SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549



                                   FORM 10-KSB

(Mark One)
/X/      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
         OF 1934

For the fiscal year ended JUNE 30, 1997

                                       OR
/ /      TRANSITION REPORT UNDER 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.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its charter)

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

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

                                 (561) 221-1754
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

                                      None.

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 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 / /


<PAGE>
                                                           (continued next page)

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/

         State   issuer's   revenues  for  its  most  recent  fiscal  year:  The
Registrant's revenues for the fiscal year ended June 30, 1997 were $18,943,569.

         The  aggregate  market  value at  September  18,  1997 of shares of the
Registrant's  Common  Stock,  $.001 par value per share  (based upon the closing
price of $16.50 per share of such stock on the  Nasdaq  National  Market on such
date), held by  non-affiliates of the Registrant was approximately  $99,142,610.
Solely for the  purposes  of this  calculation,  shares  held by  directors  and
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.

         State the number of shares  outstanding of each of the issuer's classes
of common  equity,  as of the latest  practicable  date:  At September 18, 1997,
there were outstanding  7,197,718 shares of the Registrant's Common Stock, $.001
par value.

                  Transitional Small Business Disclosure Format (check one):

                                 Yes / / No /X/

                       DOCUMENTS INCORPORATED BY REFERENCE

         The  information  required  by items  9,  10,  11 and 12 of Part III is
incorporated  by reference to a  definitive  proxy  statement to be filed by the
Registrant not later than October 28, 1997 pursuant to Regulation 14A.

                                       -1-

<PAGE>
                                     PART I

1.       DESCRIPTION OF BUSINESS.

GENERAL

         NuCo2 Inc., a Florida  corporation  organized  in 1990 (the  "Company")
operates in a relatively  new industry  which  supplies  liquid  carbon  dioxide
("bulk CO2") to retail  establishments for use in the carbonation and dispensing
of fountain beverages.  In most instances,  carbon dioxide is presently supplied
in the form of CO2  gas,  which  is  transported  and  stored  in high  pressure
cylinders. The Company offers its customers two principal services: a stationary
bulk CO2 system installed on the customer's  premises and routine filling of the
system  with bulk CO2  according  to a  defined  schedule.  The bulk CO2  system
utilizes a  cryogenic  vessel  that  preserves  CO2 in its liquid  form and then
converts  the liquid  product to  gaseous  CO2,  the  necessary  ingredient  for
beverage carbonation.  Typically the bulk CO2 system is owned by the Company and
leased to the customer under a five year noncancelable  contract,  although some
customers own their own system. The Company believes high pressure cylinders are
being displaced by bulk CO2 systems because, from a customer's perspective, bulk
CO2 systems enjoy several qualitative and economic advantages over high pressure
cylinders.

         The Company  entered the bulk CO2  business in Florida in 1990 with the
acquisition of a fountain syrup  distributor with a base of 19 bulk CO2 systems.
After  consolidating  its position in Florida  through  internal  growth and the
acquisition  of five  bulk CO2  distributors,  beginning  in 1994  the  Company,
through acquisitions, expanded into other regional markets as follows:

         o        In January 1995,  the Company  completed the  acquisition of a
                  bulk CO2 beverage distributor located in New Orleans.

         o        In June 1995, the Company  acquired  substantially  all of the
                  assets of  Bevtech,  Inc.  ("Bevtech")  a provider of bulk CO2
                  service  in  Georgia,  North  Carolina,   South  Carolina  and
                  Alabama,  more  than  doubling  the  Company's  service  area.
                  Previously,  in June 1993 the Company had acquired the Florida
                  operations of Bevtech.

         o        In January 1996, the Company acquired two bulk CO2 businesses,
                  one  operating in Arkansas,  Mississippi,  Louisiana and Texas
                  and the other operating in Florida, Georgia and Alabama.

         o        In May 1996,  the Company  acquired the bulk CO2 operations in
                  New York, New Jersey and Connecticut of The Coca-Cola Bottling
                  Company of New York, Inc.

         o        In May 1996,  the Company  acquired a second bulk CO2 business
                  operating in Mississippi.

         o        In August 1996,  the Company  acquired the bulk CO2 operations
                  of two affiliated  companies  operating in Ohio,  Kentucky and
                  Indiana.

         o        In March 1997, the Company acquired the bulk CO2 operations of
                  three independent companies operating in Texas.

         o        In April  1997,  the  Company  acquired  a bulk  CO2  business
                  operating in Houston, Texas.

         o        In  May  1997,  the  Company  acquired  a  bulk  CO2  business
                  operating in Oklahoma, Kansas, Texas and Arkansas.

         o        In May 1997,  the Company  acquired the bulk CO2 operations of
                  BOC Gases in Massachusetts, Pennsylvania and Tennessee.


<PAGE>

         o        In  June  1997,  the  Company  acquired  a bulk  CO2  business
                  operating in Georgia.

         o        In July 1997,  the Company  acquired two bulk CO2  businesses,
                  one operating in Colorado and the other operating in Nebraska,
                  Iowa and South Dakota.

         o        In  September   1997,  the  Company   acquired  the  bulk  CO2
                  operations of a company operating in Arizona.

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

         In July 1997,  the  Company  reached  an  agreement  with  Geotechnical
Instruments,  Inc.  to be the  exclusive  distributor  in the  United  States of
stationary  carbon dioxide  detectors.  The Company expects to commence the sale
and lease of the detectors in the second quarter of fiscal 1998.

         As of August  31,  1997,  the  Company  had  operations  in 34  states,
operated  43  service  and supply  depots  and  serviced  over  30,000  bulk CO2
customers, which consist primarily of restaurants,  convenience stores, taverns,
theaters, theme parks, resorts and stadiums.

INDUSTRY OVERVIEW

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

         Many types of  businesses  compete in the  beverage CO2  business,  and
market share is  fragmented.  High  pressure  cylinders and bulk CO2 service are
most frequently  provided by distributors of industrial  gases.  These companies
generally  provide a number of products  and  services  in addition to CO2,  and
often view bulk CO2 systems as  high-service  adjuncts  to their core  business.
Industrial gas distributors  generally have been reluctant to attempt to convert
their  cylinder  CO2  customers  to bulk CO2 systems for several  reasons,  that
include the capital  outlays  required to  purchase  the bulk CO2  systems,  the
idling  of  high  pressure   cylinders  and   associated   equipment,   and  the
inefficiencies  that would result from splitting their CO2 customer base between
two CO2  technologies.  Other  competitors  in the beverage  CO2 market  include
fountain supply companies and distributors of restaurant supplies and groceries,
which firms vary  greatly in size.  There are a number of small  companies  that
provide bulk CO2 service,  that operate on a local or regional geographic scope.
Many of these suppliers lack the capital  necessary to offer bulk CO2 systems to
customers on lease, or to purchase  additional or replacement  specialized  bulk
CO2 trucks and stationary depots.

         Management  believes that demand for bulk CO2 systems will be driven by
the safety,  product quality and other operating advantages afforded to users by
such systems, and the increasing availability and acceptance within

                                       -2-

<PAGE>
the food and  beverage  industry of bulk CO2 systems.  In addition,  the Company
believes that qualified  suppliers of bulk CO2 systems do not presently exist in
many regions of the United States.

COMPETITIVE STRATEGY

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

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

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

         Long term Customer  Contracts.  The Company  typically enters into five
year bulk CO2 system  lease  agreements  with its  customers.  Generally,  these
contracts are classified as one of two types:  "budget-plan"  service  contracts
and "rental plus per pound charge" contracts. Pursuant to budget plan contracts,
customers  pay fixed  monthly  charges for the lease of a Company owned bulk CO2
system installed on the customer's premises and refills of bulk CO2 according to
a predetermined  schedule. The bulk CO2 is included in the monthly rental charge
up to a  predetermined  maximum annual  volume.  If the maximum annual volume is
exceeded, the customer is charged for additional bulk CO2 delivered. Pursuant to
rental  plus per pound  charge  contracts,  the  Company  also leases a bulk CO2
system to the customer, but the customer is charged on a per pound basis for all
bulk CO2 delivered.  In exchange for a noncancelable monthly charge, the Company
installs and rents to its customers a Company owned bulk CO2 system and, through
a delivery routing system, services the bulk CO2 system and supplies bulk CO2 to
the customer's  site on a regular basis.  Even with customers that own their own
bulk CO2 systems,  the Company seeks to arrange for multi-year supply contracts.
The Company believes that the use of long-term  contracts  provides  benefits to
both  itself and its  customers.  Customers  are able to largely  eliminate  CO2
supply interruptions and the need to operate CO2 equipment themselves, while the
contract adds  stability to the Company's  revenue base and may deter  potential
competition. After the expiration of the initial term of a contract, the term of
the  contract  continues  in effect  until  either the  Company or the  customer
notifies the other of its desire to terminate.  Generally,  the Company has been
successful  contracting  with its customers for a new long-term supply contract.
To date, the Company's  experience has been that contracts  roll-over  without a
significant  portion of contracts  expiring without renewal in any one year. The
largest  number  (approximately  40%) of the Company's  current  contracts  with
customers expire by their terms in 2002.

