based compensation                                  --           --          3,298          --           --
Excess tax benefits from share-based arrangements         --           --          1,756          --           --
Issuance of 286,679 shares of common stock -
      exercise of options                              286,679            1        2,483          --           --
Purchase of treasury stock                                --           --            235         8,500         (235)
Issuance of 66,458 shares of common stock -
      exercise of warrants                              66,458         --           --            --           --
Additional costs related to prior year stock
      issuance                                            --           --           (195)         --           --
                                                    ----------   ----------   ----------    ----------   ----------
Balance, June 30, 2006                              15,654,042   $       16   $  166,617         8,500   $     (235)
                                                    ----------   ----------   ----------    ----------   ----------

See accompanying notes to financial statements.


                                                         F-6


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

                                                                                         Accumulated
                                                                                            Other            Total
                                                                         Accumulated    Comprehensive    Shareholders'
                                                                            Deficit     Income (Loss)       Equity
                                                                            -------     -------------       ------

Balance, June 30, 2003                                                    $  (57,884)        $ (129)       $  34,936
Comprehensive income:
     Net income                                                                2,180           --              2,180
     Other comprehensive income:
       Interest rate swap transaction, including
         reclassification adjustment of $86                                     --              393              393
                                                                                                           ---------
Total comprehensive income                                                                                     2,573
Redeemable preferred stock dividend                                             --             --               (763)
Issuance of 425,000 warrants to purchase shares of common stock                 --             --              1,573
Extension of 665,403 warrants to purchase shares of common stock                --             --                760
Issuance of 107,331 shares of common stock -- exercise of warrants              --             --                675
Issuance of 100,095 shares of common stock -- exercise of options               --             --              1,002
                                                                          ----------         ------        ---------
Balance, June 30, 2004                                                       (55,704)           264           40,756
Comprehensive income:
  Net income                                                                  25,591           --             25,591
  Other comprehensive (loss):
    Interest rate swap transaction                                              --              (22)             (22)
                                                                                                           ---------
Total comprehensive income                                                                                    25,569
Conversion of 5,000 shares of Redeemable
Preferred Stock                                                                 --             --              7,007
Conversion of 2,500 shares of Redeemable
Preferred Stock                                                                 --             --              3,196
Issuance of 953,285 shares of common stock - exercise of warrants               --             --                743
Issuance of 462,674 shares of common stock - exercise of options                --             --              3,500
Tax effect of disqualifying dispositions -- exercise of options                 --             --              3,080
Issuance of 2,041,713 shares of common stock                                    --             --             45,515
Redeemable preferred stock dividend                                             --             --               (182)
                                                                          ----------         ------        ---------
Balance, June 30, 2005                                                       (30,113)           242          129,184
Comprehensive income:
  Net income                                                                  10,348           --             10,348
  Other comprehensive income:
    Interest rate swap transaction (net of reclass adjustment)                  --               49               49
                                                                                                           ---------
Total comprehensive income                                                                                    10,397
Share-based compensation                                                        --             --              3,298
Excess tax benefits from share-based arrangements                               --             --              1,756
Issuance of 286,679 shares of common stock - exercise of options                --             --              2,484
Purchase of treasury stock                                                      --             --               --
Issuance of 66,458 shares of common stock - exercise of warrants                --             --               --
Additional costs related to prior year stock issuance                           --             --               (195)
                                                                          ----------         ------        ---------
Balance, June 30, 2006                                                    $  (19,765)        $  291        $ 146,924
                                                                          ==========         ======        =========

See accompanying notes to financial statements.


                                                          F-7


                                                    NUCO2 INC.
                                             STATEMENTS OF CASH FLOWS
                                                  (In thousands)

                                                                                  Year Ended June 30,
                                                                                  -------------------
                                                                         2006             2005             2004
                                                                         ----             ----             ----

Cash flows from operating activities:
Net income                                                             $ 10,348         $ 25,591         $  2,180
  Adjustments to reconcile net income to net cash
     provided by operating activities:
        Depreciation and amortization of property and equipment          15,344           13,751           13,255
        Amortization of other assets                                      2,989            2,733            1,979
        Amortization of original issue discount                            --                318              406
        Paid-in-kind interest                                              --              1,014            1,107
        Loss on asset disposal                                            1,733            1,332            1,242
        Loss on early extinguishment of debt                               --              5,817            1,964
        Change in net deferred tax asset                                  7,070          (19,638)            --
        Share-based compensation                                          3,298             --               --
        Excess tax benefits from share-based arrangements                (1,756)            --               --
        Unrealized (gain) loss on financial instrument                     (177)            --                177
        Changes in operating assets and liabilities:
           Decrease (increase) in:
             Trade accounts receivable                                   (4,388)          (2,427)              76
             Inventories                                                    (44)             (33)             (16)
             Prepaid insurance expense and deposits                      (1,566)             912           (1,119)
             Prepaid expenses and other current assets                     (385)            (191)            (188)
           Increase (decrease) in:
             Accounts payable                                             1,705              599              483
             Accrued expenses                                                24              201              229
             Accrued insurance                                              (53)             166             (155)
             Accrued payroll                                               (812)            (566)             381
             Accrued interest                                                53             (328)            (413)
             Other current liabilities                                       12               23               13
             Customer deposits                                              183              377               56
                                                                       --------         --------         --------

           Net cash provided by operating activities                     33,578           29,651           21,657
                                                                       --------         --------         --------

Cash flows from investing activities:
  Proceeds from disposal of property and equipment                         --               --                  1
  Purchase of property and equipment                                    (29,776)         (19,371)         (14,962)
  Increase in deferred lease acquisition costs                           (2,352)          (2,244)          (1,624)
  Acquisition of businesses                                              (9,543)         (17,172)            --
  Decrease (increase) in other assets                                       (11)               6              (10)
                                                                       --------         --------         --------

           Net cash used in investing activities                       $(41,682)        $(38,781)        $(16,595)
                                                                       --------         --------         --------

See accompanying notes to financial statements.


                                                        F-8


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

                                                                                   Year Ended June 30,
                                                                                   -------------------
                                                                         2006             2005             2004
                                                                         ----             ----             ----
Cash flows from financing activities:
  Net proceeds from issuance of long-term debt
     and subordinated debt and warrants                                $ 20,850         $ 59,350         $ 74,150
  Repayment of long-term debt and subordinated debt                     (17,400)         (98,281)         (78,094)
  Proceeds from issuance of common stock                                   --             46,632             --
  Issuance costs - common stock                                            (195)          (1,117)            --
  Increase in deferred financing costs                                      (18)          (1,234)          (2,745)
  Exercise of options and warrants                                        2,484            4,243            1,677
  Excess tax benefits for share-based arrangements                        1,756             --               --
                                                                       --------         --------         --------

           Net cash provided by (used in) financing activities            7,477            9,593           (5,012)
                                                                       --------         --------         --------

Increase (decrease) in cash and cash equivalents                           (627)             463               50
Cash and cash equivalents, beginning of year                                968              505              455
                                                                       --------         --------         --------

Cash and cash equivalents, end of year                                 $    341         $    968         $    505
                                                                       ========         ========         ========

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

     Interest                                                          $  1,936         $  5,981         $  6,760
                                                                       ========         ========         ========

     Income taxes                                                      $    473         $    125         $     80
                                                                       ========         ========         ========

Supplemental disclosure of non-cash investing and financing activities:

          During the fiscal year ended June 30,  2006,  a certain  officer  exercised  stock  options in a non-cash
transaction.  The officer  surrendered  8,500  shares of  previously  acquired  common stock in exchange for 34,881
shares. The Company has recorded $235, the market value of the surrendered shares, as treasury stock.

          In 2006, 2005 and 2004, the Company  increased the carrying  amount of the redeemable  preferred stock by
$0, $182, and $763,  respectively,  for dividends that were not paid and  accordingly  reduced  additional  paid-in
capital by a like amount.

See accompanying notes to financial statements.


                                                        F-9


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

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

         (a)      DESCRIPTION OF BUSINESS

                  NuCO2  Inc.  (the   "Company")  is  a  supplier  of  bulk  CO2
dispensing systems to customers in the food, beverage,  lodging and recreational
industries in the United States.

         (b)      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. The Company maintains cash balances with a financial institution in
an amount that exceeds the federal government deposit insurance.

         (c)      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.

