##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-K

|     |  |                                                  
|---- |  | -------------------------------------------------
|[X]  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)    
|     |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
|     |  | For the Fiscal Year ended December 31, 2002      
|     |  |                                                  
|     |  | OR                                               
|     |  |                                                  
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|     |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
|     |  | For the transition period  to                    

Commission file number 333-29357



---



PACKAGED ICE, INC.

(Exact name of registrant as specified in its charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|TEXAS                           |  | 76-0316492                          
|(State or other jurisdiction of |  | (I.R.S. Employer Identification No.)
|incorporation or organization)  |  |                                     

3535 TRAVIS STREET, SUITE 170
DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)

(214) 526-6740
(Issuers telephone number, including area code)



---



Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share

Securities registered pursuant to
Section 12(g) of the Act:
Preferred Share Purchase Rights

Indicate by check mark whether the registrant (1) 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 o

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).o

The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $17.4 million as of June 28, 2002, the last
business day of the registrants most recently completed second fiscal quarter.
The total number of shares of common stock, par value $0.01 per share,
outstanding as of March 11, 2003 was 20,157,304.

Documents Incorporated By Reference

Items 10, 11, 12 and 13 of Part III have been omitted from this report, since
Packaged Ice, Inc. will file with the Securities and Exchange Commission, not
later than 120 days after the close of its fiscal year, a definitive proxy
statement, pursuant to Regulation 14A, which involves the election of
directors. The information required by Items 10, 11, 12 and 13 of Part III of
this report, which will appear in the definitive proxy statement, is
incorporated by reference into this Annual Report.



---

---





---

TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | ITEM 1. Business                                                                             
|                                                  | ITEM 2. Properties                                                                           
|                                                  | ITEM 3. Legal Proceedings                                                                    
|                                                  | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                          
|                                                  | ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                  | ITEM 6. Selected Financial Data                                                              
|                                                  | ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | ITEM 8. Financial Statements and Supplementary Data                                          
|                                                  | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                  | ITEM 10. Director and Executive Officers of the Registrant                                   
|                                                  | ITEM 11. Executive Compensation                                                              
|                                                  | ITEM 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                  | ITEM 13. Certain Relationships and Related Transactions                                      
|PART III                                         
|                                                  | ITEM 14. Controls and Procedures                                                             
|                                                  | ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                       
|CERTIFICATIONS                                   
|EX-10.17 Third Amendment to Credit Agreement     
|EX-10.19 Form of 1st Amendment to Indemnification
|EX-21.1 List of Subsidiaries                     
|EX-23.1 Consent of Deloitte & Touche LLP         
|EX-99.1 CEO Certification Pursuant to 18 USC 1350
|EX-99.2 CFO Certification Pursuant to 18 USC 1350



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

|         |                                                                                               |  |      |    | 
|-------- | --------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |                                                                                               |  | Page
|         |                                                                                               |  |     
|PART I   |                                                                                               |  |      |   
|         | Item 1. Business                                                                              |  |      | 2  | 
|         | Item 2. Properties                                                                            |  |      | 12 | 
|         | Item 3. Legal Proceedings                                                                     |  |      | 13 | 
|         | Item 4. Submission of Matters to a Vote of Security Holders                                   |  |      | 13 | 
|PART II  |                                                                                               |  |      |   
|         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 14 | 
|         | Item 6. Selected Financial Data                                                               |  |      | 15 | 
|         | Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |      | 17 | 
|         | Item 8. Financial Statements and Supplementary Data                                           |  |      | 30 | 
|         | Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure  |  |      | 30 | 
|PART III |                                                                                               |  |      |   
|         | Item 10. Director and Executive Officers of the Registrant                                    |  |      | 31 | 
|         | Item 11. Executive Compensation                                                               |  |      | 31 | 
|         | Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  |      | 31 | 
|         | Item 13. Certain Relationships and Related Transactions                                       |  |      | 31 | 
|         | Item 14. Controls and Procedures                                                              |  |      | 31 | 
|         | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  |      | 33 | 
|         | SIGNATURES                                                                                    |  |      | 36 | 
|         | CERTIFICATIONS                                                                                |  |      | 37 | 

-1-



---



##### Table of Contents






PART I




ITEM 1. Business

General

Packaged Ice, Inc. is the largest manufacturer and distributor of packaged
ice in the United States and currently serves approximately 73,000 customer
locations in 31 states and the District of Columbia. We have grown
significantly since our incorporation in 1990, primarily through the
implementation of a consolidation strategy within the highly fragmented
packaged ice industry. Since April 1997, we have acquired 84 traditional ice
companies, principally in the southern half of the United States. We are
currently focused on increasing profitability and strengthening our balance
sheet through operating improvements and leverage reduction. Revenue
enhancements, expense control and selective acquisitions are an important part
of this strategy.

We operate in two business segments: ice products and non-ice products and
operations. Ice products accounted for approximately 92%, 91%, and 92% of
revenues in 2002, 2001 and 2000, respectively, and consist of the following two
activities:



| |  |  | the manufacture and delivery of traditional ice from a
central point of production to the point of sale; and                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the installation of Ice Factories, our proprietary machines
that produce, package, store and merchandise ice at the point of
sale through an automated, self-contained system.

Our other business segment, non-ice products and operations, consists of
refrigerated warehousing, the manufacturing and sale of bottled water and the
sale and leasing of ice production equipment. We sold the majority of our ice
production equipment sale and leasing business in the second quarter of 2001.

At December 31, 2002, we owned or leased 50 ice manufacturing plants, 49
distribution centers, seven refrigerated warehouses and one bottled water
plant. Including an installed base of 2,982 Ice Factories, we had a combined,
rated ice manufacturing capacity of approximately 14,425 tons of ice per day.

For a discussion of financial results by segment, including segment
revenues from external customers, a measure of profit or loss and total assets,
see Notes to Consolidated Financial Statements, Note 12.

Business Strategy

Our business strategy is to strengthen our position as the leading
packaged ice company in the United States. We plan to increase profitability
through a combination of debt reduction, margin growth through revenue
enhancements, cost savings, selective acquisitions, additional Ice Factory
placements and new Ice Factory management agreements. We believe that our
size, national scope, industry experience and proprietary Ice Factory give us
significant competitive advantages in pursuing our business strategy. These
advantages have enabled us to develop an efficient regional production and
distribution network and to service national accounts through an expanded
geographic presence. As a result, we believe that we compete effectively with
smaller, local packaged ice companies and offer self-manufacturers attractive
options for ice supply.

-2-



---



##### Table of Contents



The Ice Industry and Traditional Ice Manufacturing

The packaged ice industry is highly fragmented and is led by Packaged Ice
and several regional, multi-facility competitors. In addition, the industry
includes numerous local and regional companies of varying size and competitive
resources. We believe that most ice manufacturers have annual revenues less
than $1 million. Traditional ice manufacturers produce and package ice at
centrally located facilities and normally distribute within a limited radius of
approximately 100 miles from the point of production. Due to high product
transportation and storage costs, the ice business has historically been a
regional service business. As a result of geographic constraints, success in
the ice business depends upon an efficient manufacturing and distribution
system with high-density customer distribution routes in a region, high
customer concentration within a market area and the ability to ensure prompt
and reliable delivery during peak seasonal months. We believe that our
consolidation of traditional ice manufacturers within a geographic region
provides efficiencies in manufacturing and distribution largely due to higher
density of customer sites and the flexibility to shift production among our
manufacturing plants within a region. These efficiencies provide us with an
advantage over our competitors.

We believe that a significant amount of packaged ice is produced locally
at retail locations by self-manufacturers. These retailers typically bag ice
manually from standard ice machines used in connection with fountain dispensing
and beverage displays and utilize in-house labor. During peak consumption
periods, these retailers purchase backup ice from traditional ice
manufacturers. The more locations a retailer has, the less likely a retailer
is to be a self-manufacturer. Self-manufacturers have increased liability
risks as compared to retailers who purchase ice from traditional ice companies.
We provide retailers many advantages over self-manufacturers including
significant liability insurance, ice merchandisers (small cold storage boxes)
and industry approved sanitation procedures.

Certain regional grocery chains or divisions of national grocery chains
also self-manufacture ice at central manufacturing plants for densely
concentrated selling regions. Generally, there are not any external sales from
these manufacturing plants. Over the past several years, we have been
successful in either purchasing or assuming control of many of these plants.
This success is due to the trend that as the grocery industry continues to
consolidate, purchasing is done more through national contracts, the fact that
the grocery industry is more sophisticated in its capital allocation
considerations and the availability of the Ice Factory.

We believe that packaged ice products are purchased as needed by consumers
and that such purchases are relatively insensitive to price due principally to
the low cost of the product and the absence of substitute products. The
majority of ice purchased is used as a refrigerant and is generally not
consumed. The industry is highly seasonal, characterized by peak demand
occurring during the warmer months of May through September, with an extended
selling season occurring in the southern United States. Organic growth in the
packaged ice industry is widely believed to track population growth, although
on a year-to-year basis, weather has a more significant impact on demand. We
believe that our geographic diversification helps mitigate the potential
adverse impact of abnormal weather patterns in any particular market. National
weather patterns resulting in prolonged cold and rainy weather would adversely
impact our results of operations.

-3-



---



##### Table of Contents



The Ice Factory

THE ICE FACTORY® is an automated system that is capable of producing and
packaging 240 bags of ice per day. Our average system, excluding the systems
under management agreements, produced approximately 18,000 bags in 2002. It is
most frequently used in high volume supermarkets and other commercial
locations, such as construction staging areas and large manufacturing plants.
The placement of the Ice Factory at customer locations is based upon a thorough
review of each site, which primarily focuses on historical ice sales at the
site. Also included in the site review is an analysis of the surrounding trade
area, the level of overall retail activity, the level of direct competition and
the proximity of the site to other Ice Factories. Upon completion of this
review, a determination is made as to the viability of the location and whether
single or multiple machines are required at the time of initial installation.
We own or lease the machines from third parties and charge our customers for
empty bags purchased and delivered. We generally pay for all installation and
maintenance costs, while the retailer provides and pays for the cost of
utilities. Slightly over 9% of our 2002 packaged ice volume (on a seven-pound
equivalent basis and excluding management agreements) was sold through Ice
Factories.

In late 2001, we began entering into management agreements with certain
other traditional ice manufacturers. Under these agreements, the manufacturer
agrees to operate and maintain the Ice Factories in good working order as well
as provide certain billing and collection services to the Ice Factory
customers. We retain all the ownership expenses associated with the Ice
Factories including property taxes, lease payments and depreciation. Through
March 11, 2003, we have entered into four such agreements in California,
Oregon, Washington and Idaho representing approximately 800 Ice Factories (out
of our total of 2,982). We view these agreements as an opportunity to further
utilize the Ice Factory technology and build relationships with traditional ice
manufacturers in new markets. We will evaluate opportunities for additional
agreements as they arise.

The Ice Factory, when combined with traditional delivery methods, provides
us and our strategic partners with numerous advantages over companies with only
traditional ice manufacturing and delivery. Some of these advantages include:



| |  |  | a flexible delivery system designed to supply high volume
locations and capable of cost-effectively servicing a market in
excess of 100 miles from traditional ice manufacturing facilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ability to distribute ice
production between our traditional
ice facilities and our Ice Factories as well as satisfy seasonal peak
demand at stores with Ice Factories; and             
|
| |  |  | reduced production costs (the customer pays for electricity
and water), storage costs and distribution costs.                                                                               

An Ice Factory
typically consists of one or more standard ice makers, an
ice merchandiser built to our specifications and a bagging machine. A Texas
company manufactures the bagging component, the heart of the Ice Factory, under
an exclusive original equipment manufacturing agreement. To guard against
ice, the Ice Factory has been engineered to meet all National Sanitation
Foundation specifications for ice production, contains a patented automatic
sanitizing system and is Underwriters Laboratory approved. We have obtained
patents on certain of the technologies used in the bagging component of the Ice
Factory and have trademarked the name The Ice Factory. We believe that our
patents cover all material patentable technology currently being used in the
bagging device.