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

                                       -3-

<PAGE>

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

         Rapid  Installation  and  Diverse  Configurations.  The bulk CO2 system
installed at the customer's site consists of a cryogenic  vessel for the storage
of liquid CO2 and related valves, regulators and gas lines. The Company operates
a fleet of 43 installation vehicles with dedicated installation personnel. A key
attribute in marketing  the Company's  services to  multi-unit  customers is its
ability to rapidly install bulk CO2 systems at customers' locations with minimal
disruption.  The Company  offers  systems  ranging from 100 to 600 pounds of CO2
capacity.

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

GROWTH STRATEGY

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

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

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

         Strategic  Acquisitions.  It has been  the  Company's  experience  that
acquisition  opportunities on satisfactory terms have been regularly  available.
The Company estimates that there are more than 100 distributors throughout

                                       -4-

<PAGE>

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

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

MARKETING AND CUSTOMERS

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

         As of August 31, 1997, the Company  distributed bulk CO2 to over 30,000
customers, none of which accounted for more than 5% of the Company's fiscal 1997
net sales.  The Company has  negotiated  multi-system  placements  or CO2 supply
contracts with numerous  customers,  including  McDonald's,  Pizza Hut, Kentucky
Fried  Chicken,  Burger  King,  7-Eleven,  Circle K, EZ Serve,  Conoco,  Carmike
Cinemas, AMC Theaters,  Friendly's  Restaurant,  Universal Studios,  Walt Disney
World and Pro Player Stadium.  The Company's  relationships with chain customers
in one geographic  market  frequently help it establish  service with these same
chains  when the  Company  expands to new  markets.  After  accessing  the chain
accounts in a new market, the Company attempts to rapidly build route density by
leasing  bulk CO2 systems to  independent  restaurants,  convenience  stores and
theaters.

         The  Company  also  supplies  high  pressure  gases in  cylinder  form,
including  CO2,  helium and nitrogen.  The Company  estimates  that it currently
services  approximately  1,000 high  pressure CO2  customers,  most of whom were
either  customers of acquired  companies or are low volume users for which it is
not economical to convert to bulk CO2 systems. However, with the introduction of
100 pound  capacity  bulk CO2  systems,  the Company  anticipates  that many low
volume users will convert from high pressure cylinders.  Helium and nitrogen are
mostly supplied to existing bulk customers in connection  with filling  balloons
and dispensing beer, respectively.

                                       -5-

<PAGE>

OPERATIONS

         As of August 31, 1997,  the Company  operated 43 liquid CO2 service and
supply  depots  located  throughout  its service  area from which it operates 89
specialized  bulk CO2 trucks,  43 installation and service vehicles and one high
pressure  cylinder  delivery truck. Each specialized bulk CO2 truck covers up to
350  accounts,  depending on market  density,  refilling  customer  systems on a
regular schedule.  All delivery quantities are measured by flow meters installed
on the Company's tank trucks. This information is then loaded onto the Company's
centralized  billing  system,  which is  maintained  on an IBM AS/400  computer.
Service and supply  depots are equipped with large storage tanks (up to 40 tons)
which receive liquefied CO2 from large capacity tanker trucks and from which the
Company's bulk CO2 trucks refill for delivery to customers.  In most cases,  the
tank is accessible from the outside of the establishment.

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

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

BULK CO2 SUPPLY

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

BULK CO2 SYSTEMS

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

         The Company's in-house service department coordinates all installations
and repairs of equipment.  In addition to the normal single unit bulk CO2 system
installation, the Company has performed many complex multi-unit installations in
stadiums  (e.g.,  Pro Players Stadium and Miami Arena) and amusement parks (e.g.
Universal Studios).  These installations involve erecting custom-designed piping
systems to link bulk CO2 systems  situated in remote  locations.  The  Company's
strong technical  capabilities  represent an important competitive advantage and
have often resulted in the equipment  manufacturers  consulting with the Company
on product modifications.


                                       -6-

<PAGE>

TRADEMARKS

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

REGULATORY MATTERS

         The  business  of the  Company is subject to federal and state laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of the Company's products. The transportation of bulk CO2
is subject to regulation by various federal, state and local agencies, including
the U.S. Department of Transportation.  These regulatory  authorities have broad
powers,  and the Company is subject to regulatory and  legislative  changes that
can affect the  economics  of the  industry by  requiring  changes in  operating
practices or by influencing the demand for, and the costs of providing services.
In addition,  the Company voluntarily complies with applicable safety standards.
Management  believes that the Company is in compliance in all material  respects
with all such laws,  regulations and standards  currently in effect and that the
cost of compliance with such laws,  regulations and standards has not and is not
anticipated to have a material adverse effect on the Company.

COMPETITION

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

EMPLOYEES

         At June 30, 1997 the Company had 232  full-time  employees,  of whom 84
were involved in an executive, marketing or administrative capacity, 105 of whom
were route drivers and 43 of whom were in service/installation  functions.  None
of the Company's employees is covered by a collective bargaining agreement or is
a member of a union. The Company  considers its relationship  with its employees
to be good.

2.       DESCRIPTION OF PROPERTY.

         The  Company's  corporate  headquarters  are located in a 22,000 square
foot  facility  in  Stuart,   Florida.  This  facility  accommodates  corporate,
administrative,  marketing,  sales and warehouse  space. The lease expires March
31,  2001 with a fixed  annual  rent of  $167,215.  As of August 31,  1997,  the
Company  also leased  liquid CO2 service and supply  depots at the  following 43
locations: Florida (Stuart, Miami, Ft. Myers, Jacksonville, Tallahassee, Orlando
and Tampa); Georgia (Atlanta, Augusta, Savannah and Macon); Alabama (Birmingham,
Mobile and Opelika);  Louisiana  (New  Orleans,  Shreveport  and Lake  Charles);
Mississippi  (Jackson);  North Carolina  (Charlotte and  Raleigh-Durham);  South
Carolina  (Florence);   Arkansas  (Little  Rock);   Tennessee  (Chattanooga  and
Memphis);  New York  (Farmingdale  and  Pelham);  Ohio  (Boardman,  Columbus and
Dayton);  West Virginia  (Nitro);  New Jersey (Newark);  Kentucky  (Louisville);
Massachusetts  (Braintree);  Connecticut (Hartford);  Texas (Dallas, Houston and
San Antonio);  Pennsylvania  (Philadelphia);  Oklahoma (Oklahoma City); Colorado
(Pueblo);  Nebraska  (Omaha);  Kansas  (Kansas City) and Iowa (Des Moines).  The
properties  on which such  facilities  are located are leased from third parties
(other than the Stuart and Ft.  Myers,  Florida  service  and supply  depots) on
terms  consistent  with market rentals  prevailing in the  location's  area. The
Company believes that its other existing facilities are adequate for its current
needs and that  additional  facilities in its service area are available to meet
future needs.


                                       -7-

<PAGE>
3.       LEGAL PROCEEDINGS.

         IN  CARBONIC  DESIGNS,  INC.  V.  MVE,  INC.,  THE  TAYLOR-WHARTON  GAS
EQUIPMENT DIVISION OF HARSCO CORPORATION, WELDERS SUPPLY CO. AND NUCO2 INC., No.
249-0220-96, 249th Judicial District Court of Johnson County, Texas, filed on or
about December 31, 1996, the plaintiff,  Carbonic  Designs,  Inc.  ("CDI"),  has
asserted claims against the Company and three other  defendants for violation of
the Texas Free  Enterprise  and  Antitrust  Act of 1983 (the  "Antitrust  Act"),
business   disparagement,   tortious   interference   with  contract,   tortious
interference with prospective  business  relations,  and civil  conspiracy.  CDI
seeks actual  damages,  treble  damages under the  Antitrust  Act, and exemplary
damages, all in unspecified amounts. No trial date has been set. The Company has
been contesting the case vigorously and intends to continue to do so.

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

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

         Not applicable.

                                       -8-

<PAGE>
                                     PART II

5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Common Stock commenced  trading on the Nasdaq National Market under
the symbol "NUCO" on December 19, 1995.

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

CALENDAR 1995                                               HIGH         LOW
-------------                                               ----         ---
Fourth Quarter (from December 19, 1995)...........          12 3/4      9 1/2

CALENDAR 1996
-------------
First Quarter.....................................          17 1/4     12 1/4
Second Quarter....................................          34         17
Third Quarter.....................................          31         19 1/2
Fourth Quarter....................................          22         11 1/4

CALENDAR 1997
-------------
First Quarter.....................................          17 5/8     11
Second Quarter....................................          18 3/8     11 7/8


         At June 30, 1997, there were approximately 206 holders of record of the
Company's Common Stock. This number does not include an indeterminate  number of
shareholders whose shares are held by brokers in "street name."