         (d)      PROPERTY AND EQUIPMENT

                  Property and  equipment  are stated at cost.  The Company does
not  depreciate  bulk  systems  held for  installation  until the systems are in
service and leased to customers. Upon installation, the systems, component parts
and direct costs  associated with the installation are transferred to the leased
equipment account.  These direct costs are associated with successful placements
of such systems with customers under noncancelable contracts and which would not
be incurred by the Company but for a successful  placement.  Upon early  service
termination,  the  unamortized  portion  of  direct  costs  associated  with the
installation are expensed.  Depreciation and amortization are 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

         (e)      GOODWILL AND OTHER INTANGIBLE ASSETS

                  Goodwill,   net  of   accumulated   amortization   of  $5,006,
represents the cost in excess of the fair value of the tangible and identifiable
intangible  net assets of businesses  acquired and,  prior to July 1, 2001,  was
amortized on a straight-line  method over 20 years.  Effective July 1, 2001, the
Company adopted Statement of Financial  Accounting  Standards No. 142, "GOODWILL
AND OTHER INTANGIBLE  ASSETS,"  pursuant to which,  goodwill and indefinite life
intangible  assets are no longer amortized but are subject to annual  impairment
tests.  Other intangible  assets with finite lives continue to be amortized on a
straight-line  method over the periods of expected benefit.  The Company's other
intangible  assets  consist of customer  lists and  non-competition  agreements,
principally  acquired in 1995 through  1998 and 2005 through 2006 in  connection
with  certain  asset  acquisitions.  Customer  lists  are being  amortized  on a
straight-line  method over five to ten years,  and  non-competition  agreements,
which  generally  preclude the other party from  competing with the Company in a
designated geographical area for a stated period of time, are being amortized on
a straight-line  method over their  contractual lives which range from thirty to
one  hundred  and twenty  months.  Non-competition  agreements  also  include an
agreement  entered into in January 2001,  for $480,  with the  Company's  former
Chief Executive Officer and Chairman of the Board of Directors,  precluding this
former officer from competing with the Company for a period of five years.


                                      F-10


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

         (f)      IMPAIRMENT OF LONG-LIVED ASSETS

                  Long-lived  assets,  other than goodwill,  consist of property
and equipment, customer lists, and non-competition agreements. Long-lived assets
being  retained  for use by the Company are tested for  recoverability  whenever
events or changes in  circumstances  indicate that their carrying values may not
be  recoverable by comparing the carrying value of the assets with the estimated
future  undiscounted  cash flows that are directly  associated with and that are
expected to arise as a direct result of the use and eventual  disposition of the
asset.  Impairment  losses  are  recognized  only if the  carrying  amount  of a
long-lived  asset is not  recoverable  and exceeds the asset's  fair value.  The
impairment  loss would be calculated as the  difference  between asset  carrying
values and the fair value of the asset with fair value generally estimated based
on the present value of the estimated future net cash flows.

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

         (g)      DEFERRED FINANCING COST, NET

                  Financing costs are amortized on a  straight-line  method over
the term of the related  indebtedness.  Accumulated  amortization  of  financing
costs was $101 and $14 at June 30, 2006 and 2005, respectively.

         (h)      DEFERRED LEASE ACQUISITION COSTS, NET

                  Deferred lease acquisition  costs, net, consist of commissions
associated  with the  acquisition  of new  leases and lease  renewals  are being
amortized over the life of the related leases,  generally five to six years on a
straight-line  method.  Accumulated  amortization of deferred lease  acquisition
costs was $7,855 and $6,826 at June 30, 2006 and 2005, respectively.  Upon early
service termination, the unamortized portion of deferred lease acquisition costs
are expensed as a component of operating expenses.

         (i)      REVENUE RECOGNITION

                  The Company earns its revenues from the leasing of CO2 systems
and related gas sales. The Company,  as lessor,  recognizes revenue from leasing
of CO2 systems over the life of the related  leases.  The majority of CO2 system
agreements  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.

                  On July 1, 2003,  the Company  adopted EITF 00-21.  EITF 00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which the vendor  will  perform  multiple  revenue  generating  activities.  The
Company's bulk CO2 budget plan agreements provide for a fixed monthly payment to
cover the use of a bulk CO2 system and a predetermined  maximum quantity of CO2.
As of June 30, 2006,  approximately  70,000 of the Company's  customer locations
utilized this plan.  Prior to July 1, 2003, the Company,  as lessor,  recognized
revenue  from  leasing  CO2  systems  under  its  budget  plan  agreements  on a
straight-line basis over the life of the related leases. The Company developed a
methodology  for the purpose of separating the aggregate  revenue stream between
the rental of the  equipment  and the sale of the CO2.  Effective  July 1, 2003,
revenue attributable to the lease of equipment, including equipment leased under
the budget plan, is recorded on a straight-line basis over the term of the lease
and revenue  attributable  to the supply of CO2 and other gases,  including  CO2
provided under the budget plan, is recorded upon delivery to the customer.

                  Under the budget plan,  customers  are billed an equal monthly
amount which includes CO2 up to an annual  allowance.  The contract  arrangement
for budget plan customers is analogous to a "take-or pay" contract as defined in
SFAS No. 47, "DISCLOSURE OF LONG-TERM  OBLIGATIONS" as the budget plan purchaser
must make  specified  minimum  payments even if it does not take delivery of the
contracted  products or  services.  Each budget plan  customer has a maximum CO2
allowance  that is measured and reset on the contract  anniversary  date. On the
contract  anniversary  date,  the  Company  records  revenue in excess of actual
deliveries  of CO2 for budget  plan  customers  that have not used their  entire
annual CO2 allowance equal to the difference  between their annual CO2 allowance
and actual CO2 delivered.


                                      F-11


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

                  Because of the large number of customers under the budget plan
and the fact that the anniversary dates for determining  maximum  quantities are
spread  throughout  the year,  the  Company's  methodology  involves  the use of
estimates and assumptions to separate the aggregate  revenue stream derived from
equipment  rentals  to  budget  plan  customers,  and  also to  approximate  the
recognition  of revenue from CO2 sales to budget plan  customers  upon delivery.
The Company  believes that the adoption of EITF 00-21 has the most impact on the
recognition  of revenue on a quarterly  basis as CO2 usage  fluctuates  during a
fiscal year based on factors such as weather, and traditional summer and holiday
periods.  However,  over a twelve-month  period,  the Company  believes that the
effect is less significant as seasonal variations are largely eliminated and CO2
allowances under budget plan agreements are measured and reset annually.

                  The Company elected to apply EITF 00-21  retroactively  to all
budget plan  agreements in existence as of July 1, 2003.  Based on the Company's
analysis,  the  aggregate  amount of CO2 actually  delivered  under budget plans
during the quarter  ended June 30, 2003 was not  materially  different  than the
corresponding portion of the fixed charges attributable to CO2. Accordingly, the
Company believes that the cumulative  effect of the adoption of EITF 00-21 as of
July 1, 2003 was not significant.

         (j)      INCOME TAXES

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

         (k)      NET INCOME PER COMMON SHARE

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

         (l)      USE OF ESTIMATES

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

         (m)      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 by  employees  and  matched  at the
Company's  discretion,  up to a maximum of 1% of employee's wages. For the years
ended June 30, 2006,  2005 and 2004, the Company  contributed  $110, $94 and $0,
respectively.

         (n)      STOCK-BASED COMPENSATION

                  Prior to July 1, 2005,  the Company  followed  the guidance of
SFAS No. 123,  "ACCOUNTING FOR  STOCK-BASED  COMPENSATION"  ("SFAS 123"),  which
allowed an entity to continue to measure stock-based  compensation expense using
the  intrinsic  value  accounting  method  prescribed  by APB  Opinion  No.  25,
"ACCOUNTING  FOR STOCK  ISSUED TO  EMPLOYEES"  ("APB  25") and to make pro forma
disclosures  of net income  and  earnings  per share as if the fair value  based
method of accounting had been applied.


                                      F-12


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

                  In December 2004,  the Financial  Accounting  Standards  Board
("FASB")  revised  SFAS 123  through  the  issuance  of SFAS 123R,  "SHARE-BASED
PAYMENTS" ("SFAS 123R"). The Company adopted SFAS 123R effective with the fiscal
quarter  beginning  July  1,  2005  on  a  "modified   prospective  basis,"  and
accordingly,  pro forma  disclosure of net income and earnings per share,  is no
longer an alternative  to recognition in the statement of operations  after that
date.  Accordingly,  no  stock-based  compensation  expense is  reflected in net
income for the years  ended June 30,  2005 and 2004.  Pro forma  disclosure  for
periods prior to the effective date is provided in Note 9(e).

         The  modified  prospective  application  applies  to new  awards and to
awards  modified,  repurchased,  or cancelled on or after the effective  date of
July 1,  2005.  Additionally,  compensation  cost for the  portion of awards for
which the requisite service has not been rendered that are outstanding as of the
effective  date shall be recognized  as the requisite  service is rendered on or
after the required  effective  date. The  compensation  cost for that portion of
awards shall be based on the grant-date fair value of those awards as calculated
for either  recognition or pro forma  disclosures under SFAS 123. Changes to the
grant-date  fair value of equity awards  granted  before the required  effective
date of this Statement are precluded.  In addition,  the  compensation  cost for
those earlier  awards shall be  attributed to periods  beginning on or after the
required  effective date of SFAS 123R using the attribution method that was used
under SFAS 123 except that the method of  recognizing  forfeitures  only as they
occur shall not be continued.

         (o)      VENDOR REBATES

                  Pursuant to EITF 02-16, "ACCOUNTING BY A CUSTOMER (INCLUDING A
RESELLER)  FOR  CERTAIN  CONSIDERATION  RECEIVED  FROM A  VENDOR,"  the  Company
recognizes  rebates received from its suppliers of bulk CO2 tanks as a reduction
of capitalizable  cost. The Company  received  rebates of $1,104,  $886 and $548
during the fiscal years ended June 30, 2006, 2005, and 2004, respectively.