-4-



---



##### Table of Contents



Distribution

Due to high product transportation and shipping costs, the ice business
has historically been a regional service business in which manufacturers
produce and package ice at centrally located facilities and distribute to a
limited market radius of approximately 100 miles. Due to these geographic
constraints and the limited amount of product differentiation in the packaged
ice industry, we focus on maintaining an efficient service, distribution and
pricing system in each of our markets. We deliver ice through both traditional
distribution methods and the on-site Ice Factory system. We believe that this
unique combination of distribution platforms enables us to distribute ice
production efficiently between our traditional ice facilities and our Ice
Factories and to supplement Ice Factory production during seasonal peak demand.

Traditional Distribution.We produce and bag ice at centrally located
manufacturing facilities and subsequently store the ice or sell it through
several distribution channels. These distribution channels include selling ice
to warehouse customers who then in turn deliver ice to their retail locations
through their own distribution network, delivering pallet quantities to retail
locations at their back door or through direct store delivery where our
delivery personnel stack ice directly in the ice merchandiser units. We also
sell ice to wholesale distributors, who resell the ice to retail and other
customers. Distributors also deliver ice on our behalf to certain of our
customers. To store ice inventory, we own or rent appropriate freezer space.
During the peak summer months, we may lease additional trucks and purchase
additional ice from other producers to maintain high service levels and
customer goodwill.

We currently serve approximately 70,000 customer locations, principally
through the use of our company owned ice merchandisers that are installed at
most customer locations. Our growth has allowed us to develop an efficient
production and distribution network by providing us with customer density,
additional production capacity and dedicated distribution centers. The
increased customer density has improved routing efficiencies and reduced our
transportation costs, which represent our largest cost component. In addition,
the acquisition of additional production capacity in selected markets has
allowed us to avoid out of ice situations and related lost sales during peak
periods. Further, by acquiring dedicated distribution centers and associated
storage facilities, we have reduced our storage costs.

Ice Factory.By producing and bagging ice at the customers location, the
Ice Factory reduces our distribution, labor and energy costs because retailers
provide and pay for the cost of utilities. Transportation costs, which are the
most significant costs of traditional ice delivery, are also eliminated by
on-site production. As a result of these cost savings, we believe that the Ice
Factory provides us with operating efficiencies in high volume locations
compared to traditional ice delivery.

We believe that providing frequent, regular and reliable service and
support to our customers is one of the most important elements in operating our
Ice Factory network. We have a routine route servicing system, which utilizes
trained service representatives to perform the regularly scheduled service
procedures and  maintain toll-free telephone support for responding to customer
calls regarding repairs and maintenance.

-5-



---



##### Table of Contents



Ice Products

We market our ice products to satisfy a broad range of customers,
primarily under the Reddy Ice brand name. We produce our ice in cube,
half-moon, cylindrical, crushed and block forms to satisfy customer demands.
Our primary ice product is packaged in small bags (primarily seven pounds),
which we sell principally to convenience stores and supermarkets. We also sell
significant amounts of medium bags (16 to 20 pounds) and 10 pound block bags to
the same convenience stores and supermarkets. We sell ice in assorted bag
sizes ranging from 16 to 50 pounds to restaurants, bars, stadiums, vendors and
caterers. In addition, we sell block ice in 10, 25 and 300 pound sizes to
commercial, agricultural and industrial customers.

We began testing a new premium product, Glacé Gourmet Ice Cubes
(Glacé), in late 2002 in certain Texas retail locations. We use special
packaging for Glacé and sell it in four-pound bags. This product targets
consumers of home refrigerator ice. We continue to search for ways to enhance
our existing products and product sizes and create new products.

Customers

We market our ice products to a broad range of customers, including
supermarket chains, convenience stores, wholesale ice and food distributors,
commercial users, resorts and restaurants, agricultural buyers, and competitive
producers and self-suppliers who experience supply shortages. The primary
purchasers of our traditional ice products and users of our Ice Factory are
retailers with no internal ice production capacity. We believe that reasonable
pricing, when combined with quality service, results in customer loyalty.
There is no right of return with respect to packaged ice and our terms of sale
are consistent with standard industry practices.

We have a diversified customer base, with our largest customer accounting
for less than 8% of sales in 2002 and less than 6% in both 2001 and 2000. In
addition, we have a geographically diversified customer base, with customer
locations in 31 states, primarily in the southern half of the United States and
the District of Columbia. Some of our larger national accounts include
convenience and petroleum store chains Conoco-Phillips/Circle K, 7-Eleven,
ChevronTexaco, Shell and ExxonMobil and grocery store chains Albertsons,
Kroger, Safeway and Wal-Mart/Sams Club. Major regional customers include
convenience and petroleum store chains Diamond Shamrock, The Pantry and
RaceTrac, and grocery store chains Publix, Winn-Dixie, Food Lion and HEB. The
percentage of our volume sold to national and regional convenience and grocery
store chains has grown over the last several years as consolidation within
those industries has continued.

We believe the geographic breadth of our customer base helps protect us
from the effects of adverse weather in a particular region, such as reduced
sales due to abnormally cool or rainy conditions, although national weather
patterns may have a material adverse effect on our business.

Competition

Competition in the packaged ice industry is based primarily on price,
service and quality. To compete successfully, an ice manufacturer must be able
to substantially increase production and distribution capacity on a seasonal
basis while maintaining cost efficiency. We believe that our high quality
traditional production facilities, financial resources, high regional market
share, associated route density and proprietary Ice Factory capability provide
us with numerous competitive advantages, including a combination of competitive
pricing, a high level of customer

-6-



---



##### Table of Contents



service and high quality products. We also believe our geographic
diversification and the advantages of the Ice Factory for high volume retailers
have helped us develop relationships with certain national supermarket chains
and will continue to assist us in our penetration of this market.

The traditional packaged ice industry is highly competitive. In addition
to our direct competition, numerous convenience and grocery retailers operate
commercial ice plants for internal use or manufacture and bag ice at their
store locations. Our ice products generally do not face competition within a
particular store since only one manufacturer typically serves a retail site.
The traditional packaged ice industry in the United States is led by Packaged
Ice and approximately four smaller, regional, multi-facility competitors and,
in addition, includes numerous local and regional companies of varying sizes
and competitive resources.

Acquisitions

Beginning in 1997, we underwent a consolidation strategy within the highly
fragmented packaged ice industry. Through December 31, 2002, we completed 84
acquisitions, primarily between April 1997 and August 1999. Significant
acquisitions have included the purchase of Reddy Ice Corporation (Reddy) from
Suiza Foods Corporation in April 1998 and the purchase of Cassco Ice & Cold
Storage, Inc. (Cassco) in July 1998. Reddy, prior to the acquisition, had
been active in the consolidation of the packaged ice industry, having made 28
acquisitions from January 1997 to April 1998. Cassco was a leading regional
producer and distributor of packaged ice products and was an owner/operator of
refrigerated warehouses in the Mid-Atlantic region. Due to the decline in our
common stock value after our initial public offering in January 1999 and our
substantial overall leverage, we did not complete any significant acquisitions
in 2000, 2001 or 2002.

Our acquisition strategy was focused on expanding our traditional ice
operations into new markets across the United States and increasing our
presence in markets we served. In substantially all acquisitions, we required
the seller or its principal shareholders to enter into a covenant not to
compete with our company. In addition, we sought to retain key management of
the acquired companies in many instances. Traditional ice companies we have
acquired generally can be classified into one of two categories:



| |  |  | Market Leaders.Market Leader acquisitions are focused on
acquiring companies with a leading market share position in an
identified market area. These acquisitions represented an initial
entry into a geographic area, or, alternatively, were made
subsequent to the placement of Ice Factories with key customer
accounts in a region.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Tuck-ins.Tuck-in acquisitions are smaller acquisitions
intended to add incremental production and/or distribution
capabilities in an established market.                                                                                                                                                                                 

Although our pace of acquisitions has slowed in recent years, we believe
continued selective acquisitions will play an important part in our strategy to
strengthen our position as the leading ice company in the United States and
allow us to serve our customers better.

Dispositions

During 2001, as part of our strategy to reduce our debt leverage and make
better use our assets, we began a program to evaluate and dispose of excess and
non-core assets. During 2001,

-7-



---



##### Table of Contents



we sold several excess assets, non-core assets and our traditional ice business
in California for cash proceeds of approximately $11 million. The excess and
non-core assets sold included certain pieces of real estate and equipment, two
small refrigerated warehouses and the majority of our ice production equipment
sale and leasing business. We continued that program in 2002, realizing $3.4
million in additional proceeds primarily relating to excess real estate. We
plan to continue to market certain excess and non-core assets in 2003 and see
this as an important part of our strategy to reduce our leverage over the next
several years.

Non-Ice Products and Operations

We also derive revenues from other goods and services including
refrigerated warehousing, the manufacturing and sale of bottled water, and the
sale and leasing of ice production equipment. We sold the majority of our ice
production equipment sale and leasing business in the second quarter of 2001.
Revenues from these non-ice products and operations over the last three years
have accounted for less than 10% of our total revenues.

Employees and Labor Relations

At December 31, 2002, we employed 1,565 employees, of which five were
represented by a union or were subject to a collective bargaining agreement.
As of March 11, 2003, one employee was represented by a union or subject to a
collective bargaining agreement. Each year, during the second and third
quarters, our labor force increases to over 3,000 employees due to seasonal
increases in ice demand. We meet the majority of these seasonal hiring needs
through the use of temporary employment agencies. We generally have not
experienced any difficulty in meeting these seasonal employment needs. We have
never experienced a work stoppage due to labor difficulties and we believe our
relationship with our employees is good. Labor is our most significant expense
item and represented approximately 39% of our cost of sales and operating
expenses in 2002, excluding the associated payroll taxes and benefit expenses.

Raw Materials

We have not experienced any material supply problems in the past with
respect to our business segments.

Electricity is a significant component of our manufacturing costs and was
approximately 9% of cost of sales in 2002. In 1999, we had fixed our
electricity cost at 95% of our 1998 rates through a supply and management
agreement with a third party. That third party filed for protection under
Chapter 11 of the United States Bankruptcy Code on December 2, 2001. Although
that supply and management agreement was breached and subsequently terminated,
we did not experience any supply problems related to our electricity needs. We
took steps to minimize our electricity costs going forward, although we
experienced $1.7 million in additional costs related to our electricity use in
2002 as a result of being subject to market rates. Significant increases in
electrical rates in areas where we manufacture product could have a negative
impact on our results of operations.

We use large quantities of plastic bags. Bag usage for 2003 is expected
to approximate 420 million seven-pound equivalent bags. There are numerous
plastic bag manufacturers throughout the United States with the capability of
providing for our plastic bag needs. We currently purchase bags from several
companies to ensure price competition, although one company dominates the
industry. Historically, market prices for plastic bags have fluctuated in
response to a number of factors, including changes in polyethylene prices. A
significant, abrupt

-8-



---



##### Table of Contents



change in the price of plastic bags could have a material adverse effect
on our operating margins as we may not have the ability to pass on our
increased costs to our customers.

We also use large quantities of fuel in our distribution process.
Numerous vendors throughout the United States provide the fuel for our
vehicles. We expect fuel expense in 2003 to approximate 3% of our cost of
sales. Market prices for fuel have fluctuated widely in the past due primarily
to differing events throughout the world. Significant increases in fuel prices
could have a material adverse effect on our business as we may not be able to
pass this expense through to our customers.