         The Company has not paid any cash  dividends  on the Common Stock since
its inception and the Board of Directors does not anticipate  declaring any cash
dividends on the Common Stock in the foreseeable  future.  The Company currently
intends to utilize  any  earnings  it may  achieve  for the  development  of its
business  and  working  capital  purposes.  In  addition,  the  payment  of cash
dividends  on the Common  Stock is  restricted  by  financial  covenants  in the
Company's credit facility.

         On June  16,  1997,  the  Company,  as  partial  consideration  for the
acquisition of the bulk CO2 business of Metro Carbonation Sales & Service, Inc.,
a Georgia corporation  ("Metro"),  issued and sold to Metro 33,962 shares of the
Common Stock of the Company in reliance upon the  exemption  provided by Section
4(2) of the Securities Act of 1933, as amended. No discounts or commissions were
paid.

6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

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

OVERVIEW

         At June 30,  1997 the  Company  leased  21,919  bulk CO2 systems to its
customers,  principally  pursuant to five year  noncancelable  lease  contracts.
These customers include restaurants, convenience stores, theaters, taverns

                                       -9-

<PAGE>
and other  businesses  which dispense  carbonated  beverages.  Generally,  these
contracts are classified as one of two types:  "budget-plan"  service  contracts
and "rental plus per pound charge" contracts. Pursuant to budget plan contracts,
customers pay a fixed  monthly  charge for the lease of a Company owned bulk CO2
system installed on the customer's premises and refills of bulk CO2 according to
a predetermined  schedule. The bulk CO2 is included in the monthly rental charge
up to a  predetermined  maximum annual  volume.  If the maximum annual volume is
exceeded, the customer is charged for additional bulk CO2 delivered. Pursuant to
rental  plus per pound  charge  contracts,  the  Company  also leases a bulk CO2
system to the customer, but the customer is charged on a per pound basis for all
bulk  CO2  delivered.  The  Company's  contracts  generally  provide  for  price
increases based upon increases in the consumer price index.

         The Company  provides  some  services  besides  those offered under the
above two types of contracts.  As of June 30, 1997,  the Company  provided "fill
only" service to approximately 4,800 customers.

         As of June  30,  1997,  approximately  9,800  of the  Company's  26,934
customers  were billed on a per pound basis  which  varies with the  quantity of
bulk CO2 delivered.  These customers will tend to consume less CO2 in the winter
months,  and this may cause the  Company's  revenues and earnings for its fiscal
quarters ending in December and March to be relatively  lower than for its other
quarters.  As of June 30, 1997,  approximately  17,100 of the  Company's  26,934
customers  were  billed at a flat  monthly  rate which  generally  does not vary
throughout the year.

         The Company's  installed base of bulk CO2 systems has increased through
internally  generated new customers and through  acquisitions.  As route density
increases,  route profitability increases as the fixed costs associated with the
route are spread over a larger  revenue base.  Since the Company's  inception in
February 1990 to June 30, 1997,  14,357 Company owned bulk CO2 systems have been
installed  and  11,970   customer   accounts  have  been  acquired   through  20
acquisitions.  Approximately  3,100 of these customer accounts resulted from the
acquisition of Bevtech in June 1995.

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

GENERAL

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

         Cost of products sold is comprised of purchased CO2 and labor,  vehicle
and depot costs  associated with the Company's  storage and delivery of bulk CO2
to customers.  Selling, general and administrative expenses consist of salaries,
dispatch and  communications  costs,  and expenses  associated  with  marketing,
administration,  accounting and employee  training.  Consistent with the capital
intensive character of its business, the Company incurs

                                      -10-

<PAGE>
significant   depreciation  and  amortization  expenses.  These  stem  from  the
depreciation of Company owned bulk CO2 systems; depreciation and amortization of
bulk  system  installation  costs;   amortization  of  sales  commissions,   and
amortization of goodwill, deferred financing costs and other intangible assets.

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

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

RESULTS OF OPERATIONS

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


                                                           Year Ended June 30,

                                                          1996          1997
                                                          ----          ----

Income Statement Data:

Net sales...........................................      100.0%       100.0%

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

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

Depreciation and amortization.......................       20.2         22.4
                                                          -----        -----

Operating income (loss).............................       10.9          (.8)

Interest (income) expense...........................       10.5         (3.6)
                                                          -----        ------

Income (loss) before extraordinary item.............         .4%         2.8%

Extraordinary item..................................       (7.2)          --
                                                          ------       ------
Net income (loss)...................................       (6.8%)        2.8%
                                                           =====       ======

Other Data:

  EBITDA............................................       31.1%        21.6%
                                                           ====        ===== 


                                      -11-

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

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

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

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

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

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

         For the reasons  described above, the Company's net loss in fiscal 1996
was  $813,000  compared to net income of $527,000 in fiscal 1997;  however,  net
income  before  extraordinary  item in fiscal 1996 was $46,822.  The Company has
made no  provision  for income tax expense in either  fiscal 1996 or fiscal 1997
due to its historical

                                      -12-

<PAGE>
net losses.  At June 30, 1997 the Company had net operating  loss  carryforwards
for federal income tax purposes of $12.5 million,  which are available to offset
future federal taxable income through 2012.

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

LIQUIDITY AND CAPITAL RESOURCES

         The  Company's  cash  requirements   consist   principally  of  capital
expenditures  associated  with  placing  new bulk CO2  systems  into  service at
customers'  locations;  payments of principal  and  interest on its  outstanding
indebtedness;  payments for acquired businesses;  and working capital.  Whenever
possible, the Company seeks to obtain the use of vehicles,  land, buildings, and
other  office  and  service  equipment  under  operating  leases  as a means  of
conserving  capital.  As of June 30, 1997, the Company  anticipated  making cash
capital  expenditures  of  approximately  $20.0 million to $30.0 million  during
fiscal  1998,  primarily  for  purchases  of bulk C02 systems that it expects to
place into  service  during  this time.  Once bulk CO2  systems  are placed into
service, the Company has generally experienced positive cash flows on a per-unit
basis,  as there  are  minimal  additional  capital  expenditures  required  for
ordinary operations. In addition to the capital expenditures related to internal
growth,  the  Company  continually  reviews  opportunities  to acquire  bulk CO2
service businesses,  and may require cash in an amount dictated by the scale and
terms of any such transactions successfully concluded.

         Prior to the IPO,  the  Company's  primary  sources of  liquidity  were
borrowings under its then existing credit facility with its secured lender which
was repaid and terminated upon  consummation of the IPO; equity and debt capital
obtained from various venture capital funds and individuals,  including  parties
that sold businesses to the Company; and cash flows from operations.

         The Company's capital resources include cash flows from operations; the
net proceeds  from the Company's  Secondary  Offering;  and available  borrowing
capacity under the Company's credit facility with  NationsBank of Florida,  N.A.
(the  "NationsBank  Facility").  The Company has available under the NationsBank
Facility an aggregate of $30.0 million,  including a $6.0 million term loan that
was used,  together  with a portion of the net proceeds of the IPO, to refinance
the  outstanding  balance  of  existing  indebtedness  under  its  prior  credit
facility;   a  $13.0  million  "tank  revolver"  to  finance  the  purchase  and
installation  of new bulk  CO2  service  systems;  a $10.0  million  acquisition
revolver to finance the  purchase  of bulk CO2  service  businesses;  and a $1.0
million line of credit for general  working  capital needs.  All portions of the
NationsBank  Facility  require full repayment of all  outstanding  principal and
interest on November 30, 1998,  the maturity date of the  NationsBank  Facility.
The  NationsBank  Facility  is  secured by  substantially  all the assets of the
Company.  The Company is required to meet certain financial  covenants under the
NationsBank Facility,  and may not access borrowings which would cause its total
debt to exceed 3.25 times EBITDA on a six month rolling average  annualized.  In
September 1997, the  NationsBank  Facility was amended to adjust the funded debt
ratio to 3.5 times EBITDA on a three month rolling average annualized.

         In  September  1997,  the Company  entered into a letter of intent with
SunTrust Bank, South Florida, N.A. ("SunTrust") for Suntrust to provide, subject
to documentation,  a $50.0 million Senior Secured Revolving Credit Facility (the
"New Facility") to the Company.  SunTrust  intends to syndicate the New Facility
and serve as sole agent.  The proposed  New  Facility  contains a trigger for an
automatic  request by the Company to increase the New Facility to $100.0 million
upon the happening of certain  events.  The New Facility is expected to close on
or about  October 17,  1997.  In August  1997,  the Company  engaged  Montgomery
Securities  as its  exclusive  placement  agent  on a "best  efforts"  basis  in
connection  with a proposed  private  placement of $30.0 million in subordinated
notes.  The agent has  received  term sheets from  potential  investors  and the
transaction  is  expected to close  simultaneously  with the New  Facility.  The
Company believes that cash from operating activities,  the net proceeds from the
Secondary Offering, available borrowings under its existing credit facility, the
New Facility which will replace the existing credit  facility,  and the proposed
private placement,  will be sufficient to fund proposed  operations for at least
the next 12 months at its current rate of growth.