         (p)      TRADE RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

                  The Company  invoices its customers on a monthly  basis,  with
payment due within 30 days of the  invoice  date.  The Company  does not provide
discounts for early payment.

                  In  conjunction  with its trade  receivables  the  Company has
established a reserve for accounts that might not be  collectible.  Such reserve
is  evaluated  and  adjusted  on a  monthly  basis by  examining  the  Company's
historical  losses,  aging of its trade  receivables,  the  creditworthiness  of
significant customers based on ongoing evaluations,  and current economic trends
that might impact the level of credit losses in the future.  The  composition of
receivables consists of on-time payers,  "slow" payers, and at risk receivables,
such as  receivables  from customers who no longer do business with the Company,
are bankrupt, or are out of business.

         (q)      RECENT ACCOUNTING PRONOUNCEMENTS

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

         In March 2005, the FASB issued  Interpretation  No. 47, "ACCOUNTING FOR
CONDITIONAL  ASSET RETIREMENT  OBLIGATIONS - AN  INTERPRETATION OF SFAS NO. 143"
("FIN  47"),  effective  no later  than the end of  fiscal  years  ending  after
December 15, 2005. This Interpretation clarifies that the term conditional asset
retirement  obligation as used in SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS"  ("SFAS  143"),  refers to a legal  obligation  to perform an asset
retirement  activity  in which the  timing  and (or)  method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though  uncertainty  exists about the timing and (or) method of settlement.
Thus,  the timing and (or) method of settlement  may be  conditional on a future
event. Accordingly,  an entity is required to recognize a liability for the fair
value of a  conditional  asset  retirement  obligation  if the fair value of the
liability  can be  reasonably  estimated.  The fair value of a liability for the
conditional   asset   retirement    obligation   should   be   recognized   when
incurred--generally  upon  acquisition,  construction,  or development  and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement  of a conditional  asset  retirement  obligation  should be
factored into the  measurement  of the  liability  when  sufficient  information
exists. The adoption of FIN 47 had no material impact on the Company's financial
position, results of operations or cash flows.

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

         In December  2004,  the FASB  revised  SFAS 123 through the issuance of
SFAS 123R,  "SHARE-BASED  PAYMENT" ("SFAS 123R").  The Company adopted SFAS 123R
effective  with  the  fiscal  quarter  beginning  July 1,  2005  on a  "modified
prospective  basis," and  accordingly,  pro forma  disclosure  of net income and
earnings per share,  is no longer an alternative to recognition in the statement
of operations after that date. Accordingly,  no stock-based compensation expense
is reflected in net income for the years ended June 30, 2005 and 2004. Pro forma
disclosure for periods prior to the effective date is provided in Note 9(e).

         In November 2005, the FASB issued FSP FAS 123R-3,  "TRANSITION ELECTION
RELATED TO ACCOUNTING  FOR THE TAX EFFECTS OF  SHARE-BASED  PAYMENT  AWARDS," to
provide an alternate  transition  method for the  implementation of SFAS 123(R).
Because some entities do not have, and may not be able to re-create, information
about the net excess tax  benefits  that would have  qualified as such had those
entities  adopted  SFAS  123 for  recognition  purposes,  this FSP  provides  an
elective   alternative   transition   method.   This  method   comprises  (a)  a
computational  component that establishes a beginning  balance of the additional
paid-in  capital pool ("APIC pool") related to employee  compensation  and (b) a
simplified  method  to  determine  the  subsequent  impact  on the APIC  pool of
employee awards that are fully vested and outstanding  upon the adoption of SFAS
123R.  The  Company  adopted  the  simplified  method  set  forth in this FSP to
determine its APIC pool.



                                      F-13


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

NOTE 2 - PROPERTY AND EQUIPMENT, NET

         Property and equipment, net consists of the following:

                                                                              As of June 30,
                                                                              --------------
                                                                          2006            2005
                                                                        --------        --------
                  Leased equipment                                      $176,482        $156,160
                  Equipment and cylinders                                 24,590          19,985
                  Tanks held for installation                              6,722           5,498
                  Vehicles                                                 1,298           1,044
                  Computer equipment and software                          5,588           5,103
                  Office furniture and fixtures                            2,155           1,671
                  Leasehold improvements                                   2,083           1,978
                                                                        --------        --------
                                                                         218,918         191,439
                  Less accumulated depreciation and amortization          99,315          86,652
                                                                        --------        --------

                                                                        $119,603        $104,787
                                                                        ========        ========

         Included in leased equipment are capitalized component parts and direct
costs associated with  installation of equipment leased to others of $54,652 and
$46,812 at June 30, 2006 and 2005,  respectively.  Accumulated  depreciation and
amortization  of these  costs was $33,248 and $28,922 at June 30, 2006 and 2005,
respectively.  Upon  early  service  termination,  the  Company  writes  off the
remaining net book value of direct costs  associated  with the  installation  of
equipment.

         Depreciation  and  amortization  of property and equipment was $15,344,
$13,751,  and  $13,255  for the  years  ended  June 30,  2006,  2005,  and 2004,
respectively.

NOTE 3 - ACQUISITIONS

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

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

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

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

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

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


                                              F-14


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

excluding  goodwill,  are being  amortized  over a weighted  average life of 4.9
years.

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

         Goodwill  was  recorded  for  all of the  aforementioned  transactions,
except for the CCE  acquisition  in June  2005,  as the  purchase  price of each
acquisition exceeded the fair market value of the tangible and intangible assets
acquired and is a direct result of synergies arising from the transaction.

         The  results of the  aforementioned  acquisitions  are  included in the
Company's results of operations subsequent to the acquisition date. However, the
following  unaudited pro forma results of operations (in  thousands,  except per
share amounts) have been prepared assuming the acquisitions  described above had
occurred as of the beginning of the periods presented in the Company's financial
statements,  including  adjustments  to the financial  statements for additional
depreciation  of  tangible  assets,   amortization  of  intangible  assets,  and
increased interest on borrowings to finance the acquisitions.  The unaudited pro
forma operating results are not necessarily indicative of operating results that
would have occurred had these  acquisitions been consummated as of the beginning
of the periods presented,  or of future operating results. In certain cases, the
operating  results  for  periods  prior  to the  acquisitions  are  based on (a)
unaudited  financial data provided by the seller or (b) an estimate of revenues,
cost of revenues and/or selling,  general and  administrative  expenses based on
information  provided  by the  seller or  otherwise  available  to the  Company.
Inasmuch as the Company acquired customer accounts,  tanks at customer sites and
other assets related to the beverage carbonation businesses of Pain, CCE, CCE II
and BAE,  certain  operational and support costs provided for by the sellers are
not  applicable  to the  Company's  cost of servicing  these  customers and were
therefore eliminated;  however, the Company incurred  approximately $0.5 million
in non-recurring costs during the integration phase of the Pain acquisition that
are included in the  unaudited pro forma results  presented  below.  Integration
costs associated with CCE, CCE II and BAE were minimal.

Unaudited Pro Forma:                                      Fiscal Year Ended June 30,
                                                          --------------------------
                                                   2006             2005              2004
                                                   -----            -----             ----
Total revenues                                   $ 119,941        $ 106,527         $  97,144
Operating income (a)                                21,033           21,719            17,684

Income before provision
       for income taxes                             18,888            8,074             6,142
Provision for (benefit from) income taxes            7,391          (19,473)              301
                                                 ---------        ---------         ---------
Net income                                          11,497           27,547             5,841
Preferred stock dividends                             --               (182)             (763)
                                                 ---------        ---------         ---------
Net income available to
       common shareholders                       $  11,497        $  27,365         $   5,078
                                                 =========        =========         =========

Basic income per share                           $    0.75        $    2.14         $    0.48
                                                 =========        =========         =========
Diluted income per share                         $    0.72        $    1.93         $    0.43
                                                 =========        =========         =========

(a) SFAS  123R was  adopted  effective  July 1,  2005;  accordingly,  there is no  share-based
compensation expense in the prior years. (See Note 9(e))

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

         The  Company  adopted  SFAS  142 as of July 1,  2001,  resulting  in no
goodwill  amortization expense for the years ended June 30, 2006, 2005 and 2004.
Goodwill and indefinite life intangible  assets are no longer  amortized but are
subject to annual  impairment  tests.  The Company  determined that there was no
impairment of goodwill during 2006, 2005 and 2004.


                                             F-15


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

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

                                               Accumulated     Net Book
As of June 30, 2006:                Cost       Amortization      Value
                                    ----       ------------      -----

Goodwill                          $30,800        $ 5,006        $25,794
Non-competition agreements          3,840          2,659          1,181
Customer lists                      9,823          1,451          8,372
                                  -------        -------        -------
                                  $44,463        $ 9,116        $35,347
                                  =======        =======        =======

As of June 30, 2005:
Goodwill                          $27,100        $ 5,006        $22,094
Non-competition agreements          2,865          2,029            836
Customer lists                      6,347            587          5,760
                                  -------        -------        -------
                                  $36,312        $ 7,622        $28,690
                                  =======        =======        =======

         Changes in goodwill are summarized as follows:

Year Ended June 30,      Beginning      Additions   Disposals    Ending
-------------------      ---------      ---------   ---------    -------
2004                      $24,228           --         --        $24,228
2005                      $24,228        $ 2,872       --        $27,100
2006                      $27,100        $ 3,700       --        $30,800

         Amortization  expense for other intangible assets was $1,524, $986, and
$291 for the years ended June 30, 2006, 2005 and 2004, respectively.