Information Systems

Internal information systems are critical to our ability to operate
efficiently. We are able to monitor individual manufacturing plants and Ice
Factory performance on a daily basis through automated and other reporting
systems. This information enables us to track detailed cost and profitability
information, identify opportunities to redistribute traditional manufacturing
capacity among markets, assess the cost-effectiveness of an Ice Factory at a
particular location and analyze market sales trends. In addition, we have all
of our accounting and financial reporting functions integrated into a single
accounting platform that is installed in all reporting locations and connected
in real time to our central facility in Dallas, Texas. This system facilitates
centralized cash management, timely financial reporting, consistent reporting
formats and improved inventory tracking. In 2002, we implemented a new sales
and marketing information system utilizing information from our primary
accounting platform.

Intellectual Property

We regard the Ice Factory as proprietary and rely primarily on a
combination of patents, nondisclosure and confidentiality agreements and other
copyright protection methods to secure and protect our intellectual property
rights. We hold or have exclusive rights to several patents relating to the
Ice Factory, including the bagging device and the overall assembly of the unit.
We have patents in many of the major countries of North and South America,
Europe and Asia. The patents relating to the Ice Factory expire at various dates
from 2008 through 2013. In addition, we have developed or acquired a number of
trademarks (both registered and common law) and trade names for use in our ice
business, and we hold licenses for the use of additional trademarks from third
parties. The use of our trademarks has created goodwill and results in product
differentiation. However, we do not believe that the loss of any of our
trademarks would have a material adverse effect on our operations.

Government Regulation

The packaged ice industry is subject to various federal, state and local
laws and regulations. These require us, among other things, to obtain licenses
for our plants and machines, to pay annual license and inspection fees, to
comply with certain detailed design and quality standards regarding our plants
and Ice Factories and to continuously control the quality and quantity of our
ice.

Our packaged ice products are subject to federal and state regulation as a
food pursuant to the Federal Food, Drug and Cosmetic Act, regulations
promulgated thereunder by the Food and Drug Administration and analogous state
statutes. These statutes and regulations impose comprehensive food
manufacturing practices governing the sanitary conditions of the facilities

-9-



---



##### Table of Contents



where ice is manufactured, the design and maintenance of the equipment
used to manufacture the ice, the quality of source water and the sanitary
practices of employees during ice production. We cannot predict the types of
government regulations that may be enacted in the future by federal, state or
local governments or how existing or future laws or regulations will be
interpreted or enforced. The enactment of more stringent laws or regulations
or a stricter interpretation of existing laws and regulations may require
additional expenditures by us, some of which could be material. Various states
have imposed additional requirements including (a) quarterly testing of ice for
the presence of microbes and certain substances regulated under the federal
Safe Drinking Water Act, (b) specific requirements for keeping ice packaging
operations separate from other activities and (c) labeling requirements for the
bags used, including the name of the company, the manufacturing location and
the net weight. Certain of our Ice Factories and ice manufacturing facilities
are subject to routine and random safety, health and quality inspections. We
believe that our facilities, manufacturing practices and Ice Factories are in
substantial compliance with all applicable federal, state and local laws and
regulations and that we will be able to maintain such substantial compliance in
the future.

We are subject to certain health and safety regulations including
Occupational Safety and Health Act regulations. These regulations require us
to comply with certain manufacturing, health and safety standards to protect
our employees from accidents.

Environmental Matters

Our ice manufacturing and ice storage operations are subject to federal,
state and local environmental laws and regulations. As a result, we have the
potential to be involved from time to time in administrative or legal
proceedings relating to environmental matters. There can be no assurance that
any environmental liabilities will not be material. We cannot predict the
types of environmental laws or regulations that may be enacted in the future by
federal, state or local governments; how existing or future laws or regulations
will be interpreted or enforced; or what types of environmental conditions may
be found to exist at our facilities. The enactment of more stringent laws or
regulations or a stricter interpretation of existing laws and regulations may
require additional and unpredictable expenditures.

To reduce our potential environmental exposure, we have enacted corporate
management and engineering control programs, including the use of an outside
professional environmental engineering and consulting firm to conduct annual
audits of all facilities, as well as to provide technical and regulatory
assistance to our operating units.

We generate and handle certain hazardous substances in connection with the
manufacture and storage of packaged ice, including ammonia, which is used a
refrigerant in certain of our plants. The handling and disposal of these
substances and wastes is subject to federal, state and local regulations, and
site contamination originating from the release or disposal of such substances
or wastes can lead to significant liabilities. In addition, we have
historically used Freon refrigerants, some of which have been banned from
production.

We have enacted waste minimization management programs at all operating
units to reduce the use and storage of hazardous substances, as well as to
identify alternative non-hazardous materials to replace the regulated Freon
compounds (R-12) wherever possible. We believe that the numerous,
environmentally neutral refrigerants available and currently in development
will assure that the Freon R-12 ban will have little, if any, effect on the
results of our operations.

-10-



---



##### Table of Contents



Certain of our current and former facilities are located in industrial
areas and have been in operation for many years. It is possible that current
or historic activities on these properties will present environmental issues in
the future, the precise nature of which we cannot predict. We could,
therefore, become liable for site contamination and remediation at properties
which we currently or formerly owned. Such environmental issues have not had a
material adverse effect on our financial condition or operating results in the
past. We do not have any knowledge of claims that could be expected to have a
material adverse effect on our financial condition, although there are certain
claims made against us from time to time, including claims relating to an
ammonia release described in ITEM 3. There can be no assurance that we will
not incur significant costs in the future in connection with our historical
handling or disposal of such substances and wastes, including costs related to
the ammonia release claims.

We have enacted programs to reduce the level of exposure from current and
past operations by the continued upgrading of training, management and
engineering controls. In addition, we have continued our program of requiring
thorough environmental due diligence reviews of all new facilities, as well as
a continuing annual environmental review of our existing operations to ensure
continued environmentally sound, safe operations. Compliance with the various
federal, state and local environmental laws and regulations has not had a
significant effect on our capital expenditures, results of operations or
competitive position.

General Economic Trends and Seasonality

Our results of operations are generally affected by the economic trends in
our market area, but results to date have not been significantly impacted by
inflation. If we experience an extended period of high inflation, which
affects multiple expense items, we believe that we will be able to pass on
these higher costs to our customers.

The ice business is highly seasonal. We experience seasonal fluctuations
in our net sales and profitability. We make a disproportionate amount of our
sales in the second and
third calendar quarters. We also typically have net income in these
same periods.  We believe that over 60% of our revenues will occur
during the second and third calendar quarters when the weather conditions are
generally warmer and demand is greater, while less than 40% of our revenues
will occur during the first and fourth calendar quarters when the weather is
generally cooler. As a result of seasonal revenue declines and the lack of
proportional corresponding expense decreases, we will most likely experience
lower profit margins and even losses during the first and fourth
calendar quarters. In addition, because our operating results depend
significantly on sales during our peak season, our quarterly results of
operations may fluctuate significantly as a result of adverse weather during
this peak selling period if the weather is unusually cool or rainy on a more
national or regional basis.

Available Information

You can find more information about us at our Internet website located at
www.reddyice.com. Our annual report on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and any amendments to those reports
are available free of charge on our website as soon as reasonably practicable
after we electronically file such material with the Securities & Exchange
Commission.

-11-



---



##### Table of Contents






ITEM 2. Properties

We maintain our principal executive offices in Dallas, Texas, where we
lease approximately 10,162 square feet of space. The lease in Dallas expires
on December 31, 2004. At December 31, 2002, we owned or leased 50
manufacturing plants, 49 distribution centers, seven refrigerated warehouses
and one bottled water plant. Including an installed base of 2,982 Ice
Factories, we had a combined, rated ice manufacturing capacity of approximately
14,425 tons per day. We believe that our current physical properties, along
with our planned capital expenditures, are adequate for us to execute our
current business strategy.

Certain manufacturing and distribution facilities may be permanently
closed in conjunction with our continuing consolidation plans, while others may
be closed on a seasonal basis depending upon production requirements. As of
March 11, 2003, we have 6 idle properties that are being marketed for
disposition. These properties are excluded from the table below.

The following is a list of our active facilities and total rated
traditional ice manufacturing capacity as of March 11, 2003:

|                     |       |  |               |    |              |  |              |    |         |  |             |   |  |  |   |   |  |  |               |        | 
|-------------------- | ----- |  | ------------- | -- | ------------ |  | ------------ | -- | ------- |  | ----------- | - |  |  | - | - |  |  | ------------- | ------ | 
|                     |       |  |               |    |              |  |              |    |         |  |             |   |  |  |   |   |  |  | Traditional  
|                     |       |  |               |    |              |  |              |    |         |  |             |   |  |  |   |   |  |  | Manufacturing
|                     |       |  | No. of        |    | No. of       |  | No. of       |    | Bottled |  | Capacity   
|                     |       |  | Manufacturing |    | Distribution |  | Refrigerated |    | Water   |  | (Rated Tons
|                     |       |  | Facilities    |    | Centers      |  | Warehouses   |    | Plant   |  | Per Day)(1)
|                     |       |  |               |    |              |  |              |    |         |  |            
|Alabama              |       |  | 3             |    |              |  |             |    |         |  |            |   |  |  | 1 |   |  |  | 600           |       
|Arizona              |       |  | 2             |    |              |  | 3            |    |         |  |            |   |  |  |  |   |  |  | 912           |       
|Arkansas             |       |  | 1             |    |              |  | 2            |    |         |  |            |   |  |  |  |   |  |  | 240           |       
|California           |       |  | 1             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 80            |       
|Colorado             |       |  | 1             |    |              |  |             |    |         |  | 1           |   |  |  |  |   |  |  | 280           |       
|District of Columbia |       |  | 1             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 140           |       
|Florida              |       |  | 8             |    |              |  | 6            |    |         |  |            |   |  |  |  |   |  |  | 1,797         |       
|Georgia              |       |  | 2             |    |              |  | 1            |    |         |  |            |   |  |  |  |   |  |  | 920           |       
|Louisiana            |       |  | 3             |    |              |  | 6            |    |         |  |            |   |  |  |  |   |  |  | 720           |       
|Maryland             |       |  |              |    |              |  | 1            |    |         |  |            |   |  |  |  |   |  |  |              |       
|Mississippi          |       |  |              |    |              |  | 2            |    |         |  |            |   |  |  |  |   |  |  |              |       
|Missouri             |       |  | 1             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 180           |       
|Nevada               |       |  | 1             |    |              |  |             |    |         |  | 1           |   |  |  |  |   |  |  | 260           |       
|New Mexico           |       |  | 1             |    |              |  | 2            |    |         |  |            |   |  |  |  |   |  |  | 160           |       
|North Carolina       |       |  |              |    |              |  |             |    |         |  | 1           |   |  |  |  |   |  |  |              |       
|Oklahoma             |       |  | 3             |    |              |  | 2            |    |         |  |            |   |  |  |  |   |  |  | 502           |       
|Tennessee            |       |  | 2             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 408           |       
|Texas                |       |  | 12            |    |              |  | 21           |    |         |  |            |   |  |  |  |   |  |  | 3,052         |       
|Utah                 |       |  | 1             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 120           |       
|Virginia             |       |  | 3             |    |              |  | 6            |    |         |  | 4           |   |  |  |  |   |  |  | 880           |       
|West Virginia        |       |  | 1             |    |              |  |             |    |         |  |            |   |  |  |  |   |  |  | 120           |       
|                     |       |  |               |    |              |  |              |    |         |  |             |   |  |  |   |   |  |  |               |       
|                     | Total |  |               | 47 |              |  |              | 52 |         |  |             | 7 |  |  |   | 1 |  |  |               | 11,371 | 
|                     |       |  |               |    |              |  |              |    |         |  |             |   |  |  |   |   |  |  |               |       



---

|(1) |  | Does not include the rated ice manufacturing capacity
of our installed Ice Factories, which was approximately 3,000 tons
per day as of March 11, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

-12-



---



##### Table of Contents






ITEM 3. Legal Proceedings

We are involved in various claims, lawsuits and proceedings arising in the
ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is difficult to determine the ultimate
costs that we may incur, we believe the resolution of such uncertainties and
the incurrence of such costs will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows.