                                      -13-

<PAGE>
         As of  June  30,  1997,  the  Company's  total  outstanding  borrowings
aggregated $9.5 million, as compared to $10.8 million as of June 30, 1996. As of
June 30,1997, under the term portion of the NationsBank Facility interest ranged
from  8.44% to 8.51% per  annum,  as  compared  to 8.19% to 8.51% as of June 30,
1996.

         Working  Capital.  At June 30, 1996 the Company had working  capital of
$40.7  million.  At June 30,  1997,  the  Company  had  working  capital of $9.5
million.

         Cash Flows from  Operating  Activities.  During  fiscal 1996 and fiscal
1997,  net cash  provided  by  operating  activities  was $1.8  million and $4.3
million  respectively.  Cash flows from operating  activities  increased by $2.5
million for the fiscal  year ended June 30, 1997  compared to the same period in
1996  primarily  due to the net  income and the  increase  in  depreciation  and
amortization.

         Cash Flows from  Investing  Activities.  During  fiscal 1996 and fiscal
1997,  the  Company  made net  capital  expenditures  of $7.0  million and $16.9
million,  respectively, for new bulk CO2 systems and associated installation and
direct  placement  costs. In addition,  during the year ended June 30, 1996, the
Company  made four  acquisitions  and  expended  cash of $1.8 million and during
fiscal 1997 the  Company  made eight  acquisitions  and  expended  cash of $17.7
million.

         Cash Flows From Financing  Activities.  During fiscal 1996,  cash flows
from financing activities were $50.0 million. During fiscal 1997 cash flows used
in financing  activities  were $2.4  million.  For the year ended June 30, 1996,
cash flows from financing  activities were primarily from the issuance of Common
Stock in connection  with the IPO and the Secondary  Offering less the repayment
of long-term debt,  redemption of Preferred Stock and additional borrowings used
to finance the placement of bulk CO2 systems in service. For the year ended June
30, 1997, cash flows used in financing  activities were primarily from repayment
of long-term debt owed and the redemption of a warrant.

         The Company  believes that cash from  operating  activities,  available
borrowings under the existing facility,  the New Facility which will replace the
existing  facility,  and the proposed private  placement,  will be sufficient to
fund proposed  operations for at least the next 12 months at its current rate of
growth.

INFLATION

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

7.       FINANCIAL STATEMENTS.

         [See page F-1.]

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

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

                                      -14-

<PAGE>
                                    PART III

         The information  required by Items 9, 10, 11 and 12 of this Part III is
incorporated  by reference to the definitive  proxy statement to be filed by the
Company no later than October 28, 1997 pursuant to Regulation 14A.

ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K.

         (a)      Exhibits:

         **3.1           --      Amended and Restated  Articles of Incorporation
                                 of the Company.

         **3.2           --      Bylaws of the Company.

         **10.1          --      1995 Stock Option Plan.

         **10.2          --      Directors' Stock Option Plan.

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

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

         **10.5          --      Asset  Purchase  Agreement  among the  Company,
                                 Bevtech,   Inc.,  E.  Reid  Hunter,  Edward  M.
                                 Sellian and Suzan  Sellian,  dated November 30,
                                 1995.

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

         **10.7          --      Lease for storage facility,  Ault Road, Stuart,
                                 Florida,  between  the  Company  and  Edward M.
                                 Sellian.

         **10.8          --      Form of  Indemnification  Agreement between the
                                 Company  and  directors  and  officers  of  the
                                 Registrant.

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

         **10.10         --      Asset Purchase Agreement between the Registrant
                                 and The Coca-Cola Bottling Company of New York,
                                 Inc., dated April 18, 1996.

         **10.11         --      Amendment  No.  1 to Asset  Purchase  Agreement
                                 between  the   Registrant   and  The  Coca-Cola
                                 Bottling  Company of New York,  Inc., dated May
                                 15, 1996.

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

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

         **16            --      Letter  of  Cooper  Selvin &  Strassberg  dated
                                 December 11, 1995.

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

                                      -15-

<PAGE>




         *23.1           --      Consent of Cooper,  Selvin & Strassberg  LLP to
                                 the   incorporation   by   reference   to   the
                                 Registrant's Registration Statement on Form S-8
                                 (No.  333-06705) of the  independent  auditors'
                                 report included herein.

         *27             --      Financial Data Schedule.

---------------------------
*        Included herein.
**       Incorporated  by reference to the Company's  Registration  Statement on
         Form SB-2,  filed with the  Commission on November 7, 1995  (Commission
         File No. 33-99078), as amended.
***      Incorporated  by reference to the Company's  Registration  Statement on
         Form SB-2,  filed with the Commission on June 7, 1996  (Commission File
         No. 333-3352).
****     Incorporated by reference to the Company's Form 8-K dated July 2, 1996.

         (b)      REPORTS ON FORM 8-K

         No reports were filed on Form 8-K in the quarter ended June 30, 1997.


                                      -16-

<PAGE>
                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                           NUCO2 INC.

Dated:  September 27, 1997                 s/s EDWARD M. SELLIAN
                                           ---------------------
                                           Edward M. Sellian,
                                           Chairman of the Board and Chief
                                           Executive Officer

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  Registrant in the  capacities and on
the dates indicated.

          SIGNATURE                     TITLE                   DATE
          ---------                     -----                   ----


/S/ EDWARD M. SELLIAN             Chairman of the Board and  September 27, 1997
-------------------------------   Chief Executive Officer
    Edward M. Sellian


/S/ JOSEPH M. CRISCUOLO        President and Director        September 27, 1997
----------------------------
    Joseph M. Criscuolo


/S/ ROBERT L. FROME            Director                      September 27, 1997
----------------------------
    Robert L. Frome


/S/ JOHN J. O'NEIL             Director                      September 27, 1997
----------------------------
    John J. O'Neil


/S/ EDWARD F. O'REILLY         Director                      September 27, 1997
----------------------------
    Edward F. O'Reilly


/S/ JOANN SABATINO             Chief Financial Officer       September 27, 1997
----------------------------
    Joann Sabatino



                                      -17-
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                         PAGE NO.
                                                                                                         --------

                                   NUCO2 INC.

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

FINANCIAL STATEMENTS:

      BALANCE SHEETS AS OF JUNE 30, 1996 AND 1997.....................................................      F-3

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

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

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

NOTES TO FINANCIAL STATEMENTS.........................................................................      F-8
</TABLE>








                                      F-1


<PAGE>






                          INDEPENDENT AUDITORS' REPORT


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

We have  audited the  accompanying  balance  sheets of NuCo2 Inc. as of June 30,
1996 and 1997, and the related statements of operations,  shareholders'  equity,
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits 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, 1996
and 1997,  and the  results of its  operations  and its cash flows for the years
then ended in conformity with generally accepted accounting principles.


                                   /S/ COOPER, SELVIN & STRASSBERG LLP
                                   -----------------------------------
                                   COOPER, SELVIN & STRASSBERG LLP



Great Neck, New York August 29, 1997, except as to Note 14, the date of which is
September 18, 1997



                                       F-2

<PAGE>



                                   NuCo2 INC.
                                 BALANCE SHEETS


                                     ASSETS
                                    (NOTE 6)

<TABLE>
<CAPTION>

                                                                                                             June 30,
                                                                                                             --------
                                                                                                 1996                   1997
                                                                                                 ----                   ----

Current assets:
<S>                                                                                     <C>                    <C>            
   Cash and cash equivalents                                                            $    43,000,676        $    11,672,506
   Trade accounts receivable; net of allowance for doubtful
       accounts of $210,629 and $113,054, respectively                                        1,385,642              2,120,880
   Inventories                                                                                   52,425                 85,601
   Prepaid expenses and other current assets                                                    384,948                276,858
                                                                                          -------------          -------------
         Total current assets                                                                44,823,691             14,155,845
                                                                                          -------------          -------------

Property and equipment, net (Note 4)                                                         24,392,692             46,803,050
                                                                                          -------------          -------------

Other assets:
   Goodwill, net                                                                              3,064,877              7,580,763
   Deferred charges, net                                                                        389,343                272,608
   Customer lists, net                                                                          873,512              1,755,919
   Restrictive covenants, net                                                                   114,167              1,401,833
   Deferred lease acquisition costs, net                                                        714,040              1,274,577
   Deposits                                                                                     260,363                 99,863
                                                                                          -------------          -------------
                                                                                              5,416,302             12,385,563
                                                                                          -------------          -------------

                                                                                        $    74,632,685        $    73,344,458
                                                                                          =============          =============
</TABLE>