         Estimated  amortization  expense  for  each of the next  five  years is
$1,597,  $1,336,  $1,031,  $668 and $583 for fiscal  years ending June 30, 2007,
2008, 2009, 2010 and 2011, respectively.

NOTE 5 - LEASES

         The Company  leases  equipment to its customers  generally  pursuant to
five-year or six-year  non-cancelable  operating  leases which expire on varying
dates  through June 2012.  At June 30, 2006,  future  minimum  payments due from
customers  include,  where  applicable,  amounts for a continuous  supply of CO2
under the budget plan,  which provides  bundled pricing for tank rental and CO2.
The revenue stream has been segregated in conformity with EITF 00-21 between the
estimated  rental of equipment and the sale of CO2. The following table presents
the separate minimum revenue streams  attributable to the lease of the equipment
and the sale of the CO2:

                  Year Ended June 30,     Equipment        CO2
                  -------------------     ---------     --------
                  2007                    $ 30,793      $ 20,810
                  2008                      25,830        17,402
                  2009                      20,423        13,613
                  2010                      14,316         9,599
                  2011                       8,837         5,984
                  Thereafter                 3,235         2,184
                                          --------      --------
                                          $103,434      $ 69,592
                                          ========      ========

NOTE 6 - LONG-TERM DEBT

Long-term debt consists of the following:
                                                                                     As of June 30,
                                                                                     --------------
                                                                                  2006           2005
                                                                                  ----           ----
Notes payable to banks under credit  facility.  Drawings at June 30, 2006
     and 2005 are at a  weighted average interest rate of 6.7% and 4.8%,
     respectively                                                                $35,450        $32,000
Less current maturities of long-term debt                                           --             --
                                                                                 -------        -------
     Long-term debt, excluding current maturities                                $35,450        $32,000
                                                                                 =======        =======


                                             F-16


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

         (A)      PREVIOUS FACILITIES

         On September 24, 2001, the Company  entered into a $60.0 million second
amended  and  restated  revolving  credit  facility  with a  syndicate  of banks
("Amended  Credit  Facility").  On August 25, 2003,  the Company  terminated the
Amended Credit  Facility and entered into a $50.0 million senior credit facility
with a syndicate  of banks (the "Senior  Credit  Facility").  The Senior  Credit
Facility  initially  consisted of a $30.0  million A term loan  facility (the "A
Term Loan"),  a $10.0 million B term loan  facility  (the "B Term Loan"),  and a
$10.0 million  revolving  loan  facility (the  "Revolving  Loan  Facility").  On
October 1, 2004, in conjunction with the Pain Enterprises, Inc. transaction, the
Senior Credit  Facility was amended to, among other things,  increase the B Term
Loan to $23.0 million and to modify certain financial covenants. The A Term Loan
and Revolving  Loan Facility were due to mature on August 25, 2007,  while the B
Term Loan was due to mature on August 25,  2008.  The  Company  was  entitled to
select  either  Eurodollar  Loans (as defined) or Base Rate Loans (as  defined),
plus  applicable  margin,  for  principal  borrowings  under the  Senior  Credit
Facility.  Applicable  margin  was  determined  by a pricing  grid  based on the
Company's  Consolidated  Total  Leverage  Ratio (as defined).  The Senior Credit
Facility was  collateralized  by all the  Company's  assets.  Additionally,  the
Company was precluded from declaring or paying any cash dividends.

         The Company, on a quarterly basis, was also required to assess and meet
certain  affirmative  and  negative  covenants,  including  but not  limited  to
financial  covenants.  These financial covenants were based on a measure that is
not  consistent  with  accounting  principles  generally  accepted in the United
States of  America.  Such  measure  is EBITDA  (as  defined),  which  represents
earnings before  interest,  taxes,  depreciation  and  amortization,  as further
modified by certain defined  adjustments.  The failure to meet these  covenants,
absent a waiver or amendment, would have placed the Company in default and cause
the debt outstanding under the Senior Credit Facility to immediately  become due
and payable.  The Company was in compliance  with all covenants under the Senior
Credit  Facility as of September 30, 2003 and all subsequent  quarters up to and
including March 31, 2005.

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

         (B)      CURRENT FACILITY

         On May 27, 2005, the Company  terminated the Senior Credit Facility and
entered into a $60.0  million  revolving  credit  facility with Bank of America,
N.A.  (the "2005 Credit  Facility"),  maturing on May 27,  2010.  The Company is
entitled to select either Base Rate Loans (as defined) or Eurodollar  Rate Loans
(as defined),  plus applicable margin,  for principal  borrowings under the 2005
Credit Facility.  Applicable  margin is determined by a pricing grid, as amended
in March 2006, based on the Company's  Consolidated  Leverage Ratio (as defined)
as follows:


            Pricing      Consolidated Leverage      Eurodollar Rate   Base Rate
             Level               Ratio                   Loans          Loans
            -------------------------------------------------------------------
               I      Greater than or equal to          2.000%          0.500%
                      2.50x

              II      Less than 2.50x but greater       1.750%          0.250%
                      than or equal to 2.00x

              III     Less than 2.00x but greater       1.500%          0.000%
                      than or equal to 1.50x

              IV      Less than 1.50x but greater       1.250%          0.000%
                      than or equal to 0.50x

               V      Less than 0.50x                   1.000%          0.000%


         Interest is payable  periodically  on borrowings  under the 2005 Credit
Facility. The 2005 Credit Facility is uncollateralized. The Company is required,
on a  quarterly  basis,  to assess and meet  certain  affirmative  and  negative
covenants, including financial covenants. These financial covenants are based on
a measure that is not consistent with accounting  principles  generally accepted
in the United  States of America.  Such  measure is EBITDA (as  defined),  which
represents earnings before interest,  taxes,  depreciation and amortization,  as


                                             F-17


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

further  modified  by certain  defined  adjustments.  The  failure to meet these
covenants,  absent a waiver or amendment, would place the Company in default and
cause the debt outstanding under the 2005 Credit Facility to immediately  become
due and payable. The Company was in compliance with all covenants under the 2005
Credit  Facility  as of the first  assessment  date on June 30, 2005 and through
June 30, 2006.

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

         (C)      HEDGING ACTIVITIES

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

         The Company uses derivative  instruments to manage exposure to interest
rate risks. The Company's objectives for holding derivatives are to minimize the
risks using the most effective methods to eliminate or reduce the impact of this
exposure.  Prior to August 25, 2003, the Company was a party to an interest rate
swap agreement (the "Prior Swap") with a notional  amount of $12.5 million and a
termination date of September 28, 2003. Under the Prior Swap, the Company paid a
fixed interest rate of 5.23% per annum and received a LIBOR-based floating rate.
In conjunction  with the  termination  of the Prior Swap prior to maturity,  the
Company  paid  $0.1  million,  which  represented  the  fair  value  of the swap
liability. The $0.1 million was reclassified from other comprehensive income and
recognized as a component of the loss on early extinguishment of debt.

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

         In order to reduce the  Company's  exposure to increases in  Eurodollar
rates, and consequently to increases in interest  payments,  the Company entered
into a new interest rate swap  transaction  (the "2005 Swap"),  comprised of two
instruments  ("Swap A" and "Swap B"), on September  28, 2005,  with an effective
date of October 3, 2005. Swap A, in the amount of $15.0 million (the "A Notional
Amount"),  matures on October 3, 2008 and Swap B, in the amount of $5.0  million
(the "B Notional Amount"), matures on April 3, 2007. Pursuant to Swap A and Swap
B,  the  Company  pays a fixed  interest  rate of 4.69%  and  4.64%  per  annum,
respectively,  and receives a Eurodollar-based  floating rate. The effect of the
2005 Swap is to  neutralize  any changes in  Eurodollar  rates on the A Notional
Amount and the B Notional  Amount.  The 2005 Swap meets the  requirements  to be
designated  as a cash flow hedge and is deemed a highly  effective  transaction.
Accordingly,  changes  in the fair  value of Swap A and Swap B are  recorded  as
other  comprehensive  income.  During  fiscal  2006 the  Company  recorded  $0.3
million,  representing  the change in fair value of the 2005 Swap from inception
through June 30, 2006, as other comprehensive income.