We are a party to a lawsuit in connection with an ammonia release at our
Baton Rouge, Louisiana manufacturing facility in June 2001. The case, which is
a consolidation of seven lawsuits, is titled Wallace Acey, Jr. et al vs. Reddy
Ice Corporation. This lawsuit was filed August 30, 2001 in the 19th Judicial
District Court, Parish of East Baton Rouge, Louisiana and has been assigned
docket number 487373 Division N. There are multiple plaintiffs who have
primarily alleged injuries consisting of inconvenience, watery eyes and
offensive odors. The plaintiffs have not made a specific request for relief in
the lawsuit. We maintain insurance to cover such events and our insurance
carrier is contesting the suit and plans to vigorously defend against any
claims. This lawsuit is still in a preliminary stage and the ultimate outcome
is impossible to determine at this time. An unfavorable result in excess of the
available insurance coverage could have a material adverse effect on our
consolidated financial position, results of operations or cash flows.




ITEM 4. Submission of Matters to
a Vote of Security Holders

During the quarter ended December 31, 2002, no matters were submitted to a
vote of security holders.

-13-



---



##### Table of Contents






PART II




ITEM 5. Market for
Registrants Common Equity and Related Stockholder Matters

Our common stock trades on the American Stock Exchange under the symbol
ICY. The following table sets forth the high and low sale prices of our
common stock for the periods indicated:

| |      |                |  |   |      |  |             |   |      |  |  |  | 
| | ---- | -------------- |  | - | ---- |  | ----------- | - | ---- |  |  |  | 
| |      |                |  |   |      |  | PRICE RANGE
| |      |                |  |   |      |  |            
| |      |                |  |   |      |  | HIGH        |   | LOW 
| |      |                |  |   |      |  |             |   |     
| | 2001 |                |  |   |      |  |             |   |      |  |  |  | 
| |      | First Quarter  |  | $ | 2.30 |  |             | $ | 1.38 | 
| |      | Second Quarter |  | $ | 2.19 |  |             | $ | 1.50 | 
| |      | Third Quarter  |  | $ | 2.21 |  |             | $ | 1.47 | 
| |      | Fourth Quarter |  | $ | 1.90 |  |             | $ | 1.00 | 

| |      |                |  |   |      |  |             |   |      |  |  |  | 
| | ---- | -------------- |  | - | ---- |  | ----------- | - | ---- |  |  |  | 
| |      |                |  |   |      |  | PRICE RANGE
| |      |                |  |   |      |  |            
| |      |                |  |   |      |  | HIGH        |   | LOW 
| |      |                |  |   |      |  |             |   |     
| | 2002 |                |  |   |      |  |             |   |      |  |  |  | 
| |      | First Quarter  |  | $ | 1.39 |  |             | $ | 1.05 | 
| |      | Second Quarter |  | $ | 1.50 |  |             | $ | 1.07 | 
| |      | Third Quarter  |  | $ | 1.38 |  |             | $ | 0.98 | 
| |      | Fourth Quarter |  | $ | 1.15 |  |             | $ | 0.58 | 

On March 11, 2003, the closing sales price of our common stock, as
reported by the American Stock Exchange, was $1.46 per share. As of March 11,
2003, we had approximately 142 shareholders of record. We estimate that there
were approximately 1,800 beneficial holders of our common stock as of March 11,
2003.

We have never declared or paid any cash dividends on our common stock. In
addition, provisions of our revolving credit facility, our 10% exchangeable
preferred stock and, in some instances, our 9 3/4% senior notes prohibit us
from paying dividends. Further, we intend to retain any future earnings to
reduce debt and fund growth. Accordingly, we do not anticipate paying any cash
dividends in the foreseeable future.

The following information relates to the sales and other issuances of our
securities within the past three fiscal years, none of which were registered
pursuant to the Securities Act of 1933 as amended (the Securities Act).
Unless otherwise indicated, all of the following issuances were exempt from
registration under Section 4(2) of the Securities Act:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2000 and 2001, we issued shares of common stock in connection with
the cashless exercise of warrants with an exercise price of $0.01. All
of these warrants were issued in 1997 in connection with a $75 million
issuance of our 12% senior notes, which are no longer outstanding. Upon
exercise of the warrants, the shares were issued on the dates and in the
amounts as follows: 12,765 shares on July 19, 2000, 5,674 shares on
September 26, 2000 and 230,347 shares on July 16, 2001.

Although not required for disclosure under this Form 10-K, the following
information relates to certain sales and other issuances of our securities
within the past three fiscal years which were registered pursuant to the
Securities Act:

-14-



---



##### Table of Contents





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2000, we issued 66,936 shares of common stock to employees under
our 2000 Employee Stock Purchase Plan at prices ranging between $2.34 and
$3.51 per share. 
|
| | On August 31, 2001, we issued 100,000 shares of common stock in
connection with the exercise of employee stock options at a price of
$1.60 per share.              
|
| | During 2001, we issued 415,906 shares of common stock to employees under
our 2000 Employee Stock Purchase Plan at prices ranging between $1.17 and
$1.49 per share.
|
| | On January 9, 2002, we issued 16,967 shares of common stock to employees
under our 2000 Employee Stock Purchase Plan at a price of $0.91 per
share.                




ITEM 6. Selected Financial Data

The following table sets forth, for the periods and dates indicated,
selected consolidated data derived from our consolidated financial statements.
The following information should be read in conjunction with our consolidated
financial statements, including the notes thereto, and Managements Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this report.

|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |          |         |  
|---------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------- | ---------------------------------------- | ------- | ---- | ------ | ------ | ------- | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | - | ------- | -------- | ------- | -
|                                                     |                                                     |                                                                                                      |         | Year Ended December 31,                 
|                                                     |                                                     |                                                                                                      |         |                                         
|                                                     |                                                     |                                                                                                      |         | 2002                                     |         | 2001 |        | 2000   |         | 1999 |        | 1998   
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |        
|                                                     |                                                     |                                                                                                      |         | (in thousands, except per share amounts)
|Operating Data:                                      |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Revenues                                                                                             |         | $                                        | 235,660 |      |        | $      | 244,247 |      |        | $       | 244,044 |   |        | $       | 231,723 |   |         | $        | 179,861 |  
|                                                     |                                                     | Cost of sales                                                                                        |         |                                          | 144,852 |      |        |        | 156,434 |      |        |         | 149,889 |   |        |         | 139,386 |   |         |          | 108,276 |  
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Gross profit                                                                                         |         |                                          | 90,808  |      |        |        | 87,813  |      |        |         | 94,155  |   |        |         | 92,337  |   |         |          | 71,585  |  
|                                                     |                                                     | Operating expenses                                                                                   |         |                                          | 33,739  |      |        |        | 37,372  |      |        |         | 37,139  |   |        |         | 37,738  |   |         |          | 31,741  |  
|                                                     |                                                     | Depreciation and amortization expense                                                                |         |                                          | 24,704  |      |        |        | 33,816  |      |        |         | 28,631  |   |        |         | 30,526  |   |         |          | 20,729  |  
|                                                     |                                                     | Loss (gain) on disposition of assets                                                                 |         |                                          | 4,345   |      |        |        | (49     | )    |        |         |        |   |        |         |        |   |         |          |        |  
|                                                     |                                                     | Impairment of assets                                                                                 |         |                                          | 7,363   |      |        |        |        |      |        |         |        |   |        |         |        |   |         |          |        |  
|                                                     |                                                     | Other income, net                                                                                    |         |                                          | 161     |      |        |        | 19      |      |        |         | 17      |   |        |         | 21      |   |         |          | 4       |  
|                                                     |                                                     | Gain (loss) on extinguishment of debt(1)                                                             |         |                                          | 2,494   |      |        |        |        |      |        |         |        |   |        |         |        |   |         |          | (17,387 | )
|                                                     |                                                     | Interest expense                                                                                     |         |                                          | (34,870 | )    |        |        | (36,686 | )    |        |         | (32,470 | ) |        |         | (30,409 | ) |         |          | (24,705 | )
|                                                     |                                                     | Cumulative effect of change in accounting principle                                                  |         |                                          | (73,230 | )    |        |        |        |      |        |         |        |   |        |         |        |   |         |          |        |  
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Net loss                                                                                             |         | $                                        | (84,788 | )    |        | $      | (19,993 | )    |        | $       | (4,068  | ) |        | $       | (6,315  | ) |         | $        | (22,973 | )
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |          |         |  
|                                                     |                                                     | Net loss available to common shareholders                                                            |         | $                                        | (88,598 | )    |        | $      | (23,451 | )    |        | $       | (7,202  | ) |        | $       | (9,393  | ) |         | $        | (28,891 | )
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |          |         |  
|Loss per Basic and Diluted Share of Common Stock(2): |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Net loss available to common shareholders before
cumulative effect of change in accounting principle |         | $                                        | (0.76   | )    |        | $      | (1.19   | )    |        | $       | (0.37   | ) |        | $       | (0.53   | ) |         | $        | (5.91   | )
|                                                     | Cumulative effect of change in accounting principle |                                                                                                      |         | (3.64                                    | )       |      |        |       |         |      |        |        |         |   |        |        |         |   |         |         |        
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |          |         |  
|                                                     | Net loss available to common shareholders           |                                                                                                      | $       | (4.40                                    | )       |      | $      | (1.19  | )       |      | $      | (0.37   | )       |   | $      | (0.53   | )       |   | $       | (5.91    | )      
|                                                     |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |          |         |  
|Weighted Average Common Shares Outstanding(2):       |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Basic and diluted                                                                                    |         |                                          | 20,157  |      |        |        | 19,756  |      |        |         | 19,340  |   |        |         | 17,565  |   |         |          | 4,886   |  
|Other Financial Data:                                |                                                     |                                                                                                      |         |                                          |         |      |        |        |         |      |        |         |         |   |        |         |         |   |         |         
|                                                     |                                                     | Cash flows  operating activities                                                                    |         | $                                        | 32,690  |      |        | $      | 19,153  |      |        | $       | 19,102  |   |        | $       | 14,409  |   |         | $        | 16,320  |  
|                                                     |                                                     | Cash flows  investing activities                                                                    |         | (11,595                                  | )       |      |        | (7,602 | )       |      |        | (29,368 | )       |   |        | (37,128 | )       |   |         | (314,788 | )      
|                                                     |                                                     | Cash flows  financing activities                                                                    | (24,808 | )                                        |         |      | (2,365 | )      |         |      | 7,674  |         |         |   | 22,911 |         |         |   | 287,070 |         
|                                                     |                                                     | EBITDA(3)                                                                                            | 57,230  |                                          |         |      | 50,460 |        |         |      | 57,033 |         |         |   | 54,620 |         |         |   | 39,848  |         
|                                                     |                                                     | Capital expenditures(4)                                                                              | 14,403  |                                          |         |      | 16,510 |        |         |      | 23,165 |         |         |   | 30,413 |         |         |   | 22,830  |         
|                                                     |                                                     | Dispositions(5)                                                                                      | 3,378   |                                          |         |      | 10,968 |        |         |      | 1,967  |         |         |   | 4,496  |         |         |   |        |         