<TABLE>
<CAPTION>

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
<S>                                           <C>                                       <C>                    <C>            
   Current maturities of long-term debt (Note 6)                                        $     1,358,447        $     2,180,601
   Accounts payable                                                                           2,226,795              1,514,048
   Accrued expenses                                                                             497,975                961,544
   Other current liabilities                                                                     73,529                 22,699
                                                                                          -------------          -------------
       Total current liabilities                                                              4,156,746              4,678,892

Long-term debt, excluding current maturities (Note 6)                                         9,485,994              7,365,740
Customer deposits                                                                               305,535                598,177
                                                                                          -------------          -------------
         Total Liabilities                                                                   13,948,275             12,642,809
                                                                                          -------------          -------------

Shareholders' equity (Note 7):
   Common stock; par value $.001 per share; 30,000,000 shares authorized; issued
       and outstanding 7,129,467 shares at June 30, 1996 and 7,197,718
       shares at June 30, 1997                                                                    7,129                  7,198
   Additional paid-in capital                                                                63,743,312             63,233,043
   Accumulated deficit                                                                       (3,066,031)            (2,538,592)
                                                                                          --------------         --------------
         Total shareholders' equity                                                          60,684,410             60,701,649
Commitments and contingencies (Note 12)
                                                                                        $    74,632,685        $    73,344,458
                                                                                          =============          =============
</TABLE>

See accompanying notes to financial statements.





                                       F-3

<PAGE>

                                   NuCo 2 INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                                   Years Ended June 30,
                                                                                                   --------------------
                                                                                                1996                   1997
                                                                                                ----                   ----



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

   Costs and expenses:
       Cost of products sold                                                                  5,177,320              8,991,823
       Selling, general and administrative expenses                                           3,066,381              5,858,934
       Depreciation and amortization                                                          2,417,492              4,246,035
                                                                                          -------------          -------------
                                                                                             10,661,193             19,096,792
                                                                                          -------------          -------------

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

   Other expenses (income):
       Interest expense (income), net                                                         1,257,984               (680,662)
                                                                                          -------------          --------------

         Income before extraordinary item                                                        46,822                527,439
                                                                                          -------------          -------------

   Extraordinary item - loss on extinguishment of debt                                          859,522                -
                                                                                          -------------          -------------

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

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

         Net income (loss) attributable to common stockholders                          $      (923,617)       $       527,439
                                                                                          ==============         =============

   Income (loss) per common share (Note 1)

         Income (loss) before extraordinary item                                        $         (0.01)       $          0.07

         Extraordinary item (Note 6)                                                              (0.18)               -
                                                                                          --------------         -------------

         Net income (loss)                                                              $         (0.19)       $          0.07
                                                                                          ==============         =============

         Weighted average number of common and common
           equivalent shares outstanding                                                       4,677,900             7,334,131
                                                                                          ==============         =============
</TABLE>




See accompanying notes to financial statements.


                                       F-4

<PAGE>
                                   NuCo2 INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                       Series A             Series B            Series C          Series D
                                    ---------------     ----------------    -----------------   ---------------
                                    Shares   Amount     Shares   Amount     Shares    Amount    Shares   Amount
                                    ------   ------     ------   ------     ------    ------    ------   ------

<S>                                 <C>     <C>         <C>    <C>          <C>    <C>           <C>    <C>       
Balance, June 30, 1995               485    $485,000     500    $500,000     500   $  500,000    1,500  $1,500,000
Redemption of Series A              (485)   (485,000)     -          -        -            -        -          -  
Redemption of Series B                -         -       (500)   (500,000)     -            -        -          -  
Conversion of Series C                -         -         -          -      (500)    (500,000)      -          -   
Conversion of Series D                -         -         -          -        -            -    (1,500) (1,500,000)
Conversion of subordinated debt
 and exercise of warrants and
 options                              -         -         -          -        -            -         -             
Issuance of 2,022,576 shares of
   common stock - Initial
   Public Offering                    -         -         -          -        -            -         -         -   
Issuance of 1,761,165 shares of
   common stock - secondary
   offering                           -         -         -          -        -            -         -         -   
Net (loss)                            -         -         -          -        -            -         -         -   
Dividends declared on
   Preferred Stock                    -         -         -          -         -           -         -         -   
                                    ------  --------  -------  --------  ---------  -----------  ------  ----------
Balance, June 30, 1996                -         -         -          -        -            -         -         -   
Issuance of 34,289 shares of
   common stock - exercise
   of options                         -         -         -          -        -            -         -         -   
Redemption of warrant                 -         -         -          -        -            -         -         -   
Additional expenses - secondary
   offering                           -         -         -          -        -            -         -         -   
Issuance of 33,962 shares of
   common stock - asset
   acquisition                        -         -         -          -        -            -         -         -   
Net income                            -         -         -          -         -           -         -         -   
                                   -------  --------  -------  --------  ---------  -----------  ------  ----------
Balance, June 30, 1997                -         -         -          -         -           -         -         -   
                                   =======  ========  =======  ========  =========  ===========  ======  ==========
</TABLE>
<TABLE>
<CAPTION>
                                       Common Stock       Additional
                                    -------------------      Paid-in     Accumulated  Shareholders'
                                    Shares       Amount      Capital       Deficit       Equity
                                    ------       ------   ----------- --------------  ----------
<S>                                 <C>         <C>       <C>         <C>           <C>         
Balance, June 30, 1995              1,932,953   $ 1,933   $    9,317  $(2,253,331)  $    742,919
Redemption of Series A                    -         -            -           -         (485,000)
Redemption of Series B                    -         -        499,500         -             (500)
Conversion of Series C                155,164       155      499,845         -                0
Conversion of Series D                300,266       300    1,499,700         -                0
Conversion of subordinated debt
 and exercise of warrants and
 options                              957,343       957      805,400         -          806,357
Issuance of 2,022,576 shares of
   common stock - Initial
   Public Offering                  2,022,576     2,023   16,149,341         -       16,151,364
Issuance of 1,761,165 shares of
   common stock - secondary
   offering                         1,761,165     1,761   44,641,484         -       44,643,245
Net (loss)                                -         -            -       (812,700)     (812,700)
Dividends declared on
   Preferred Stock                        -         -       (361,275)        -         (361,275)
                                   ----------   -------  -----------  ------------  -----------
Balance, June 30, 1996              7,129,467     7,129   63,743,312   (3,066,031)   60,684,410
Issuance of 34,289 shares of
   common stock - exercise
   of options                          34,289        34      152,319         -          152,353
Redemption of warrant                     -         -     (1,143,450)        -       (1,143,450)
Additional expenses - secondary
   offering                               -         -        (59,100)        -          (59,100)
Issuance of 33,962 shares of
   common stock - asset
   acquisition                         33,962        35      539,962         -          539,997
Net income                                -         -            -        527,439       527,439
                                   ----------   -------  -----------  ------------  -----------
Balance, June 30, 1997              7,197,718   $ 7,198  $63,233,043  $(2,538,592)  $60,701,649
                                   ==========   =======  ===========  ============  ===========
</TABLE>
See accompanying notes to financial statements.

                                       F-5
<PAGE>

                                   NuCo 2 INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

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

<S>                                                                       <C>                    <C>            
Income before extraordinary item                                          $        46,822        $       527,439
Extraordinary item - loss on extinguishment of debt                               859,522                   -
                                                                            -------------          -------------
Net income (loss)                                                                (812,700)               527,439
Cash flows from operating activities:
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
        Depreciation and amortization of property and equipment                 1,609,063              3,130,022
        Amortization of other assets                                              808,429              1,116,013
        Loss on disposal of property and equipment                                155,592                294,411
        Write-off of deferred financing costs                                     784,069                  -
        Changes in operating assets and liabilities:
        Decrease (increase) in:
           Trade accounts receivable                                             (646,224)              (735,238)
           Inventories                                                            (11,441)               (33,176)
           Prepaid expenses and other current assets                             (356,368)               108,090
        Increase (decrease) in:
           Accounts payable                                                       278,794               (712,747)
           Accrued expenses                                                      (103,910)               463,569
           Other current liabilities                                               39,064                (50,830)
           Customer deposits                                                      100,463                236,392
                                                                            -------------          -------------

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

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

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



                                       F-6

<PAGE>

                                   NuCo 2 INC.
                            STATEMENTS OF CASH FLOWS

                                   (Continued)
<TABLE>
<CAPTION>

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

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

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

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

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

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

     Interest                                                                       $     1,661,645        $     903,729
                                                                                    --=============        ===============

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


Supplemental schedule of noncash investing and financing activities:
  Acquisition of businesses:
     Fair value of assets acquired                                                  $     4,269,535        $     1,098,718
     Cost in excess of net assets of businesses acquired                                    746,910                244,000
     Liabilities assumed or incurred                                                     (3,248,985)               (56,250)
     Issuance of common stock                                                                     -               (539,996)
                                                                                    ---------------        ---------------
            Cash paid                                                               $     1,767,460        $      746,472
                                                                                    ===============        ===============
</TABLE>

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

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


See accompanying notes to financial statements.