                                             F-18


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

NOTE 7 - SUBORDINATED DEBT

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

         On August 25, 2003,  concurrently with the closing of the Senior Credit
Facility,  the Company  prepaid  the 1997 Notes and 1999 Notes and issued  $30.0
million of its 16.3% Senior  Subordinated  Notes Due February 27, 2009 (the "New
Notes") with interest only payable  quarterly in arrears on February 28, May 31,
August 31 and November 30 of each year,  commencing  November 30, 2003. Interest
on the New Notes was 12% per annum  payable  in cash and 4.3% per annum  payable
"in kind" by adding the amount of such interest to the  principal  amount of the
New Notes then outstanding.  The weighted average effective interest rate of the
New Notes,  including the amortization of deferred  financing costs and original
issue discount,  was 18.0% per annum. Ten year warrants to purchase an aggregate
of 425,000  shares of the Company's  common stock at an exercise  price of $8.79
per  share  were  issued  in  connection  with  the  New  Notes.  Utilizing  the
Black-Scholes  Model,  the warrants issued in connection with the New Notes were
valued at $3.70 per warrant, or an aggregate value of $1.6 million. In addition,
the maturity date of 665,403  existing  warrants,  335,101 due to expire in 2004
and 330,302 due to expire in 2005, was extended to February  2009,  resulting in
additional value of $1.31 and $0.97 per warrant,  respectively,  or an aggregate
value of $0.8  million.  At the date of  issuance,  in  accordance  with APB 14,
"ACCOUNTING  FOR CONVERTIBLE  DEBT AND DEBT ISSUED WITH PURCHASE  WARRANTS," the
Company allocated  proceeds of $27.7 million to the debt and $2.3 million to the
warrants,  with the  resulting  discount on the debt referred to as the Original
Issue  Discount.  The Original  Issue  Discount was being  amortized as interest
expense over the life of the debt.

         As with the Senior  Credit  Facility,  the Company was required to meet
certain  affirmative and negative  covenants under the New Notes,  including but
not limited to  financial  covenants.  The Company  was in  compliance  with all
covenants  under  the New  Notes as of  September  30,  2003 and all  subsequent
quarters up to and including March 31, 2005.

         In  connection  with the  early  repayment  of the 1997  Notes and 1999
Notes,  during the first quarter of fiscal 2004 the Company recognized a loss of
$1.1 million attributable to the unamortized  financing costs and original issue
discount  associated  with the 1997  Notes and 1999  Notes,  and  recorded  $0.6
million of financing  costs and original issue discount  associated with the New
Notes. Such fees were being amortized over the life of the New Notes.

         On April 4, 2005,  the Company  used $34.3  million of the net proceeds
from the sale of  2,041,713  shares of common  stock in an  underwritten  public
offering in March 2005 to redeem the New Notes at 106% of the original principal
amount plus accrued  interest.  In addition,  during the quarter  ended June 30,
2005, the Company  recognized a loss on the early termination of debt associated
with the New Notes of approximately $4.1 million,  which includes the prepayment
penalty,  unamortized  fees and the  amortized  portion  of the  original  issue
discount.

         During fiscal 2004, warrants to purchase 30,831 shares of the Company's
common  stock  issued in  connection  with the 1997  Notes and 1999  Notes  were
exercised pursuant to the cashless exercise provision contained in the warrants.
In connection with the cashless exercise,  warrants to purchase 50,647 shares of
the Company's common stock were canceled.  In addition,  in fiscal 2004 warrants
to purchase  75,000  shares of the  Company's  common stock issued in connection
with the New Notes were  exercised for proceeds of $659,  recorded as additional
paid-in-capital  on the  Company's  balance  sheet as of June 30,  2004.  During
fiscal 2005,  warrants to purchase  893,956 shares of the Company's common stock
issued  in  connection  with the 1997  Notes,  1999  Notes  and New  Notes  were
exercised for proceeds of $743. In connection with certain  cashless  exercises,
warrants to purchase 389,528 shares of the Company's common stock were canceled.
As of June 30, 2005, no warrants issued in connection with the 1997 Notes,  1999
Notes or New Notes were outstanding.

NOTE 8 - REDEEMABLE PREFERRED STOCK

         In  May  2000,  the  Company  sold  5,000  shares  of its  Series  A 8%
Cumulative  Convertible  Preferred  Stock, no par value (the "Series A Preferred
Stock"), for $1,000 per share (the initial "Liquidation Preference"). Cumulative
dividends  were payable  quarterly in arrears at the rate of 8% per annum on the


                                             F-19


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

Liquidation  Preference,  and, to the extent not paid in cash, were added to the
Liquidation Preference.  Shares of the Series A Preferred Stock were convertible
into  shares  of  common  stock at any time at a  conversion  price of $9.28 per
share.  In August 2004, the holder of the Series A Preferred Stock converted its
shares  into  754,982  shares of common  stock,  and  $7,007,  representing  the
Liquidation Preference,  was reclassified to common stock and additional paid-in
capital on the Company's balance sheet.

         In  November  2001,  the Company  sold 2,500  shares of its Series B 8%
Cumulative  Convertible  Preferred  Stock, no par value (the "Series B Preferred
Stock"), for $1,000 per share (the initial "Liquidation Preference"). Cumulative
dividends  were payable  quarterly in arrears at the rate of 8% per annum on the
Liquidation  Preference,  and, to the extent not paid in cash, were added to the
Liquidation Preference.  Shares of the Series B Preferred Stock were convertible
into  shares of common  stock at any time at a  conversion  price of $12.92  per
share.  In December 2004, the holder of the Series B Preferred  Stock  converted
its shares into 247,420  shares of common stock,  and $3,197,  representing  the
Liquidation Preference,  was reclassified to common stock and additional paid-in
capital on the Company's balance sheet.

         During the fiscal  years ended June 30, 2005 and,  2004,  the  carrying
amount (and Liquidation  Preferences) of the Series A Preferred Stock and Series
B Preferred  Stock was increased by $182 and $763,  respectively,  for dividends
accrued.

NOTE 9-  SHAREHOLDERS' EQUITY

         (A)      OFFERING

         On March 30,  2005,  the Company  sold  2,041,713  shares of its common
stock in an underwritten public offering.  Based on the public offering price of
$24.17 per share and after deducting underwriting discounts and commissions, net
proceeds  were  approximately  $46.6  million.  On March 31,  2005,  the Company
reduced the outstanding  principal amount of the Senior Credit Facility by $11.2
million and on April 4, 2005,  the Company used  approximately  $34.3 million of
the net proceeds  from the offering to redeem all of the New Notes (see Note 7).
In addition,  the Company incurred $1.3 million in legal,  accounting,  printing
and other  expenses  which were  recorded as a reduction of  additional  paid-in
capital.

         (B)      NON-QUALIFIED STOCK OPTIONS AND WARRANTS

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

         In January  2001,  the Company  granted to each  non-employee  director
options for 10,000 shares of common stock.  An aggregate of 50,000  options were
granted at an  exercise  price of $7.82 per share.  In March  2003,  the Company
granted to each non-employee  director options for 6,000 shares of common stock,
or an aggregate of 36,000  options,  at an exercise price of $4.85 per share. In
September 2003, the Company granted to two of its non-employee directors options
for 22,000  shares of common  stock,  or an aggregate of 44,000  options,  at an
exercise  price of $8.91 per share.  In  addition,  in March  2004,  the Company
granted a non-employee  director  options for 6,000 shares of common stock at an
exercise  price of $16.25 per share.  The exercise price for all grants is equal
to the average  closing price of the common stock on the Nasdaq  National Market
for the 20 trading  days prior to the grant  date.  During the fiscal year ended
June 30, 2006, an  additional  18,000  options were granted to two  non-employee
directors at an exercise  price of $23.14 per share.  All options vest in two to
five equal  annual  installments  commencing  upon  issuance and have a ten-year
term.


                                             F-20


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

         The weighted-average fair value per share of options granted during the
fiscal  years  ended  June 30,  2006,  2005 and 2004 was  $3.86,  $0, and $2.68,
respectively.

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

                                                           Weighted Average
                                              Options       Exercise Price       Options
                                            Outstanding       Per Option       Exercisable
                                            -----------       ----------       -----------
         Outstanding at June 30, 2003          86,000         $    6.58           42,000
              Granted                          50,000              9.79
                                              -------
         Outstanding at June 30, 2004         136,000              7.76           78,667
              Exercised                       (51,333)             6.88
                                              -------
         Outstanding at June 30, 2005          84,667              8.29           66,001
              Granted                          18,000             23.14
                                              -------
         Outstanding at June 30, 2006         102,667         $   10.90           94,667
                                              =======

         The following table sets forth certain information as of June 30, 2006:

                                          Options Outstanding                                  Options Exercisable
                      ------------------------------------------------------    ---------------------------------------------------
                                     Weighted       Weighted       Aggregate                  Weighted       Weighted     Aggregate
                                      Average       Average        Intrinsic                   Average        Average     Intrinsic
Range of Exercise       Options      Remaining      Exercise         Value        Options     Remaining      Exercise       Value
  Prices              Outstanding      Life          Price           (000)      Exercisable      Life          Price        (000)
  ------              -----------      ----          -----           -----      -----------      ----          -----        -----
$ 4.85 - $10.00          78,667        6.24        $    7.69        $ 1,286        78,667        6.24        $    7.69     $ 1,286
$ 10.01 - $15.00           --           --               --            --            --           --               --         --
$ 15.01 - $20.00          6,000        7.75            16.25             47         4,000        7.75            16.25          31
$ 20.01 - $23.14         18,000        8.45            23.14             16        12,000        8.45            23.14          11
                        -------        ----        ---------        -------        ------        ----        ---------     -------
                        102,667        6.72        $   10.90        $ 1,349        94,667        6.58        $   10.01     $ 1,328
                        =======        ====        =========        =======        ======        ====        =========     =======