-15-



---



##### Table of Contents



|                    |                                                        |  |   |                                          |   |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         |  | 
|------------------- | ------------------------------------------------------ |  | - | ---------------------------------------- | - | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- |  | 
|                    |                                                        |  |   | Year Ended December 31,                 
|                    |                                                        |  |   |                                         
|                    |                                                        |  |   | 2002                                     |   | 2001 |   | 2000    |  | 1999 |   | 1998   
|                    |                                                        |  |   |                                          |   |      |   |         |  |      |   |        
|                    |                                                        |  |   | (in thousands, except per share amounts)
|Balance Sheet Data: |                                                        |  |   |                                          |   |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                    | Total cash and cash equivalents and restricted cash(6) |  | $ | 6,500                                    |   |      | $ | 16,913  |  |      | $ | 1,027   |  |  | $ | 3,619   |  |  | $ | 3,427   | 
|                    | Total assets                                           |  |   | 347,573                                  |   |      |   | 460,784 |  |      |   | 470,660 |  |  |   | 462,332 |  |  |   | 440,257 | 
|                    | Total current and non-current debt (7)                 |  |   | 305,214                                  |   |      |   | 332,667 |  |      |   | 332,270 |  |  |   | 322,290 |  |  |   | 338,381 | 
|                    | Total exchangeable preferred stock                     |  |   | 40,992                                   |   |      |   | 37,181  |  |      |   | 33,723  |  |  |   | 30,589  |  |  |   | 66,546  | 
|                    | Total preferred stock with put redemption option       |  |   |                                         |   |      |   |        |  |      |   |        |  |  |   |        |  |  |   | 3,223   | 
|                    | Total common stock with put redemption option          |  |   |                                         |   |      |   |        |  |      |   |        |  |  |   |        |  |  |   | 1,972   | 
|                    | Total shareholders equity (deficit)                   |  |   | (37,149                                  | ) |      |   | 52,477  |  |      |   | 75,369  |  |  |   | 82,369  |  |  |   | 1,300   | 



---

|(1) |  | In April 2002, we adopted Statement of Financial Accounting Standard No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. In accordance with that
statement, we have reclassified the loss on refinancing in 1998 from
extraordinary items to operations in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Shares of common stock issuable under stock options and warrants have
not been included in the computation of diluted loss per share as their
effect is antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | EBITDA represents earnings before interest, income taxes, depreciation,
amortization, the gain or loss on disposition of assets, impairment of
assets, gain or loss on extinguishment of debt and the cumulative effect of
changes in accounting principles. We have included EBITDA data (which are
not measures of financial performance under accounting principles
generally accepted in the United States of America) because we understand
such data is used by certain investors to determine a companys historical
ability to service its indebtedness. EBITDA should not be considered by
an investor as an alternative to net income, as an indicator of Packaged
Ices operating performance or as an alternative to cash flow as a measure
of liquidity. EBITDA may not be comparable to similarly captioned items
presented by other companies.
|   
|(4) |  | Includes all amounts incurred, but does not include expenditures used to
acquire traditional ice businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) |  | Includes all proceeds from dispositions of property and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(6) |  | Includes restricted cash of $6.7 million at December 31, 2001, which was
used to collateralize outstanding standby letters of credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) |  | Includes the line of credit and the current and noncurrent portions of
long-term obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

-16-



---



##### Table of Contents






ITEM 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Selected
Financial Data, and our consolidated financial statements, including the notes
thereto beginning on page F-1, and the other information appearing elsewhere in
this report.

General

We view the manufacture and distribution of ice through traditional ice
manufacturing and the Ice Factory as our predominant business segment. Our
other business segment, non-ice products and operations, consists of
refrigerated warehousing and the manufacturing and sale of bottled water.

Uncertainty of Forward Looking Statements and Information

Other than statements of historical facts, statements made in this Form
10-K, statements made by us in periodic press releases or oral statements made
by our management to analysts and shareholders within the meaning of such terms
under the Private Securities Litigation Reform Act of 1995 and statements made
in the course of presentations about our company, constitute forward-looking
statements. We believe the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from future results expressed or
implied by the forward-looking statements. Factors you should consider that
could cause these differences are:



| |  |  | general economic trends and seasonality;                                                
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | substantial leverage and ability to service debt;                                       
|
| |  |  | availability of credit facilities and restrictive covenants under the credit facilities;
|
| |  |  | risks associated with acquisitions and failure to integrate acquired businesses;        
|
| |  |  | availability of capital sources;                                                        
|
| |  |  | competitive practices in the industry in which we compete;                              
|
| |  |  | fluctuations in operating costs;                                                        
|
| |  |  | technological changes and innovations;                                                  
|
| |  |  | changes in labor conditions;                                                            
|
| |  |  | capital expenditure requirements;                                                       
|
| |  |  | legislative or regulatory requirements; and                                             
|
| |  |  | weather.                                                                                

You should not unduly rely on these forward-looking statements as they
speak only as of the date of this report. Except as required by law, we are
not obligated to publicly release any revisions to these forward looking
statements to reflect events or circumstances occurring after the date of this
report or to reflect the occurrence of unanticipated events. Important factors
that could cause our actual results to differ materially from our expectations
are discussed elsewhere in this report.

-17-



---



##### Table of Contents



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues. Revenues decreased $8.5 million, from $244.2 million for the
twelve months ended December 31, 2001 to $235.7 million for the twelve months
ended December 31, 2002. Revenues decreased $6.4 million in our ice segment as
a result of the sale of our traditional ice business in California, offset by
1) slight volume increases due to better weather conditions in most of our
markets and the recovery from the effects of the terrorist attacks in New York
City and Washington, D.C. on September 11, 2001 and 2) increases in average
selling prices in our non-California markets. Revenues in our non-ice
operations decreased $2.2 million for the twelve months ended December 31, 2002
as compared with the same period in 2001, primarily due to the sale in 2001 of
two cold storage operations and our ice production equipment sale and leasing
business. The decrease due to the sales of these operations was partially
offset by a $1.2 million increase in sales at our Virginia cold storage warehouses
related to the signing of a significant new customer contract in 2002,
partially offset by a loss of sales to our poultry customers caused by an
outbreak of avian flu in Virginia.

Cost of Sales. Cost of sales decreased $11.5 million, from $156.4 million
for the twelve months ended December 31, 2001 to $144.9 million for the twelve
months ended December 31, 2002. This decrease primarily resulted from the sale
of our traditional ice operations in California and labor and other cost
reductions in our remaining operations that were implemented in the last half
of 2001. Offsetting these reductions were increases in electricity and
insurance costs.

Gross Profit. Gross profit increased $3.0 million, from $87.8 million for
the twelve months ended December 31, 2001 to $90.8 million for the twelve
months ended December 31, 2002. As a percentage of revenues, gross profit
increased from 36.0% for the twelve months ended December 31, 2001 to 38.5% for
the twelve months ended December 31 2002. These increases were the result of
increased operating efficiencies in our ice operations, higher average selling
prices and the sale of our traditional ice business in California, which
generated lower gross profit margins than our other markets, offset by reduced
margins at our Virginia cold storage warehouses due to reduced amounts of
customer products moved through our warehouses by our poultry customers.

Operating Expenses.Operating expenses decreased $3.7 million, from $37.4
million for the twelve months ended December 31, 2001 to $33.7 million for the
twelve months ended December 31, 2002. As a percentage of revenues, operating
expenses decreased from 15.3 % for the twelve months ended December 31, 2001 to
14.3% for the twelve months ended December 31, 2002. These decreases resulted
from a reduction in labor and benefits due to a consolidation of administrative
functions and headcount reductions during the second and third quarters of
2001, the sale of our traditional ice business in California in December 2001
and the sale of certain non-ice operations in the last half of 2001, offset by
an increase in incentive compensation expense relating to improved performance.

Depreciation and Amortization.Depreciation and amortization decreased
$9.1 million, from $33.8 million for the twelve months ended December 31, 2001
to $24.7 million for the twelve months ended December 31, 2002. As a
percentage of revenues, depreciation and amortization decreased from 13.8% for
the twelve months ended December 31, 2001 to 10.5% for the twelve months ended
December 31, 2002. This decrease was primarily due to (1) the disposition of
significant fixed assets over the last eighteen months and (2) the adoption of
Stamement of Financial Accounting Standards ("SFAS")  No. 142, Goodwill and Other Intangible Assets on January 1, 2002. SFAS
No. 142 changed the accounting for goodwill and certain intangible assets with
an indefinite life from an

-18-



---



##### Table of Contents



amortization method to an impairment-only approach. Amortization of
goodwill and certain other intangible assets, including goodwill recorded in
past business combinations, ceased upon adoption of this statement.
Amortization expense related to these items was $6.0 million in 2001.
Offsetting this decrease in expense is additional depreciation expense related
to property additions since December 31, 2001.

Gain (Loss) on Disposition of Assets.During the year ended December 31,
2002, we sold certain non-core assets, including several pieces of excess real
estate, for a net loss of $2.4 million. In addition, we resolved all
outstanding issues related to the sale of our traditional ice business in
California and as a result recorded an additional charge of $1.9 million.

Impairment of Assets.We reclassified excess real estate as Assets Held
for Sale and recorded a non-cash charge of $3.3 million to write down their
carrying value to their estimated fair value. In accordance with SFAS
No. 142, we
evaluated our goodwill as of December 31, 2002 and recorded a non-cash
impairment charge of $4.1 million related to our bottled water and cold storage
operations.

Gain on the Extinguishment of Debt.During the twelve months ended
December 31, 2002, we purchased and retired 9 3/4% Senior Notes with an
aggregate principal amount of $15.0 million, which resulted in a gain on
extinguishment of debt of $2.5 million.

Interest Expense. Interest expense decreased $1.8 million, from $36.7
million for the twelve months ended December 31, 2001 to $34.9 million for the
twelve months ended December 31, 2002. As a percentage of revenues, interest
expense decreased from 15.0% for the twelve month periods ending December 31,
2001 to 14.8% for the twelve months ended December 31, 2002. The dollar
decrease in interest expense was due to a $3.6 million non-cash charge to
expense in December 2001 related to our interest rate collar agreement, lower
average borrowings under our credit facility and lower outstanding balances of
our 9 3/4% Senior Notes, offset by higher payments under our interest rate
collar agreement and a higher average interest rate on the term loan included
in our amended credit facility.

Cumulative Effect of Change in Accounting Principle.On January 1, 2002
we adopted SFAS No. 142, Goodwill and Other Intangible Assets. Adoption of
this statement resulted in a charge to net income of $73.2 million (net of $0
tax). The allocation of the charge to our ice and non-ice segments was $70.1
million and $3.1 million, respectively.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues. Revenues increased $0.2 million, from $244.0 million for the
year ended December 31, 2000 to $244.2 million for the year ended December 31,
2001. This increase in revenues consisted of a $1.0 million decrease in
revenues from ice operations and a $1.2 million increase in revenues from
non-ice operations. The decrease in ice operation revenue was primarily due to
abnormally cool and rainy weather in the first quarter of 2001 and during
September of 2001 in our Texas and Oklahoma markets as compared to the same
periods in 2000, the effects of the terrorist attacks in New York City and
Washington, D.C. on September 11, 2001, offset by new customer locations and
price increases. The increase in non-ice products and operations was due to
increased bottled water unit sales, offset by a reduction in ice equipment
leasing revenue related to the sale of that business in June 2001.

Cost of Sales.Cost of sales increased $6.5 million, from $149.9 million
for the year ended December 31, 2000 to $156.4 million for the year ended
December 31, 2001. The cost of

-19-



---



##### Table of Contents



sales as a percentage of revenues increased 2.6% from 61.4% for the year
ended December 31, 2000 to 64.0% for the year ended December 31, 2001. This
increase primarily resulted from (i) the fact that not all of our costs change
proportionately to changes in revenues, especially in the first and fourth
calendar quarters, when fixed costs account for a greater proportion of our
cost of sales, (ii) increases in fuel prices and employee health benefit costs
(primarily in the first quarter of 2001), (iii) the impact of additional Ice
Factory operating leases ($1.9 million higher than in 2000), (iv) our increased
presence in West Coast markets that generated sales with a lower margin than
our other markets and (v) the effect of the bankruptcy of the third party with
which we contracted for the majority of our electricity purchases.