                                       F-7

<PAGE>

                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

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

             (a)   Description of business

             NuCo2 Inc., (the "Company"),  a Florida corporation,  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

             For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments  purchased with an original maturity of three
months or less to be cash equivalents.

             (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 costs are associated with successful placements of such
systems with  customers  under  noncancellable  contracts and which would not be
incurred by the  Company  but for a  successful  placement.  Upon early  service
termination,  the  unamortized  portion  of  direct  costs  associated  with the
installation are charged to cost of products sold. Depreciation and amortization
is computed using the  straight-line  method over the estimated  useful lives of
the respective assets or the lease terms for leasehold  improvements,  whichever
is shorter.

             The depreciable lives of property and equipment are as follows:

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

             (e)   Other Assets

             Goodwill, Net

             Goodwill,  net,  represents  costs  in  excess  of  net  assets  of
businesses  acquired and is being amortized on a straight-line basis over twenty
years.  Accumulated  amortization  of goodwill was $174,607 and $390,603 at June
30, 1996 and 1997,  respectively.  The Company  evaluates the  recoverability of
goodwill as well as the amortization  periods to determine whether an adjustment
of the carrying value is appropriate.

                                       F-8

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

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

             Deferred Charges, Net

             Deferred  charges,  net,  consist  of the  unamortized  portion  of
financing  costs  which  are  being  amortized  over  the  term  of the  related
indebtedness,  ranging from thirty-six to sixty months. Accumulated amortization
of  deferred  costs  was  $199,091  and  $368,238  at June 30,  1996  and  1997,
respectively.  Included in the statement of  operations  for the year ended June
30, 1996 is an extraordinary  write-off of deferred financing fees in connection
with the reduction of certain indebtedness (Note 6).

             Customer Lists, Net

             Customer lists, net, consist of the unamortized portion of customer
lists acquired in connection with asset  acquisitions  which are being amortized
over five years, the average life of customer leases.  Accumulated  amortization
of  customer  lists  was  $257,948  and  $565,090  at June 30,  1996  and  1997,
respectively.  The  Company's  policy is to value  customer  lists  based on the
estimated value of future cash flows over the life of the customer lease.

             Restrictive Covenants, Net

             Restrictive  covenants,  net,  consist of covenants  not to compete
arising in connection  with asset  acquisitions  which are being  amortized over
their  contractual  lives ranging from thirty to one hundred and twenty  months.
Accumulated  amortization  of restrictive  covenants was $60,833 and $173,167 at
June  30,  1996  and  1997,  respectively.  The  Company's  policy  is to  value
restrictive  covenants  based  on  the  negotiated   contractual  value  of  the
restrictive covenant or a third party appraisal.

             Deferred Lease Acquisition Costs, Net

             Deferred  lease  acquisition  costs,  net,  consist of  commissions
associated  with the  acquisition of new leases and are being amortized over the
life of the related leases,  generally five years.  Accumulated  amortization of
deferred lease  acquisition costs was $428,284 and $709,830 at June 30, 1996 and
1997, respectively.  Upon early service termination,  the unamortized portion of
deferred  lease   acquisition   costs  are  charged  to  selling,   general  and
administrative expenses.

             (f)   Revenue Recognition

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

             (g)   Income Taxes

             The  Company  has  adopted  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. The Company
adopted  Statement  No.  109 in  fiscal  1994.  There was no  cumulative  effect
adjustment on the financial  statements as a result of this change in accounting
for income taxes.

                                       F-9

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 1  -    Description  of  Business  and  Summary of  Significant  Accounting
             Policies - (continued)

             (h)   Net Income or Loss Per Common Share

             The net income or loss per share  computations  presented are based
on the weighted  average number of common shares and dilutive common  equivalent
shares  outstanding  during each year.  Fully diluted and primary income or loss
per common share are the same amounts for each period.

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

             (i)   Use Of Estimates

             The   preparation  of  financial   statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

             (j)   Employee Benefit Plan

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

NOTE 2   -  Public Offerings

            (a)    Initial Public Offering (IPO)

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

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

             Prior to the IPO, the Company had  outstanding  approximately  $2.9
million in principal amount of Senior Subordinated Notes, a portion of which was
convertible at the option of the holders thereof into Common Stock.  The holders
of the Senior  Subordinated  Notes converted,  effective upon the closing of the
IPO,  approximately  $407,000 of the principal amount of the Senior Subordinated
Notes into an aggregate of 805,209  shares of Common Stock.  The Company  repaid
the remaining  principal of the Senior  Subordinated  Notes and accrued interest
thereon  with a portion of the net  proceeds of the IPO.  The  Company  also had
outstanding  485  shares of Series A  Preferred  Stock,  500  shares of Series B
Preferred Stock, 500 shares of Series C Preferred Stock and 1,500

                                      F-10

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 2 -    Public Offerings - (continued)

shares of Series D Preferred  Stock.  Effective upon closing of the IPO, (i) the
Company  redeemed  with a  portion  of the  net  proceeds  of the IPO all of the
outstanding  Series A  Preferred  Stock  and  Series B  Preferred  Stock  for an
aggregate of $485,500 plus  approximately  $243,000 of dividends and (ii) all of
the  outstanding   Series  C  Preferred  Stock  and  Series  D  Preferred  Stock
automatically converted into an aggregate of 455,430 shares of Common Stock. The
Company  used a  portion  of the net  proceeds  of the IPO to pay  dividends  of
approximately  $118,000 on the Series C  Preferred  Stock and Series D Preferred
Stock. In addition,  the holders of warrants to purchase an aggregate of 118,167
shares of Common Stock exercised such warrants effective upon the closing of the
IPO.

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

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

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

             (b)   Secondary Public Offering

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

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

NOTE 3 -     Acquisitions

             In January  1996,  the Company  purchased  certain  assets from two
unrelated companies,  one located in Louisiana and the other located in Georgia.
The aggregate combined purchase price was $1,020,550.  The Company paid cash for
both of these transactions.

             Effective May 15, 1996, the Company acquired  substantially  all of
the  assets  associated  with the  bulk CO2  operating  segment  of the  BevServ
Division of The  Coca-Cola  Bottling  Company of New York,  Inc.  (BevServ)  for
$2,914,374.  The Company financed the acquisition  through available  borrowings
under its $30 million credit facility.

             Effective  June 1, 1996, the Company  acquired  certain assets of a
bulk CO2 company having its principal place of business in  Mississippi,  for an
aggregate  purchase  price of $248,010.  The entire  purchase price was financed
through the acquisition facility with the Company's bank.

                                      F-11

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 3  -    Acquisitions - (continued)

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

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

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

             In  May  1997,  the  Company   acquired  certain  assets  from  two
companies,  City Carbonic  Company,  Inc. and the BOC Group,  Inc. City Carbonic
Company,  Inc., operating in Oklahoma,  Kansas, Texas and Arkansas,  sold assets
for an aggregate purchase price of approximately $3,000,000. The BOC Group, Inc.
beverage bulk CO2 operations  were located in  Massachusetts,  Pennsylvania  and
Tennessee and were  acquired for an aggregate  purchase  price of  approximately
$5,125,000. The Company paid cash for these transactions and as of June 30, 1997
has an additional accrual of approximately $500,000 for post closing adjustments
in connection with these transactions.

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

             These  acquisitions  were  accounted for by the purchase  method of
accounting  and,  accordingly,  the  purchase  prices  and  direct  costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired companies based upon their estimated fair market values at the dates of
acquisition.  This resulted in goodwill of approximately $775,000 and $4,732,000
in the  years  ended  June  30,  1996  and  1997,  respectively,  which is being
amortized on a straight-line  basis over twenty years. The results of operations
of the acquired  companies  are included in the Company's  financial  statements
since the effective dates of the acquisitions.

             The  following   summarized,   unaudited,   pro  forma  results  of
operations  assume  that the  acquisitions  described  above  occurred as of the
beginning of the periods presented:

                                                   Year Ended June 30,
                                                   -------------------
                                            1996                       1997
                                            ----                       ----
Net sales                                   $18,923,657            $22,963,529
Income (loss) before extraordinary item        (681,264)               663,940
Net income (loss)                            (1,540,786)               663,940
Net income (loss) per common share                 (.33)                   .09



                                      F-12

<PAGE>

                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 4 -     Property and Equipment, Net

             Property and equipment, net consists of the following:

                                                          June 30,
                                                          --------
                                                 1996                 1997
                                                 ----                 ----
Leased equipment                              $22,901,699          $42,207,142
Equipment and cylinders                         2,920,456            6,114,340
Systems held for installation                   1,195,299            2,028,937
Vehicles                                          229,641              209,190
Computer equipment                                164,039              798,421
Office furniture and fixtures                      62,378              766,901
Leasehold improvements                             18,482            1,005,173
Construction in progress                          368,008                --
                                              -----------         ------------
                                               27,860,002           53,130,104
Less accumulated depreciation                   3,467,310            6,327,054
                                              -----------         ------------
                                              $24,392,692          $46,803,050
                                              ===========          ===========

             Capitalized  component  parts  and  direct  costs  associated  with
installation  of equipment  leased to others  included in leased  equipment  was
$3,155,424 and $6,335,593 at June 30, 1996 and 1997,  respectively.  Accumulated
depreciation  and  amortization of these costs were $1,118,377 and $1,934,704 at
June 30, 1996 and 1997, respectively.