         (C)      EMPLOYEE STOCK OPTION PLANS

         In 1995, the Board of Directors adopted the 1995 Stock Option Plan (the
"1995  Plan"),  which  terminated  in November  2005.  Under the 1995 Plan,  the
Company reserved  2,400,000 shares of common stock for employees of the Company.
Under the terms of the 1995 Plan,  options  granted were either  incentive stock
options or  non-qualified  stock options.  The exercise price of incentive stock
options was  required  to be at least equal to 100% of the fair market  value of
the Company's  common stock at the date of the grant,  and the exercise price of
non-qualified stock options was not to be less than 75% of the fair market value
of the Company's common stock at the date of the grant. The maximum term for all
options  was ten years,  with  outstanding  options  having a  weighted  average
remaining  contractual  life of 6.9 years as of June 30, 2006.  Options  granted
prior  to   termination  of  the  1995  Plan  generally  vest  in  equal  annual
installments  from three to five years,  though a limited  number of grants were
partially  vested at the grant date.  As of June 30,  2006,  options to purchase
1,123,274  shares of the Company' common stock were  outstanding  under the 1995
Plan. In addition,  in September  2005, the Board of Directors  adopted the 2005
Employee Stock Option Plan (the "2005 Employee  Plan").  Under the 2005 Employee
Plan,  the Company has reserved  250,000 shares of common stock for employees of
the Company. As of June 30, 2006, no options to purchase shares of the Company's
common stock were outstanding under the 2005 Employee Plan.

         The weighted-average  fair value per share of options granted under the
1995 Plan during the fiscal years ended June 30, 2006,  2005 and 2004 was $4.83,
$7.80 and $4.11, respectively.


                                             F-21


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

         The following table summarizes transactions pursuant to the 1995 Plan:

                                                    Weighted Average
                                      Options        Exercise Price     Options
                                     Outstanding       Per Option      Exercisable
                                     -----------       ----------      -----------
Outstanding at June 30, 2003         1,288,520         $    9.13        640,373
       Granted                         379,300             15.61
       Expired or canceled             (73,288)            12.18
       Exercised                       (90,009)            10.17
                                     ---------
Outstanding at June 30, 2004         1,504,523             10.55        865,653
       Granted                         290,500             25.42
       Expired or canceled             (12,713)            13.50
       Exercised                      (362,408)             7.66
                                     ---------
Outstanding at June 30, 2005         1,419,902             14.31        921,002
       Granted                           8,225             25.52
       Expired or canceled             (18,174)            22.04
       Exercised                      (286,679)             9.48
                                     ---------
Outstanding at June 30, 2006         1,123,274         $   15.49        877,661
                                     =========

         The following table sets forth certain information as of June 30, 2006:

                                          Options Outstanding                                  Options Exercisable
                      ------------------------------------------------------    ---------------------------------------------------
                                     Weighted       Weighted      Aggregate                  Weighted       Weighted      Aggregate
                                      Average       Average       Intrinsic                   Average        Average      Intrinsic
Range of Exercise       Options      Remaining      Exercise        Value        Options     Remaining      Exercise        Value
  Prices              Outstanding      Life          Price          (000)      Exercisable      Life          Price         (000)
  ------              -----------      ----          -----          -----      -----------      ----          -----         -----
$ 4.49 - $10.00         313,320        5.40        $   7.72       $  5,113       284,645        5.27        $   7.66      $  4,662
$ 10.01 - $15.00        362,918        5.94           12.71          4,112       337,568        5.82           12.56         3,875
$ 15.01 - $20.00        161,989        8.00           19.29            769       115,189        8.00           19.28           548
$ 20.01 - $25.00         40,000        8.94           24.01              1        20,000        8.94           24.01             1
$ 25.01 - $25.67        245,047        9.01           25.67           --         120,259        9.01           25.67          --
                      ---------        ----        --------       --------       -------        ----        --------      --------
                      1,123,274        6.86        $  15.49       $  9,996       877,661        6.43        $  13.91      $  9,087
                      =========        ====        ========       ========       =======        ====        ========      ========

         In October  2005,  the Board of  Directors  adopted the 2005  Executive
Management  Stock  Option  Plan  (the  "2005  Executive  Plan").  Under the 2005
Executive  Plan, the Company has reserved  1,500,000  shares of common stock for
executives and key managers of the Company,  which may be either incentive stock
options or non-qualified  stock options.  The exercise price of stock options is
required to be at least equal to 100% of the fair market value of the  Company's
common  stock at the date of the grant.  The maximum term for all options is ten
years, with outstanding options having a weighted average remaining  contractual
life of 9.1 years as of June 30, 2006. In addition,  executive  officers granted
options  under  the  initial  grant in 2005  will  not be  eligible  to  receive
additional  options until fiscal 2008. Options granted are expected to vest over
a period of one to three years based on the  achievement  of annual  performance
targets established by the Board of Directors. However, all options granted will
vest  over a period of not less than two  fiscal  years up to a maximum  of five
fiscal years, and any unvested options vest at the end of the five years.

         During  the  fiscal  year  ended June 30,  2006,  the  Company  granted
1,069,000  options under the 2005 Executive Plan with a weighted  exercise price
of $24.49  per share and a  weighted-average  grant date fair value per share of
$4.53.

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


                                             F-22


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

                                               Weighted Average
                                   Options      Exercise Price       Options
                                 Outstanding      Per Option       Exercisable
                                 -----------      ----------       -----------
Outstanding at June 30, 2005           --         $    --               --
       Granted                    1,069,000           24.49
       Forfeited                    (36,000)          24.00
                                  ---------
Outstanding at June 30, 2006      1,033,000       $   24.51           258,249
                                  =========

         The following table sets forth certain information as of June 30, 2006:

                                        Options Outstanding                                  Options Exercisable
                    ------------------------------------------------------    ---------------------------------------------------
                                   Weighted       Weighted       Aggregate                  Weighted       Weighted     Aggregate
                                    Average       Average        Intrinsic                   Average        Average     Intrinsic
Range of Exercise     Options      Remaining      Exercise         Value        Options     Remaining      Exercise       Value
  Prices            Outstanding      Life          Price           (000)      Exercisable      Life          Price        (000)
  ------            -----------      ----          -----           -----      -----------      ----          -----        -----
$24.00 - $30.18      1,033,000       9.06         $ 24.51           $ -         258,249        9.06         $ 24.51        $ -
                     =========       ====         =======           ==          =======        ====         =======        ==


         (D)      NON-EMPLOYEE DIRECTORS' STOCK OPTION PLANS

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

         The  maximum  term for all  options  under both plans (the  "Directors'
Plans")  is ten  years,  with  outstanding  options  having a  weighted  average
remaining   contractual   life  of  8.1   years  as  of  June  30,   2006.   The
weighted-average  fair  value per share of options  granted  under the 1995 Plan
during the fiscal years ended June 30, 2006, 2005 and 2004 was $4.87,  $5.94 and
$3.94, respectively.

         The following table summarizes  transactions pursuant to the Directors'
Plans:

                                                    Weighted Average
                                      Options        Exercise Price     Options
                                     Outstanding       Per Option      Exercisable
                                     -----------       ----------      -----------
Outstanding at June 30, 2003            72,000         $    9.00          50,000
       Granted                          24,000             13.71
       Exercised                       (12,000)             8.98
                                        ------
Outstanding at June 30, 2004            84,000             10.35          60,000
       Granted                           6,000             22.70
       Expired or canceled              (9,981)             7.82
       Exercised                       (47,019)             8.82
                                        ------
Outstanding at June 30, 2005            33,000             15.53          19,000
       Granted                          60,000             25.77
                                        ------
Outstanding at June 30, 2006            93,000         $   22.14          40,000
                                        ======

         The following table sets forth certain information as of June 30, 2006:


                                             F-23


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

                                          Options Outstanding                                  Options Exercisable
                      ------------------------------------------------------    ---------------------------------------------------
                                     Weighted       Weighted       Aggregate                  Weighted       Weighted     Aggregate
                                      Average       Average        Intrinsic                   Average        Average     Intrinsic
Range of Exercise       Options      Remaining      Exercise         Value        Options     Remaining      Exercise       Value
  Prices              Outstanding      Life          Price           (000)      Exercisable      Life          Price        (000)
  ------              -----------      ----          -----           -----      -----------      ----          -----        -----

$ 10.01 - $15.00        15,000         3.60         $ 12.50         $ 173          15,000        3.60         $ 12.50       $ 173
$ 15.01 - $20.00        12,000         7.70           15.74           100           8,000        7.70           15.74          66
$ 20.01 - $25.00        26,000         8.79           23.04            26          12,000        8.82           23.07          12
$ 25.01 - $30.87        40,000         9.39           27.09         --              5,000        9.04           25.37       --
                        ------         ----         -------         -----          ------        ----         -------       -----
                        93,000         8.06         $ 22.14         $ 299          40,000        6.67         $ 17.93       $ 252
                        ======         ====         =======         =====          ======        ====         =======       =====

         (E)      SHARE-BASED COMPENSATION

         Prior to July 1, 2005,  the Company  followed  the guidance of SFAS No.
123,  "ACCOUNTING FOR STOCK-BASED  COMPENSATION"  ("SFAS 123"), which allowed an
entity to  continue  to measure  stock  option  compensation  expense  using the
accounting method prescribed by APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO  EMPLOYEES"  ("APB 25") and to make pro forma  disclosures  of net income and
earnings  per share as if the fair value  based  method of  accounting  had been
applied.