Gross Profit.Gross profit decreased $6.4 million, from $94.2 million for
the year ended December 31, 2000, to $87.8 million for the year ended December
31, 2001. As a percentage of revenues, gross profit from ice products
decreased from 38.2% to 35.7%. The decrease in gross profit percentage was due
to additional expenses relating to health insurance and fuel in the first
quarter of 2001, the increased use of operating leases associated with the Ice
Factories compared to 2000, a third party bankruptcy and higher sales in West
Coast markets. Gross profit on non-ice operations decreased from 42.3% to
38.5%, primarily due to increased bottled water unit sales with lower margins.

Operating Expenses. Operating expenses increased $0.2 million, from $37.1
million for the year ended December 31, 2000, to $37.4 million for the year
ended December 31, 2001. This increase was due to the impacts of severance
expenses of $1.5 million and certain bankruptcies of $0.5 million, offset by
decreases resulting from headcount reductions during 2001. As a percentage of
revenues, operating expenses increased from 15.2% to 15.3%.

Depreciation and Amortization. Depreciation and amortization increased
$5.2 million, from $28.6 million for the year ended December 31, 2000, to $33.8
million for the year ended December 31, 2001. Depreciation and amortization
increased $2.5 million due to full year effect of the capital expenditures and
additions to intangible assets made during 2000 and the capital expenditures
made in 2001. In addition, depreciation and amortization increased $2.7
million related to the write-off of unamortized debt issue costs related to our
former credit facility.

Gain on Disposition of Assets:During the year ended December 31, 2001,
we sold certain excess and non-core assets and our traditional ice business in
California. Dispositions of excess and non-core assets included several pieces
of real estate, the majority of our ice production equipment sales and leasing
business and two cold storage facilities. The result of these dispositions was
a net gain on disposition of assets of approximately $49,000.

Interest Expense. Interest expense increased $4.2 million, from $32.5
million for the year ended December 31, 2000, to $36.7 million for the year
ended December 31, 2001. The increase in interest expense resulted from a $3.6
million non-cash expense related to our interest rate swap agreement and higher
levels of borrowings during the year ended December 31, 2001 as compared with
the year ended December 31, 2000, offset by lower interest rates.

Liquidity and Capital Resources

We generate cash from the sale of packaged ice through traditional
delivery methods, by which we manufacture, package, and store ice at a central
facility and transport it to our customers retail locations when needed, and
through Ice Factories, which manufacture, package and store ice in our
customers retail locations. Our primary uses of cash are (a) cost of sales,
(b) operating expenses, (c) debt service and (d) capital expenditures related
to replacing and

-20-



---



##### Table of Contents



modernizing the capital equipment in our traditional ice plants and
acquiring and installing additional Ice Factories.

We estimate our capital expenditures for 2003 will range between $12.0 and
$13.0 million, which will primarily be used to maintain and expand our
traditional ice operations. There can be no assurance that capital
expenditures will not exceed this estimate. In addition, we initiated a
leasing program for some of our Ice Factory installations in late 1999 and
continued to utilize that strategy during 2000 and early 2001. Beginning in
the second quarter of 2001, we stopped using operating leases for our Ice
Factory installations. Our annual lease obligation is approximately $4 million
and is contained within cost of sales. These operating leases expire during
2004 and 2005 and we will potentially purchase these assets at that time.
Certain of these leases have early purchase options in 2003 that we may
exercise under certain circumstances. The purchase cost of these assets under
lease have not been included in our 2003 capital expenditure plan due to the
uncertainty of the purchase.

During 2001, we began a program to redeploy certain Ice Factories that
generated margins below our targeted returns to higher margin locations and
continued that program in 2002. During 2002, we placed 26 new Ice Factories,
net of removals, and do not expect substantial net additions in 2003. Any
capital expenditures associated with new Ice Factories are contained within our
2003 capital expenditure plan.

As we have consolidated acquisitions into the existing company
infrastructure, we have identified non-core and excess assets. Beginning in
2001, we began aggressively marketing these assets for sale resulting in
proceeds of $11.0 million that year. A portion of those proceeds was from the
sale of our traditional ice business in California. In 2002, we continued to
market non-core and excess assets and as a result, we realized proceeds of
approximately $3.4 million. We are continuing to market certain excess and
non-core assets that we have determined to be disposable and anticipate
proceeds of at least $1.5 million in 2003.

We estimate a loss in the first quarter of 2003 and negative cash flows
from operations due to the highly seasonal nature of our business. We have
reported, and may in the future report, negative cash flows during the first
quarter when the weather is generally cooler. We believe, however,
that our overall treasury management of cash on hand and available borrowings
under our credit facility will be adequate to meet debt service requirements,
fund ongoing capital requirements, and satisfy working capital and general
corporate needs. At December 31, 2002, we had a working capital deficit of
approximately $6.1 million and had approximately $22.3 million of availability
under our revolving credit facility.

At December 31, 2002, we had approximately $305.2 million of total debt
outstanding as follows:



| |  |  | $255.0 million of 9 3/4%
senior notes due 2005;         
| | - |  | --------------------------------------------------------
|
| |  |  | $50.0 million outstanding under our credit facility; and
|
| |  |  | $0.2 million of other debt, net of debt discount.       

On December 27, 2001, we refinanced our bank credit facility with a new
lender. The total commitment under the facility is $88 million, consisting of
a $38 million line of credit and a $50 million term loan. At December 31,
2002, we had $22.3 million of availability under the line of credit and cash on
hand of $6.5 million.

-21-



---



##### Table of Contents



Principal balances outstanding under the line of credit bear interest per
annum, at our option, at the London Inter-Bank Offered Rate (LIBOR) plus 3.5%
or the prime rate (as announced from time to time by JPMorgan Chase Bank) plus
1.5%. There was no balance on the line of credit at December 31, 2002. The
outstanding balance at December 31, 2001 was classified as a current liability
because of our intention to use the line of credit to fund our working capital.
No principal payments are required until the final maturity date of October
31, 2004. Principal balances outstanding under the term loan bear interest per
annum, at our option, at LIBOR plus 4% or the prime rate plus 2%, with a
minimum of 9.5%. At December 31, 2002, the weighted average interest rate of
borrowings outstanding under the credit facility was 9.5%. Interest is payable
monthly. We pay a monthly fee on the average availability under the credit
facility based on an annual rate of 0.5%, a $20,000 per quarter loan servicing
fee and a $360,000 annual fee on the anniversary date of the credit facility.

For fiscal years beginning on or after January 1, 2002, there is a
mandatory principal payment on the term loan equal to 65% of our Excess Cash
Flow (as defined in the credit facility). This principal payment is due within
10 days of delivery of the annual audited financial statements to the lenders,
which may occur no later than 90 days after a fiscal year end. In accordance
with the credit facility, the principal payment can be waived if certain
conditions are met and we pay the Amortization Waiver Fee (as defined in the
credit facility). We anticipate obtaining a waiver for the 2002 principal
payment and paying the related Amortization Waiver Fee of approximately
$368,000 in March 2003. The Amortization Waiver Fee was accrued as of December
31, 2002. Any balances outstanding under the term loan are due October 31,
2004.

Covenants contained in the credit facility and the indenture governing the
9 3/4% senior notes require us to meet certain financial tests, and other
restrictions limit our ability to pay dividends, borrow additional funds or to
acquire or dispose of assets. All of our assets and the capital stock of all
of our significant subsidiaries collateralize the credit facility.
The 9 3/4%
senior notes are generally unsecured obligations, and are senior in right of
payment to all existing and future subordinated debt (as defined in the
indenture) and pari passuto all of our senior indebtedness.
The 9 3/4%
senior notes are effectively subordinated to the credit facility.

The borrowing base under the line of credit is comprised of eligible
accounts receivable and eligible equipment and in addition, from January 28 to
July 15 of each calendar year, a $10 million seasonal overadvance. Outstanding
standby letters of credit reduce the amount available under the line of credit.
We anticipate having adequate collateral during the first and second quarters
of 2003 to maintain a minimum availability of $5 million under the line of
credit. During the second half of 2003, we expect to have additional
availability resulting from higher cash flows from operations and lower capital
expenditures during the second and third quarters of the year. We are
evaluating several options regarding the deployment of the excess cash flow
that we expect to accumulate during these periods. These options include the
purchase of our 9 3/4% senior notes on the open market and additional capital
expenditures, including the purchase of Ice Factory operating leases.

At December 31, 2002 and March 11, 2003, we had $7.1 million and $7.4
million of standby letters of credit outstanding, respectively, primarily to
secure certain insurance obligations. We may be required to increase our
letters of credit during 2003 due to new insurance policies and electricity
supply contracts. Letters of credit in the amount of $0.7 million have various
final expiration dates from 2008 through 2012. The remaining letters of credit
in the amount of $6.7 million have no final expiration dates.

-22-



---



##### Table of Contents



The table below summarizes the future payments due under our significant
contractual obligations as of December 31, 2002:

|                 |                               |   |       |       |      |   |      |      |      |   |               |       |         |   |          |     |  |   |     |     | 
|---------------- | ----------------------------- | - | ----- | ----- | ---- | - | ---- | ---- | ---- | - | ------------- | ----- | ------- | - | -------- | --- |  | - | --- | --- | 
|                 |                               |   |       |       |      |   |      |      |      |   | 2004 to       |       | 2006 to |   | 2008 and
|                 |                               |   | Total |       | 2003 |   | 2005 |      | 2007 |   | thereafter   
|                 |                               |   |       |       |      |   |      |      |      |   |              
|                 |                               |   |       |       |      |   |      |      |      |   | (in millions) |       |         |   |          |     |  |   |    
|Long-term debt   |                               | $ | 305.2 |       |      | $ | 0.1  |      |      | $ | 305.0         |       |         | $ | 0.1      |     |  | $ | 0.0 |    
|Line of credit   |                               |   |      |       |      |   |     |      |      |   |              |       |         |   |         |     |  |   |    |    
|Operating leases |                               |   | 44.2  |       |      |   | 12.6 |      |      |   | 17.4          |       |         |   | 9.2      |     |  |   | 5.0 |    
|                 |                               |   |       |       |      |   |      |      |      |   |               |       |         |   |          |     |  |   |     |    
|                 | Total contractual obligations |   | $     | 349.4 |      |   | $    | 12.7 |      |   | $             | 322.4 |         |   | $        | 9.3 |  |   | $   | 5.0 | 

During 1999 and continuing into 2000, the pace of our acquisition
activities slowed significantly and has subsequently ceased except for one
small tuck-in acquisition completed in 2001. The decreased acquisition
activity is generally due to the decline in the price of our common stock from
the time of our initial public offering in January 1999, which has made it
difficult for us to use our stock as consideration for acquisitions. In 1999,
in connection with possible future acquisitions, we filed an acquisition
shelf registration statement to register the sale of up to five million shares
of common stock, of which 3,953,780 shares remain unissued as of December 31,
2002.

We may need to raise additional funds through public or private debt or
equity financing to take advantage of opportunities that may become available
to us, including acquisitions. The availability of such capital will depend
upon prevailing market conditions and other factors over which we have no
control, as well as our financial condition and results of operations. There
can be no assurance that sufficient funds will be available to finance intended
acquisitions or capital expenditures.