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

NOTE 5 -     Leases

             The Company leases equipment to its customers generally pursuant to
five-year  noncancellable operating leases which expire on varying dates through
June 2003. At June 30, 1997,  future  minimum  rentals due from customers are as
follows:

Year Ending June 30,
--------------------
1998                                         $12,203,586
1999                                          11,082,710
2000                                           9,323,459
2001                                           6,473,289
2002                                           2,376,728
Thereafter                                        14,375
                                             -----------
                                             $41,474,147
                                             ===========




                                      F-13

<PAGE>

                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 6 -     Long-Term Debt

             Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                               JUNE 30,
                                                                                               --------

                                                                                     1996                           1997
                                                                                     ----                           ----
<S>                                                                                   <C>                     <C>
Note payable issued in connection with a 1995 asset acquisition of $479,000,
         principal  and  interest (at 7%)  payments of $9,485  payable  monthly,
         maturing January,  2000 and collateralized by the purchased assets with
         a net book value of $472,456 at June 30, 1997                               $  359,794              $  268,263


Note payable to bank of $6,000,000  under a $30 million  facility,  interest
         only for 12 months and principal  payments of $100,000 plus interest at
         a  fixed  rate  of  8.51%,  payable  monthly  for  twenty-three  months
         commencing  January 1997. Any accrued interest and one final payment of
         all unpaid  principal due and payable on November 30, 1998;  secured by
         substantially all assets of the Company.                                     6,000,000               5,400,000

Note payable to bank of $10,000,000 under a $30 million  facility,  interest
         only for 12 months at two hundred  seventy-five  basis points above the
         30-day  London  InterBank  Offering Rate  ("LIBOR")  (8.44% at June 30,
         1997),  with the principal  amount  outstanding at the end of 12 months
         (December  1996) and 24 months  (December 1997) converted to term loans
         calculated on a 60 month  amortization  schedule.  The first converted,
         acquisition  facility,  term  loan  of  $3,248,010  is due  in  monthly
         installments of  approximately  $54,134.  Any accrued  interest and one
         final  payment of all unpaid  principal due and payable on November 30,
         1998; secured by substantially all assets of the Company.                    3,248,010               2,977,343

Note payable to bank of $13,000,000 under a $30 million  facility,  interest
         only for 12 months at two hundred  seventy-five  basis points above the
         30-day  London  InterBank  Offering Rate  ("LIBOR")  (8.44% at June 30,
         1997),  with the principal  amount  outstanding at the end of 12 months
         (December  1996) and 24 months  (December 1997) converted to term loans
         calculated on a 60 month  amortization  schedule.  The first converted,
         tank facility,  term loan of $908,455 is due in monthly installments of
         approximately  $15,141.  Any accrued  interest and one final payment of
         all unpaid  principal due and payable on November 30, 1998;  secured by
         substantially all assets of the Company.                                       908,455                 832,750
</TABLE>

                                      F-14

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 6 - Long-Term Debt - (continued)
<TABLE>
<CAPTION>
                                                                                               June 30,
                                                                                               --------

                                                                                     1996                           1997
                                                                                     ----                           ----
<S>                                                                                 <C>                     <C>
Note payable of $290,162  for the  financing  of  equipment,  principal  and
         interest (at 8%) payments of $6,045 payable monthly, maturing August 3,
         1997  collateralized  by equipment with a net book value of $185,711 at
         June 30, 1997 and personally guaranteed by a shareholder of the Company.      75,037                    6,005

Note payable of $423,698, principal and interest (at 10%) payments of
         $9,002 payable monthly, matured May 1, 1997.                                  94,248                        -

Other note  payable  issued  in  connection  with a 1995  asset  acquisition,
         principal payments aggregating $50,000 per annum beginning
         July, 1995 through December 31, 1997.                                         75,000                   25,000

Various notes  payable of $111,282 for the  financing of  equipment,  principal
         payments of $2,959  payable  monthly,  maturing from  September 1997 to
         August 2000 collateralized by equipment
         with a net book value of $76,537 at June 30, 1997.                            83,897                   36,980
                                                                                   ----------                -----------

                                                                                   10,844,441                9,546,341

Less current maturities of long-term debt                                           1,358,447                2,180,601
                                                                                   ----------                -----------

         Long-term debt, excluding current maturities                             $ 9,485,994               $7,365,740
                                                                                   ==========                ===========
</TABLE>


             In  addition,  the Company  maintains a revolving  promissory  note
payable  to a bank in the amount of  $1,000,000  under a $30  million  facility,
interest only at two hundred  seventy-five  basis points above the 30-day London
InterBank  Offering Rate ("LIBOR"),  payable  monthly and maturing  November 30,
1998.  At June 30,  1997,  no  borrowings  were  outstanding  under this  credit
arrangement.

             The Company is required to meet certain  financial  covenants under
the $30 million  facility,  and may not access  borrowings which would cause its
funded  debt ratio to exceed  3.25  times  EBITDA on a 6 month  rolling  average
annualized (see Note 14(c)).

                                      F-15

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 6 -     Long-Term Debt - (continued)


             The aggregate maturities of long-term debt for the years subsequent
to June 30, 1997 are as follows:

Year Ending
-----------
1998                                                 $2,180,601
1999                                                  7,293,227
2000                                                     71,542
2001                                                        971
                                                    -----------

                                                     $9,546,341
                                                    ===========


             Interest expense on long and short-term debt amounted to $1,402,773
and $884,627 for the years ended June 30, 1996 and 1997, respectively.

Extraordinary item - loss on extinguishment of debt

             For the year ended June 30, 1996,  the Company  incurred a one time
extraordinary  charge of $859,522 for the write-off of deferred  financing costs
and prepayment penalties related to debt which was repaid within the proceeds of
the IPO.

NOTE 7  -    Shareholders' Equity

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

             (a)   Stock Option Plans

             The board of  directors  adopted  the 1995  Option  Plan (the "1995
Plan").  Under the 1995 Plan, the Company has reserved  350,000 shares of common
stock for  employees of the Company.  Under the terms of the 1995 Plan,  options
granted may be either incentive stock options or non-qualified stock options, or
both. The exercise price of incentive options shall be at least equal to 100% of
the fair market  value of the  Company's  common stock at the date of the grant,
and the exercise  price of  non-qualified  stock options issued to employees may
not be less than 75% of the fair market value of the  Company's  common stock at
the date of the grant. The maximum term for all options is 10 years. All options
granted to date vest  one-third per annum  commencing  one year from the date of
grant. As of June 30, 1997, options for 41,437 shares are exercisable.

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

                                             Shares               Exercise Price
                                             ------               --------------
Outstanding at June 30, 1995                    -0-                      -0-
Granted                                     130,991                  $9-$17.50
Expired or canceled                             340                       $9
Exercised                                       -0-                      -0-
                                          ---------                  ---------
Outstanding at June 30, 1996                130,651                  $9-$17.50
Granted                                     222,500                     $11.25
Expired or canceled                           6,225                  $9-$11.25
Exercised                                       322                       $9
                                          ---------                  ---------
Outstanding at June 30, 1997                346,604                  $9-$17.50
                                          =========                  =========


                                      F-16

<PAGE>

NOTE 7 - Shareholders' Equity - (continued)

             The board of directors of the Company adopted the Directors'  Stock
Option  Plan  (the   "Directors'   Plan").   Under  the  Directors'  Plan,  each
non-employee  director will receive  options for 6,000 shares of common stock on
the date of his or her first election to the board of directors. In addition, on
the third  anniversary of each  director's  first election to the Board,  and on
each three year anniversary thereafter,  each non-employee director will receive
an  additional  option to purchase  6,000 shares of common  stock.  The exercise
price per share for all options  granted under the Directors' Plan will be equal
to the fair  market  value of the  common  stock  as of the date of  grant.  All
options  vest  in  three  equal  annual  installments  beginning  on  the  first
anniversary of the date of grant.  During the year ended June 30, 1996,  options
to purchase a total of 24,000 shares of common stock at an exercise  price of $9
per share  were  issued.  As of June 30,  1997,  options  for 8,000  shares  are
currently exercisable. No options have been exercised under the Directors' Plan.