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

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

Weighted average of grants            For the Year Ended June 30,
                                      ---------------------------
  awarded during the:              2006            2005           2004
                                   ----            ----           ----

Volatility                        25.0%            31.8%         33.3%
Risk free interest rate            4.3%            3.7%           3.5%
Expected dividend yield             0%              0%             0%
Expected term (in years)         2.4 years       4.0 years      3.7 years

         The Company  recognized $3.3 million ($2.4 million net of income taxes)
in stock option  compensation  during the fiscal year ended June 30,  2006.  The
following table (in thousands,  except per share amounts) illustrates the effect
on net income and  earnings  per share as if the  Company  had  applied the fair
value recognition  provisions of SFAS 123 to share-based  compensation  prior to
the  adoption of SFAS 123-R  effective  July 1, 2005.  However,  no  share-based
compensation  was  recognized  in the  financial  statements  during that period
pursuant  to APB 25. The  Company  was not  subject to an income tax  provision,
except for the alternative  minimum tax, for the fiscal year ended June 30, 2004
(see Note 11). Share-based  compensation for the year ended June 30, 2005, would
have been $2.3 million ($1.7 million net of income taxes).


                                             F-24


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

                                                            For the Year Ended June 30,
                                                     -----------------------------------------
                                                       2006            2005             2004
                                                     --------        --------         --------
Net income, as reported                              $ 10,348        $ 25,591         $  2,180
Less:
   Stock-based compensation - fair value
   measurement prior to adoption of SFAS 123-R           --            (1,691)          (1,272)
                                                     --------        --------         --------
Net income, pro forma                                  10,348          23,900              908
Preferred stock dividends                                --              (182)            (763)
                                                     --------        --------         --------
Net income available to
    common shareholders - pro forma                  $ 10,348        $ 23,718         $    145
                                                     ========        ========         ========

Basic income per share - reported                    $   0.67        $   1.98         $   0.13
                                                     ========        ========         ========
Basic income per share - pro forma                   $   0.67        $   1.85         $   0.01
                                                     ========        ========         ========

Diluted income per share - reported                  $   0.65        $   1.79         $   0.12
                                                     ========        ========         ========
Diluted income per share - pro forma                 $   0.65        $   1.67         $   0.01
                                                     ========        ========         ========

         A  summary  of  the  Company's   nonvested  shares  granted  under  the
aforementioned  plans as of June 30, 2006 and changes  during the 12 months then
ended, is presented as follows:

                                                              Weighted Average
                                                               Grant-Date Fair
                                                 Shares            Value
                                                 ------            -----
Nonvested as of June 30, 2005                     527,399         $   5.76
Granted                                         1,155,225             4.54
Granted that vested during the period            (323,437)            3.34
Exercised that vested during the period          (223,650)            5.92
Forfeited                                         (54,173)            5.10
                                                ---------         --------
Nonvested as of June 30, 2006                   1,081,364         $   5.14
                                                =========         ========

         The aggregate  intrinsic  value of options  exercised  during the years
ended June 30,  2006,  2005 and 2004 was $4.5  million,  $7.2  million  and $0.7
million,  respectively.  As of June 30,  2006,  there was $4.2  million of total
unrecognized  compensation  cost related to nonvested  share-based  compensation
arrangements  granted under the  aforementioned  plans, which will be recognized
over a weighted average life of 1.6 years.

NOTE 10 - EARNINGS PER SHARE

         The  Company  calculates  earnings  per  share in  accordance  with the
requirements of SFAS No. 128,  "EARNINGS PER SHARE" ("SFAS 128").  The following
table  presents the Company's net income  available to common  shareholders  and
income per share, basic and diluted (in thousands, except per share amounts):


                                      F-25


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

                                                                   For the Year Ended June 30,
                                                            -----------------------------------------
                                                              2006            2005             2004
                                                            --------        --------         --------
Net income                                                  $ 10,348        $ 25,591         $  2,180
Redeemable preferred stock dividends                            --              (182)            (763)
                                                            --------        --------         --------
Net income-
    available to common shareholders                        $ 10,348        $ 25,409         $  1,417
                                                            ========        ========         ========

Weighted average outstanding shares of common stock:

Basic                                                         15,427          12,808           10,689
Diluted                                                       15,997          14,295           11,822

Earnings per basic share of common stock                    $   0.67        $   1.98         $   0.13
                                                            ========        ========         ========
Earnings per diluted share of common stock                  $   0.65        $   1.79         $   0.12
                                                            ========        ========         ========

         In August 2004,  5,000  shares of the  Company's  redeemable  preferred
stock were converted into 754,982  shares of common stock.  The remaining  2,500
shares of  redeemable  preferred  stock were  converted  into 247,420  shares of
common stock in December 2004 (see Note 8). In accordance with SFAS 128, diluted
shares of common stock in fiscal 2005 includes 209,812 common stock  equivalents
as if the  Redeemable  Preferred  Stock,  prior to  exercise  (Note 8), had been
converted to shares of common stock as such conversion would have been dilutive.
Accordingly, the calculation of diluted income per share for the year ended June
30, 2005 excludes redeemable preferred stock dividends.

            The weighted average shares  outstanding used to calculate basic and
diluted earnings per share were calculated as follows:

                                                            For the Year Ended June 30,
                                                     -----------------------------------------
                                                       2005            2005             2004
                                                     --------        --------         --------

Weighted average shares outstanding - basic         15,427,463      12,808,025      10,688,802

Outstanding  options and warrants to purchase
  shares of common stock - remaining shares
  after assuming repurchase with proceeds
  from exercise                                        569,860       1,486,514       1,133,033
                                                    ----------      ----------      ----------

Weighted average shares outstanding - diluted       15,997,323      14,294,539      11,821,835
                                                    ==========      ==========      ==========

         During  the year  ended  June 30,  2006,  2005 and  2004,  the  Company
excluded the  equivalent  shares  listed in the table below as these options and
warrants to purchase common stock were anti-dilutive.  In addition, for the year
ended June 30, 2004,  the Company  excluded the effects of the conversion of its
outstanding  redeemable  preferred stock using the "if converted" method, as the
effect would be anti-dilutive (Note 8). The Company's redeemable preferred stock
was convertible into 973,104 shares of common stock as of June 30, 2004.

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


                                      F-26


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

                                           As of June 30,
                              -------------------------------------
   Range of Exercise Prices     2006           2005          2004
   ------------------------     ----           ----          ----
      $ 10.01 - $15.00           --             --          112,200
      $ 15.01 - $20.00           --             --          646,779
      $ 20.01 - $25.00                       295,000           --
      $ 25.01 - $30.87        132,000           --             --
                              -------        -------        -------
                              132,000        295,000        758,979
                              =======        =======        =======

NOTE 11 - INCOME TAXES

         The Company  accounts for income  taxes under SFAS No. 109  "ACCOUNTING
FOR INCOME  TAXES"  ("SFAS  109").  Deferred  income  taxes  reflect the net tax
effects of net operating loss  carryforwards and temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the  amounts  used for income tax  purposes.  The tax  effects of  temporary
differences  that give rise to  significant  portions of deferred tax assets and
deferred tax liabilities are as follows:

                                                   As of June 30,
                                              -------------------------
                                                2006            2005
                                                ----            ----
Deferred tax assets:
Current
      Allowance for doubtful accounts         $    998         $    725
      Other                                        133             --
      Net operating loss carryforwards           7,467            6,871
                                              --------         --------
                                                 8,598            7,596
                                              --------         --------
Non-current
      Intangible assets                          1,298            1,407
      Other                                      1,003               75
      Net operating loss carryforwards          32,549           37,839
                                              --------         --------
                                                34,850           39,321
                                              --------         --------
Total deferred tax assets                       43,448           46,917
                                              --------         --------

Deferred tax liabilities:
Non-current
      Goodwill                                  (3,778)          (3,217)
      Fixed assets                             (22,265)         (20,981)
                                              --------         --------
Total deferred tax liabilities                 (26,043)         (24,198)
                                              --------         --------

Net deferred tax assets                       $ 17,405         $ 22,719
                                              ========         ========

         The Company's  deferred tax assets include the benefit of net operating
loss  carryforwards  incurred by the Company  through the fiscal year ended June
30, 2005.  While the Company attained  profitability  during the year ended June
30, 2004, based on the consideration of all of the available  evidence including
the recent history of losses,  management  concluded as of June 30, 2004 that it
was more likely than not that all of the net  deferred  tax assets  would not be
realized.  Accordingly,  the Company recorded a valuation allowance equal to the
net deferred tax assets at that time.