Due to the obligations represented by the approaching maturities of our
credit facility, which becomes due in October 2004, and our 9 3/4% senior
notes and our mandatorily redeemable preferred stock, both of which are due in
2005, management and our board of directors have begun to analyze and consider
various financial and strategic alternatives. We are in the process of
exploring our options and believe there are a number of attractive alternatives
to be explored over the course of 2003. In January 2003, we engaged Credit
Suisse First Boston to assist us in evaluating the various alternatives.

Significant Accounting Policies

Allowances for Doubtful Accounts.We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make the required payments on their accounts. We have attempted to reserve for
these estimated losses based on our past experience with similar accounts
receivable and believe our reserves to be adequate. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments on their accounts, additional allowances may be
required.

Long-Lived Assets.Property and equipment is carried at cost and is being
depreciated on a straight-line basis over estimated lives of 2.5 to 40 years.
Maintenance and repairs are charged to expense as incurred, while capital
improvements that extend the useful lives of the underlying assets are
capitalized. We accounted for all of our historical acquisitions using the
purchase

-23-



---



##### Table of Contents



method of accounting and as a result recorded significant amounts of goodwill.
Other intangible assets include the following that are amortized over their
useful lives:

|                           |  |                                                      
|-------------------------- |  | -----------------------------------------------------
|Intangible Assets          |  | Useful Life                                          
|                           |  |                                                      
|Goodwill                   |  | Indefinite life                                      
|Trade names                |  | Indefinite life                                      
|Ice factory system patents |  | Straight line method over 17 years                   
|Debt issue costs           |  | Interest method over the terms of the debt           
|Other intangibles          |  | Straight line method over the terms of the agreements

Impairment of
Long-Lived Assets.In accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, long-lived assets and certain
identifiable intangible assets to be held and used are reviewed for impairment
on an annual basis or whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The determination
of recoverability of long-lived assets and certain other identifiable
intangible assets is based on an estimate of undiscounted future cash flows
resulting from the use of the asset or its disposition. Measurement of an
impairment loss for long-lived assets and other intangible assets that
management expects to hold and use are based on the fair value of the asset.
Long-lived assets to be disposed of are reported at the lower of carrying
amount or net realizable value. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill is evaluated using a market valuation
approach based on valuations of comparable businesses.

Inherent in the determination of such future cash flows and valuations are
certain estimates and judgements, including the interpretation of current
economic indicators and market values and assumptions about our strategic plans
with regards to our operations. To the extent additional information arises or
our strategies change, it is possible that our conclusions regarding the
impairment of goodwill or other long-lived assets could change and result in a
material effect on our financial position or results of operations.

Revenue Recognition.Revenue is recognized when product (packaged ice,
ice packaging bags, bottled water and ice equipment) is delivered to and
accepted by customers. There is no right of return with respect to the
packaged ice, bags delivered and bottled water. Revenue resulting from Ice
Factory management agreements and cold storage services is recognized as earned
under contract terms.

New Accounting Pronouncements

On January 1,
2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
changed the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon adoption of this statement.
Adoption of this statement resulted in a charge to net income of $73.2 million
(net of $0 tax). The allocation of the charge to our ice and non-ice segments
was $70.1 million and $3.1 million, respectively. Prospectively, we will
annually evaluate the carrying amount of goodwill associated with our operating
segments using a market valuation approach to identify any potential impairment
of goodwill. As a result of this annual evaluation, an additional impairment
charge of $4.1 million was recognized at December 31, 2002 in our non-ice
segment.

-24-



---



##### Table of Contents



On January 1, 2002, we adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting requirements for the impairment and disposal of
long-lived assets. In accordance with this statement, we have presented
certain assets to be disposed of as assets held for sale as of December 31,
2002.

In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other
things, amends SFAS No. 4 and SFAS No. 64 to require that gains and losses from
the extinguishment of debt generally be classified within continuing
operations. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002 and early application is encouraged. We adopted
SFAS No. 145 upon issuance and as a result, have reflected gains on the
extinguishment of debt within continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. Adoption of this
statement on January 1, 2003 did not have a significant effect on our
consolidated financial position or results of operations.

In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends
SFAS No. 123 to provide
alternate methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the effects
of stock-based compensation on reported results. The provisions of
SFAS No. 148 are effective for years ending after December 15, 2002 and interim periods
beginning after December 15, 2002. We adopted SFAS No. 148 upon issuance and the
adoption did not have any impact on our results of operations or financial
position in 2002. However, we have modified the disclosures in the December
31, 2002 financial statements to be in compliance with this statement.

Risk Factors

Our substantial debt obligations may prevent us from funding planned
activities, may require us to seek additional debt or equity financing, sell
selected assets or diminish our ability to react to changes in our industry.

We have financed many of our acquisitions through the incurrence of debt,
and consequently, we have substantial debt service requirements. At December
31, 2002, our total indebtedness was $305.2 million. Our high level of debt
could have important consequences to us, including the following:



| |  | A substantial portion of our cash flow must be dedicated to paying
interest on our debt. This reduces the level of cash flow available
to fund working capital, capital expenditures and acquisitions.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The indenture that governs the 9 3/4% senior notes and the credit
agreement for our credit facility require us to meet certain financial
tests. Additionally, there are other restrictions that       

-25-



---



##### Table of Contents





|  |  | limit our ability to pay dividends, borrow additional funds or to dispose of
assets. These covenants and restrictions may affect our flexibility in
planning for and reacting to changes in our business.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Our high level of debt diminishes our ability to
react to changes in general economic, industry and
competitive conditions.                                                                              

If we are unable to generate enough cash flow to make debt service
payments, we may be required to:



| |  | seek additional debt or equity financing, or renegotiate our existing
debt arrangements on terms which may be less favorable than our
current arrangements;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | sell selected assets; or                                                                                                                                   
| 
| |  | reduce or delay planned capital expenditures.                                                                                                              

There can be no assurance that we could accomplish any of these measures.

In addition, we will be required to repay or refinance our credit
facility, 9 3/4% senior notes and potentially our mandatorily redeemable
preferred stock between October 31, 2004 and April 15, 2005. In addition, if
we do not repay or refinance our credit facility by March 2004, the balances
outstanding under our credit facility and potentially the balances
outstanding under the 9 3/4% senior notes will be
classified as current liabilities as of December 31, 2003. No assurances can be given that we will be
able to accomplish these repayments or refinancings on acceptable terms and
conditions.

Our failure to successfully compete could adversely affect our prospects
and financial results.

Our businesses are highly competitive. We have many competitors in each
of our product, service and geographic markets. Competition in our businesses
is based primarily on price and service. If we fail to successfully compete
against our competitors, our business will be adversely affected. Winning new
customers is important to our future growth, as the overall demand for ice is
widely believed to track population growth. There are low barriers to entry in
the ice industry and we could be adversely affected by any expansion of
capacity by our existing competitors or by new entrants in our markets. We
could also be adversely affected if our larger grocery or convenience store
customers decide to manufacture their own ice.

The seasonal nature of the ice business results in lower profits, and even
losses, in the first and fourth quarters of the year.

We experience
significant seasonal fluctuations in our net sales and
profitability. We make a disproportionate amount of our sales in the second
and third calendar quarters when the weather is generally warmer. We also
typically have net income during these same periods. As a result of seasonal
revenue declines and the lack of a corresponding decrease in expenses during
the first and fourth quarters, we will likely experience lower profit margins
and even losses during these periods. In addition, because our operating
results depend significantly on sales during the second and third calendar
quarters, our results of operations during these periods may fluctuate
significantly if the weather is unusually cool or rainy.

-26-



---



##### Table of Contents



The results of our operations may be adversely affected by weather.

Cold or rainy weather can decrease sales, while extremely hot weather may
increase our expenses, each resulting in a negative impact on our operating
results and cash flow. Ice consumers demand ice for a variety of reasons, but
many of them buy ice in connection with outdoor-related activities, both
commercial and recreational. As a result, demand for ice increases in hotter,
sunnier weather, and conversely, demand decreases in colder, wetter weather.
During extended periods of extremely cold and rainy weather on a national
basis, our revenues and resulting profits may substantially decline. In
addition, extremely hot weather does not necessarily result in greater profits.
During extended periods of extremely hot weather, our profits and cash flow
may decline because of an increase in expenses in response to excess demand.
We may have to transport ice from one plant to another, and in some cases,
purchase ice from third party sources and transport it to a specific market to
meet this excess demand.

The market value of our common stock could be further adversely affected
if we continue to report operating losses.

Since our company was formed in 1990, we have reported substantial net
losses. This has been primarily due to the following:



| |  | interest expenses primarily associated with our historically high levels of debt;                                                                                                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | substantial depreciation of property and equipment;                                                                                                                                                                                                               
| 
| |  | substantial amortization of goodwill and other intangible assets primarily associated with our acquisitions and market
expansion and an impairment charge of $73.2 million that was
recognized in connection with the adoption of SFAS No. 142 on
January 1, 2002;
| 
| |  | other asset impairment charges.                                                                                                                                                                                                                                   

As of December 31, 2002, we had an accumulated deficit of $149.7 million
and total shareholders deficit of $37.1 million. We cannot guarantee that we
will be profitable in the future.

Increases in the prices of electricity, certain raw materials, insurance
and other required expenses could have an adverse effect on our results of
operations.

We use substantial amounts of electricity in connection with our
manufacturing process. In 1999, we entered into a supply and management
agreement with a third party to fix our electric costs at rates that were
generally lower than market rates. On December 2, 2001, the third party filed
for bankruptcy under Chapter 11 of the United States Bankruptcy Code, thereby
breaching its agreement with us. Since that time, we have been paying market
rates for electricity that are higher than those under the supply agreement.
The impact of this event was $1.7 million in extra electricity charges in 2002.
Further increases in market rates could potentially have an adverse impact on
our operations.

Our business is sensitive to increases in the cost of fuel to operate the
refrigerated trucks we use to deliver ice and to increases in the cost of
polyethylene, which in turn increases the cost of our bags. Additionally, our
business is also sensitive to increase in insurance costs, which includes
general liability, workers compensation, health and vehicle insurance. We have
already experienced increases in fuel costs, bag costs and insurance and expect
additional increases in 2003. If the prices for these items and other required
expenses should increase significantly, we

-27-



---



##### Table of Contents



will experience increased costs that we may not be able to pass along to
our customers. There can be no assurance that significant changes in the prices
of plastic bags, water, fuel, insurance or other commodities would not have a
material adverse effect on our business, results of operations and cash flow.

We may be exposed to significant environmental liabilities.

Our ice manufacturing and storage operations could create conditions that
might result in environmental accidents, and cause us to be named as defendants
in lawsuits. We currently carry liability insurance that we believe is
adequate to cover our losses in these situations. However, this insurance may
be insufficient to pay for all or a large part of these losses. If our
insurance failed to cover these losses, our profits and our cash flow would
decrease.

We may not have the ability to repurchase the 9 3/4% senior notes in the
event of a change of control.

As of March 11, 2003, the majority of our debt consisted of $255 million
of 9 3/4% senior notes. If there is a change of control of Packaged Ice, such
as a merger or sale by us of all or substantially all of our assets, the
holders of the 9 3/4% senior notes have the right to require us to purchase
the outstanding 9 3/4% senior notes at 101% of the principal amount of the
notes plus any accrued and unpaid interest. We may not have the ability to
raise the funds necessary to finance the repurchase of the 9 3/4% senior notes
if the holders require such a repurchase. This could result in a default under
other debt agreements, including our credit facility.

Changes in government laws and regulations and could have an adverse
effect on our results of operations.

Like any food company, we are subject to various local, state and federal
laws relating to many aspects of our business, including labeling, sanitation,
health and safety, and manufacturing processes. We cannot predict the types of
government regulations that may be enacted in the future by the various levels
of government or how existing or future laws or regulations will be interpreted
or enforced. The enactment of more stringent laws or regulations or a stricter
interpretation of existing laws and regulations may require additional
expenditures by us, some of which could be material.