             (b)   Warrants

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

             In May 1997,  the Company  granted a warrant to purchase  1,000,000
shares of common stock to BOC pursuant to the supply  agreement  (see Note 12b).
The warrant is exercisable  from May 1, 1999 to May 1, 2002 at an exercise price
of $17 per share and from May 1, 2002 until April 30, 2007 at an exercise  price
of $20 per share.  The option may be exercised  earlier for a material breach in
the supply contract or a change in control of the Company.  As of June 30, 1997,
the warrant was not exercisable.

             (c)   Non-Qualified Stock Options

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

             Statement  of  Financial   Standards   No.  123,   Accounting   for
Stock-Based  Compensation,  defines a fair value based method of accounting  for
stock  options.  It is effective for fiscal years  beginning  after December 15,
1995.  The  Statement  allows an entity to  continue  to measure  cost using the
accounting  method prescribed by APB Opinion No. 25, Accounting for Stock Issued
to Employees,  and to make pro forma  disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The fair
value  of each  option  grant  is  estimated  on the  date of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in fiscal 1996 and 1997; expected volatility of 80%,
risk-free interest rate of approximately 6.4%, and expected lives of one to five
years.  The  Company is  adopting  SFAS 123 in fiscal year end June 30, 1997 and
presents  the  following  pro forma  disclosures  rather than change its present
method of accounting for employee stock options:

                                      F-17

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997



NOTE 7 - Shareholders' Equity - (continued)


                                                       Year Ended June 30,

                                                      1996                1997
                                                      ----                ----

Net loss attributable to common shareholders     $(1,043,617)      $(972,561)

Net loss per common share                        $(      .22)      $(    .13)
                                                 ===========      ============

Weighted average number of common and
  common equivalent shares outstanding             4,669,903      7,294,472
                                                 ============     ============


                  The pro forma  adjustment for stock based  compensation  costs
under SFAS 123 for the years ended 1996 and 1997 is  approximately  $120,000 and
$1,500,000, respectively.


NOTE 8 -          Income Taxes

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

                                                         June 30,
                                                         --------
                                                   1996               1997
                                                   ----               ----
Deferred tax assets:
  Allowance for doubtful accounts              $    79,200        $   42,500
  Amortization expense                              42,700           137,800
  Other                                              2,200             3,700
  Net operating loss carryforwards               2,978,600         4,696,200
                                                ----------         ---------
     Total gross deferred tax assets             3,102,700         4,880,200
Less valuation allowance                          (842,500)         (636,400)
                                               -----------       -----------
  Net deferred tax assets                        2,260,200         4,243,800
                                               -----------       -----------
Deferred tax liabilities:
  Depreciation expense                          (2,260,200)       (4,243,800)
                                               -----------       -----------
     Total gross deferred tax liabilities       (2,260,200)       (4,243,800)
                                               -----------       -----------
     Net deferred taxes                        $   --            $    --
                                               ===========       ===========


         At June 30, 1997, the Company had net operating loss  carryforwards for
Federal income tax purposes of $12,490,000, which are available to offset future
Federal  taxable  income,  if any, in varying  amounts  through  June 2012.  The
valuation allowance for deferred tax assets as of July 1, 1996 was $842,500. The
net change in the total valuation allowance for the year ended June 30, 1997 was
a decrease of $206,100.

                                      F-18

<PAGE>

                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 9 - Related Party Transactions

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

              Year Ending June 30,
              --------------------
              1998                       $179,000
              1999                        167,000
              2000                        167,000
              2001                        125,000

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

NOTE 10  -  Lease Commitments

         The Company leases office  equipment,  trucks and  warehouse/depot  and
office  facilities under operating leases (including  related party leases,  see
Note 9) that expire at various dates through December 2003. Future minimum lease
payments under noncancellable operating leases (that have initial noncancellable
lease terms in excess of one year) are approximately as follows:

            Year Ending June 30,
            --------------------
                    1998                       $1,872,000
                    1999                        1,635,000
                    2000                        1,242,000
                    2001                        1,000,000
                    2002                          670,000
                    Thereafter                    372,000
                                               ----------
                                               $6,791,000
                                               ==========

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

NOTE 11  -  Concentration of Credit and Business Risks

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

         There were no  customers  that  accounted  for greater than 5% of total
sales for the years  ended June 30, 1996 or 1997,  nor were there any  customers
that accounted for greater than 5% of total accounts receivable at June 30, 1996
or 1997.

NOTE 12 -   Commitments and Contingencies

         (a)      Employment Agreements

         The Company has an employment agreement with an employee that currently
provides  minimum annual  compensation of $70,000 per year through  December 31,
1997. The contract  provides for additional  compensation in the form of bonuses
based on performance,  medical insurance  coverage,  and a company vehicle.  The
employment  agreement  also  includes a covenant  against  competition  with the
Company which extends for two years after termination for any reason.

                                      F-19

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 12 -  Commitments and Contingencies - (continued)

         The Company has an employment  agreement with an officer of the Company
that currently provides minimum annual compensation of $150,000 per year through
October 1999. The contract  provides for additional  compensation in the form of
bonuses  to  be   determined  by  the  board  of  directors  and  incentive  and
non-qualified  stock options  pursuant to the Company's 1995 Plan to purchase up
to 100,000 shares (see Note 7). The agreement also calls for a covenant  against
competition which extends one year beyond termination for any reason.

         (b)  Supply Agreement

         In May  1997,  the  Company  entered  into  an  exclusive,  subject  to
expirations of existing contracts, ten-year carbon dioxide supply agreement with
The BOC Group,  Inc.  ("BOC").  The agreement  ensures  readily  available  high
quality CO2 as well as relatively stable liquid carbon dioxide prices.  Pursuant
to the agreement,  the Company must purchase all of its liquid CO2  requirements
from BOC.  The  agreement  contains  annual  escalations  for the  lesser of the
Producer  Price Index for  Chemical  and Allied  Products or the average  annual
percentage  increase  in  the  selling  price  of  liquid  CO2  to  BOC's  large
multi-location beverage customers.  Increases in each of the first five contract
years shall not exceed 3%.

         (c)  Other

         Carbonic  Designs,  Inc. ("CDI") v. MVE, Inc., The  Taylor-Wharton  Gas
Equipment  Division of Harsco  Corporation,  Welders  Supply Co. and NuCO2 Inc.,
filed on or about  December 31, 1996 asserted  claims for violation of the Texas
Free  Enterprise  and AntiTrust Act of 1983,  business  disparagement,  tortious
interference  with contract,  tortious  interference  with prospective  business
relations and civil  conspiracy.  CDI seeks various damages,  all in unspecified
amounts.  The Company has been  contesting  the case  vigorously  and intends to
continue to do so.

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

 NOTE 13 -    Disclosures about Fair Value of Financial Instruments

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

         (a)      Cash and cash equivalents

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

         (b)      Long-term debt

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

         The  carrying  amounts  and  fair  values  of the  Company's  financial
instruments at June 30, 1997 are as follows:

                                                  Carrying Amount   Fair Value
                                                  ---------------   ----------
Cash and cash equivalents                           $11,672,506     $11,672,506
Long-term debt, including current maturities          9,546,341       9,546,341



                                      F-20

<PAGE>
                                   NuCo2 INC.
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997

NOTE 14 -    Subsequent Events

         (a)      Acquisitions


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

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

         In September 1997, the Company  purchased  certain assets of a bulk CO2
company  with  operations  in  Arizona  for  an  aggregate   purchase  price  of
$1,100,000. The Company paid cash for this transaction.

         (b) Private Placement

         In August  1997,  the  Company  engaged  Montgomery  Securities  as its
exclusive  placement  agent  on a "best  efforts"  basis  in  connection  with a
proposed offering by private placement of $30 million in Subordinated Notes. The
agent has received term sheets from potential  investors and the  transaction is
anticipated to close on or about October 17, 1997.

         (c) Credit Facility

         In September  1997,  the  Company's  existing $30 million  facility was
amended  to adjust  the  funded  debt  ratio to 3.50  times  EBITDA on a 3 month
rolling average annualized.

         In September  1997, the Company entered into a fully  underwritten  $50
million Senior Secured  Revolving  Credit Facility (the "Facility") with a bank.
The bank intends to syndicate the Facility and serve as sole agent. The proposal
contains a trigger  for an  automatic  request by the  Company to  increase  the
Facility  to  $100,000,000.  The  proposal  also  includes  usual and  customary
covenants.
The Facility is expected to close simultaneously with the private placement (see
Note 14(b)).

         (d) Lease Commitments

         The Company entered into fourteen  operating  leases in July and August
1997.  Three leases were for warehouse  facilities with aggregate annual rentals
of approximately $32,000 expiring at various dates through December 1998. Eleven
leases were for trucks with aggregate annual rentals of  approximately  $132,000
expiring at various dates through December 2002.

                                      F-21