         However,  as of June 30, 2005,  after  consideration  of all  available
positive and negative  evidence,  it was  concluded  that the deferred tax asset
relating to the Company's net operating loss carryforwards will more likely than
not be realized in the future. Thus, the entire valuation allowance was reversed
and  reported  as a  component  of the  fiscal  2005  income tax  provision.  In
considering  whether or not a valuation  allowance was  appropriate  at June 30,
2006 and 2005,  the  Company  considered  several  aspects,  including,  but not
limited to the following items:

       o Cumulative  pretax  book  income  during the three years ended June 30,
         2006 and 2005.

       o Both  positive and  negative  evidence as to the  Company's  ability to
         utilize  its  federal  net  operating  loss   carryforwards   prior  to
         expiration,  such as the projected  generation of taxable  income,  the
         Company's position in the market place, existence of long-term customer
         contracts, and growth opportunities


                                      F-27


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

       o Future reversals of taxable temporary differences

       o Tax planning strategies

         As of June  30,  2006,  the  Company  evaluated  and will  continue  to
evaluate whether or not its net deferred tax assets will be fully realized prior
to expiration.  In order to utilize the entire  deferred tax asset,  the Company
will need to generate  taxable income of approximately  $111 million.  Should it
become more likely than not that all or a portion of the net deferred tax assets
will not be realized a valuation allowance will be recorded.

         As of June 30, 2006, the Company had net operating  loss  carryforwards
for federal  income tax  purposes of  approximately  $102  million and for state
purposes in varying amounts. The federal net operating loss carryforwards expire
through June 2025 as follows:

                   Year of Expiration
                   ------------------
                        2007-2011         $   --
                        2012-2016           15,047
                        2017-2021           59,537
                        Thereafter          27,233
                                          --------
                                          $101,817
                                          ========

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

         The significant  components for income taxes attributable to continuing
operations for the years ended June 30, 2006, 2005, and 2004 were as follows:

                                                                    Years Ended June, 30
                                                        ------------------------------------------
                                                          2006             2005            2004
                                                          ----             ----            ----
Current
    Federal                                             $  4,034         $   --           $     63
    State                                                    931               80               79
    Benefit of net operating loss carry forwards          (4,694)            --               --
                                                        --------         --------         --------
Total - Current                                         $    271         $     80         $    142
                                                        ========         ========         ========

Deferred
    Federal                                             $  5,991         $(16,397)        $   --
    State                                                  1,079           (3,241)            --
                                                        --------         --------         --------
Total - Deferred                                        $  7,070         $(19,638)        $   --
                                                        --------         --------         --------
  Total                                                 $  7,341         $(19,558)        $    142
                                                        ========         ========         ========

         The income tax  provision  differs  from that which  would  result from
applying the U.S. statutory income tax rate of 35% as follows:

Tax at U.S. statutory rate                              $  6,191         $  2,112         $    813
State taxes, net of federal benefit                          761              301              141
Non-deductible items                                         389              445              116
Change in valuation allowance                               --            (22,416)            (928)
                                                        --------         --------         --------
                                                        $  7,341         $(19,558)        $    142
                                                        ========         ========         ========

         The  change in the net  deferred  tax  valuation  allowance  of $22,416
during  the  year  ended  June  30,  2005  is  net of  $268  tax  impact  of the
disqualifying  dispositions of incentive  stock options  reflected as additional
paid-in  capital.  In  addition,  during the year ended June 30,  2005,  the tax
impact of the disqualifying dispositions of incentive stock options and exercise
of  non-qualified  stock  options  reflected as additional  paid-in  capital was
$2,812


                                      F-28


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

recorded as additional paid-in capital. During the year ended June 30, 2006, the
Company recorded $1,756 as additional paid-in capital representing the excess of
the tax benefit associated with the disqualifying disposition of incentive stock
options and exercise of non-qualified  stock options over the tax deduction from
compensation expense recognized for those options.

NOTE 12 - LEASE COMMITMENTS

         The Company leases office  equipment,  trucks and  warehouse/depot  and
office  facilities  under operating  leases that expire at various dates through
June 2012.  Primarily all of the facility  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,
                  --------------------
                          2007             $ 5,529
                          2008               4,694
                          2009               3,628
                          2010               2,803
                          2011               1,242
                       Thereafter              120
                                           -------
                                           $18,016
                                           =======

         Total  rental  costs  under   non-cancelable   operating   leases  were
approximately $5,936, $5,650 and $5,377 in 2006, 2005 and 2004, respectively.

NOTE 13 - CONCENTRATION OF CREDIT AND BUSINESS RISKS

         The Company's  business  activity is with customers  located within the
United  States.  For each of the years  ended June 30,  2006,  2005 and 2004 the
Company's   sales  to  customers  in  the  food  and  beverage   industry   were
approximately 95%.

         There were no  customers  that  accounted  for greater than 5% of total
sales  for each of the three  years  ended  June 30,  2006,  nor were  there any
customers  that  accounted for greater than 5% of total  accounts  receivable at
June 30, 2006 or 2005.

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

NOTE 14 - COMMITMENTS AND CONTINGENCIES

         In May 1997,  the Company  entered  into an  exclusive  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 purchases  virtually all of its
liquid CO2 requirements from BOC. The agreement contains annual adjustments over
the prior  contract year for an increase or decrease in the Producer Price Index
for Chemical and Allied Products ("PPI") or the average  percentage  increase in
the selling  price of bulk  merchant  carbon  dioxide  purchased by BOC's large,
multi-location beverage customers in the United States, whichever is less.

         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.

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


                                      F-29


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

NOTE 15 - RELATED PARTY TRANSACTIONS

         Robert L. Frome, a Director of the Company, is a member of the law firm
of Olshan  Grundman  Frome  Rosenzweig  & Wolosky  LLP,  which law firm has been
retained by the Company. Fees paid by the Company to such law firm during fiscal
2006, 2005 and 2004, were $125, $631 and $117, respectively.

         In connection with the  Refinancing  described in Note 7, 55,000 of the
ten year  warrants to purchase an aggregate of 425,000  shares of the  Company's
common  stock at an  exercise  price of $8.79 per share were  issued to Craig L.
Burr,  then a Director  of the  Company,  and one of the  purchasers  of the New
Notes, an affiliate of Mr. Burr's. Such warrants were exercised in May 2004.

         In connection with the Refinancing  described in Note 7, 250,000 of the
ten year  warrants to purchase an aggregate of 425,000  shares of the  Company's
common stock at an exercise  price of $8.79 per share were issued to  affiliates
of J.P. Morgan Partners (BHCA), L.P.,  purchasers of a portion of the New Notes.
In addition, the expiration date of warrants to purchase an aggregate of 665,403
shares of the  Company's  common  stock at an exercise  price of $6.65 per share
previously  issued to J.P. Morgan Partners  (BHCA),  L.P. in connection with the
1997 Notes and 1999 Notes was  extended  until  February  27, 2009 (See Note 7).
Richard D. Waters,  Jr., then a Director of the Company, is an affiliate of J.P.
Morgan Partners (BHCA), L.P. All such warrants were exercised in December 2004.

NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

         (b)      Long-term 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:

                                                  As of June 30,
                                                  --------------
                                               2006           2005
                                            ----------     ----------
Cash and cash equivalents                    $   341        $   968
Accounts receivable                           12,955          8,568
Accounts payable and accrued expenses         12,451          7,958
Long-term debt                                35,450         32,000
Fair value of swap - asset                       291             65


                                      F-30


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

NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                                     1st Quarter             2nd Quarter           3rd Quarter            4th Quarter
                               -------------------     -------------------     -------------------     ------------------
                                 2006        2005        2006        2005        2006        2005       2006         2005
                                 ----        ----        ----        ----        ----        ----       ----         ----
Total revenues                 $27,865     $21,881     $28,753     $24,680     $29,197     $24,611     $30,381     $26,168
Gross profit                    15,202      11,921      15,872      14,049      15,593      13,383      17,046      14,318
Operating income                 5,008       3,948       4,746       4,717       4,189       4,881       5,558       5,289
Net income                       2,955       1,854       2,639       2,437       2,180       2,710       2,574      18,590

Earnings per share (a):
   Basic                       $  0.19     $  0.15     $  0.17     $  0.20     $  0.14     $  0.21     $  0.17     $  1.22
   Diluted                     $  0.19     $  0.14     $  0.17     $  0.18     $  0.14     $  0.20     $  0.16     $  1.16

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


                                      F-31


                                   NUCO2 INC.
                                   Schedule II
                        Valuation and Qualifying Accounts
                                  in Thousands

                                         Column B           Column C - Additions         Column D         Column E
                                         --------     ------------------------------     --------         --------
                                        Balance at    Charge to
                                       Beginning of   Costs and        Charged to                      Balance At end
                                          Period       Expenses       Other Accounts    Deductions        of Period
                                          ------       --------       --------------    ----------        ---------
Year ended June 30, 2004
   Allowance for doubtful accounts        $2,299       $  316               $--           $  520            $2,095
Year ended June 30, 2005
   Allowance for doubtful accounts        $2,095       $  595               $--           $  840            $1,850
Year ended June 30, 2006
   Allowance for doubtful accounts        $1,850       $  908               $--           $  220            $2,538


                                      F-32`