Accidents involving our products and equipment could expose us to claims
for damages.

We are subject to a risk of product liability claims and adverse publicity
if a consumer is allegedly harmed while using our products or equipment. Any
such claim may result in negative publicity, loss of revenues, or higher costs
associated with litigation against Packaged Ice or being named as a defendant
in lawsuits asserting large claims.

We currently carry product liability insurance that we believe is adequate
to cover our losses in these situations. However, this insurance may be
insufficient to pay for all or a large part of these losses. If our insurance
does not pay for these losses, our results of operations and cash flow would
decrease.

Our limited patent protection may not prevent competitors from using our
proprietary bagging device or developing a similar machine, which could reduce
our competitive advantage.

-28-



---



##### Table of Contents



Other than patents that we own or licenses we have on the Ice Factory, we
currently do not have patents on any of our products. We believe the patents
on the bagging device are important to the Ice Factory as a whole, but there
can be no assurance that any issued patent will provide us with a meaningful
competitive advantage. It is also our practice to protect certain of our
proprietary materials and processes by relying on trade secrets laws and
non-disclosure and confidentiality agreements. There can be no assurance that
confidentiality or trade secrets will be maintained or that others will not
independently develop or obtain access to such materials or processes.

We now have a competitor in the Ice Factory market, which could take some
of our customers business.

As the sole major company using an on-site ice production and delivery
system, we had a distinct competitive advantage because the Ice Factory is
preferred to traditional ice delivery by many of our high volume customers and
the Ice Factory sector of our business gives us more flexibility during peak
seasons than our competitors. In 2001, a competitor began testing a similar
machine in certain of its markets. If our competitor or any new competitors
are successful with the rollout of a competing system, it is possible that we
may lose business we have gained and business we would gain as a result of the
Ice Factory, which will result in decreased cash flows and results of
operations.

Acquisitions may result in the recording of goodwill and other intangibles
assets, and may have a negative impact on our results of operations.

If we begin acquiring other businesses again as part of our strategy, such
acquisitions could result in the recording of goodwill and other intangibles
assets. Goodwill and other intangible assets represented 43.2% of our total
assets and exceeded shareholders deficit by $187.4 million as of December 31,
2002. Accounting principles generally accepted in the United States of America
require that acquisitions initiated after June 30, 2001 be accounted for under
the purchase method of accounting. Any resulting goodwill will remain on the
balance sheet and not be amortized. Furthermore, the amortization of goodwill
created by acquisitions prior to June 30, 2001 ceased on December 31, 2001. We
are required to test these assets on an annual basis or whenever there is
reason to suspect that their values have been diminished or impaired and
write-downs may be necessary, which would increase our losses. The adoption of
this accounting principle on January 1, 2002 resulted in an initial impairment
charge of $73.2 million. The required annual test resulted in an additional
impairment charge of $4.1 million in the fourth quarter of 2002.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks

Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.

On November 28, 2000, we entered into an interest rate collar agreement
(the Collar Agreement). The Collar Agreement has a notional amount of $50
million and a term of 4 years. If the Index Rate (30-day LIBOR, as defined in
the Collar Agreement) exceeds 7.75%, we will receive the difference between the
Index Rate and 7.75%. If the Index Rate falls below 5.75%, we will pay the
difference plus 1%. If we had been required to settle the Collar Agreement as
of December 31, 2002, we would have had to pay $4.9 million.

-29-



---



##### Table of Contents



We are exposed to some market risk due to the floating interest rates
under our credit facility. Principal balances outstanding under the line of
credit bear interest, at our option, at the London Inter-Bank Offered Rate
(LIBOR) plus 3.5% or the prime rate (as announced from time to time by JP
Morgan Chase Bank) plus 1.5%. The term loan bears interest, at our option, at
LIBOR plus 4% or the prime rate plus 2%, with a minimum of 9.5%.

As of December 31, 2002, the credit facility had an outstanding principal
balance of $50.0 million at a weighted average interest rate of 9.5% per annum.
Due to our interest rate collar agreement and the fact that the term loan has
a minimum interest rate of 9.5%, the effect of a change in interest rates on
our interest expense depends on the level of LIBOR rates. At December 31,
2002, the 30-day LIBOR rate was 1.38%.

The following table shows the approximate annual increase (decrease) in
interest expense given the current principal balances on all of our debt if
LIBOR were to increase by 1% from the initial levels indicated below:

|                                                |  |                 |   |               |  |                |      |  
|----------------------------------------------- |  | --------------- | - | ------------- |  | -------------- | ---- | -
|                                                |  | Increase in the |   | Estimated    
|Initial LIBOR Rate                              |  | LIBOR rate      |   | Annual Impact
|                                                |  |                 |   |              
|                                                |  |                 |   |               |  | (in thousands)
|Less than or equal to 4.5%                      |  |                 | 1 | %             |  | $              | (500 | )
|Greater than 4.5%, less than
or equal to 5.5%   |  |                 | 1 | %             |  | $              | (62  | )
|Greater than 5.5%, less than
or equal to 5.75%  |  |                 | 1 | %             |  | $              | 438  |  
|Greater than 5.75%, less than
or equal to 7.75% |  |                 | 1 | %             |  | $              | 250  |  
|Greater than 7.75%                              |  |                 | 1 | %             |  | $              | 0    |  




ITEM 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required hereunder are
included in this report as set forth in Item 15(a) hereof and are incorporated
herein by reference.
















ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

-30-



---



##### Table of Contents






PART III

The information required by Item 10, Director and Executive Officers of
the Registrant, Item 11, Executive Compensation, Item 12, Security
Ownership of Certain Beneficial Owners and Item 13, Certain Relationships and
Related Transactions, of Part III is incorporated by reference to the
information set forth in our definitive proxy statement for the 2003 Annual
Meeting of the Shareholders, which is expected to be filed within 120 days of
our fiscal year end.




ITEM 14. Controls and Procedures

Quarterly evaluation of the companys Disclosure Controls and Internal
Controls.Within the 90 days prior to the date of this Annual Report on Form
10-K, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (Disclosure Controls), and our internal
controls and procedures for financial reporting (Internal Controls). This
evaluation (the Controls Evaluation) was done under the supervision and with
the participation of management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO). Rules adopted by the Securities &
Exchange Commission (SEC) require that in this section of the Annual Report
we present the conclusions of the CEO and the CFO about the effectiveness of
our Disclosure Controls and Internal Controls based on and as of the date of
the Controls Evaluation.

CEO and CFO Certifications.Appearing immediately following the
Signatures section of this Annual Report there are two separate forms of
Certifications of the CEO and the CFO. The first form of Certification is
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Annual Report which you are
currently reading is the information concerning the Controls Evaluation
referred to in the Section 302 Certifications and this information should be
read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.

Disclosure Controls and Internal Controls.Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (the Exchange Act), such as this Annual Report, is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. Disclosure Controls are also designed with the
objective of ensuring that such information is accumulated and communicated to
our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that
(1) our transactions are properly authorized; (2) our assets are safeguarded
against unauthorized or improper use; and (3) our transactions are properly
recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.

Limitations on the Effectiveness of Controls.The companys management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all controls issues
and instances of fraud, if any, within the company have been detected. These

-31-



---



##### Table of Contents



inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

Scope of the Controls Evaluation.The CEO/CFO evaluation of our
Disclosure Controls and our Internal Controls included a review of the
controls objectives and design, the controls implementation by the company
and the effect of the controls on the information generated for use in this
Annual Report. In the course of the Controls Evaluation, we sought to identify
data errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our Quarterly Reports on
Form 10-Q and Annual Report on Form 10-K. The overall goals of these various
evaluations activities are to monitor our Disclosure Controls and our Internal
Controls and to make modifications as necessary. Among other matters, we
sought in our evaluation to determine whether there were any significant
deficiencies or material weaknesses in the companys Internal Controls, or
whether the company had identified any acts of fraud involving personnel who
have a significant role in the companys Internal Controls. This information
was important both for the Controls Evaluation generally and because items 5
and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO
and CFO disclose that information to our Board of Directors Audit Committee
and to our independent auditors and to report on related matters in this
section of the Annual Report. In the professional auditing literature,
significant deficiencies are referred to as reportable conditions; these
are control issues that could have a significant adverse effect on the ability
to record, process, summarize and report financial data in the financial
statements. A material weakness is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to deal
with other controls matters in the Controls evaluation, and in each case if a
problem was identified, we considered what revision, improvement and/or
correction to make in accordance with our on-going procedures.

In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Annual Report, there have been
no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Conclusions.Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to Packaged Ice,
Inc. and its consolidated subsidiaries is made known to management, including
the CEO and CFO, particularly during the period when our periodic reports are
being prepared, and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly presented in
conformity with generally accepted accounting principles.

-32-



---



##### Table of Contents






ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K



|(a) |  | The following documents are filed as part of this Annual Report or are
incorporated by reference:                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|1.  |  | Financial Statements                                                                                                                                                                                                                     
|   
|    |  | As to financial statements and supplementary information, reference is
made to INDEPENDENT AUDITORS REPORT on Page F-1 of this Annual Report.                                                                                         
|   
|2.  |  | Financial Statement Schedules                                                                                                                                                                                                            
|   
|    |  | None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included in
the consolidated financial statements or notes thereto included elsewhere
in this Annual Report.
|   
|3.  |  | Exhibits                                                                                                                                                                                                                                 

|            |  |                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                       
|2.1         |  | Stock Purchase Agreement between Packaged Ice, Inc. and Suiza Foods
Corporation dated March 27, 1998. (Exhibit 2.1)(5)                                                                                                                                                                
|2.2         |  | Stock Purchase Agreement between Packaged Ice, Inc., WLR Foods,
Inc. and Cassco Ice & Cold Storage, Inc. dated July 31, 1998. (Exhibit
2.1)(7)                                                                                                                                        
|3.1         |  | Restated Articles of Incorporation of Packaged Ice filed with the
Secretary of State of the State of Texas on February 5, 1992. (Exhibit
3.2)(1)                                                                                                                                      
|3.2         |  | Articles of Amendment to the Restated Articles of Incorporation of
Packaged Ice filed with the Secretary of State of the State of Texas on
August 11, 1998. (Exhibit 3.2) (6)                                                                                                         
|3.3         |  | Amended and Restated Bylaws of Packaged Ice, effective as of
January 20, 1997. (Exhibit 3.5)(1)                                                                                                                                                                                       
|4.1         |  | Amended and Restated Certificate of Designation of 10% Exchangeable
Preferred Stock. (Exhibit 4.12)(5)                                                                                                                                                                                
|4.2         |  | Indenture by and among Packaged Ice, as Issuer, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A. as Trustee dated as of
January 28, 1998, Amended and Restated as of April 30, 1998. (Exhibit
4.1)(5)                                                                  
|4.3         |  | Common Stock Purchase Warrant, dated July 17, 1997, executed by
Packaged Ice for the benefit of SV Capital Partners LP. (Exhibit
10.39)(2)                                                                                                                                            
|4.4         |  | Registration Rights Agreement by and between Packaged Ice and
Silver Brands Partners, L.P. (formerly SV), dated February 3, 1999.
(Exhibit 4.7)(9)                                                                                                                                    
|4.5         |  | Warrant Agreement among Packaged Ice and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent, dated as
of April 17, 1997. (Exhibit 10.12)(1)                                                                                                          
|4.6         |  | Warrant Agreement among Packaged Ice and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent, dated as
of October 16, 1997. (Exhibit 10.7)(3)                                                                                                         
|4.7         |  | Common Stock Purchase Warrant Agreement issued by Packaged Ice and
issued to Culligan Water Technologies, Inc. issuing 1,807,692 fully
paid and nonassessable shares of Packaged Ices common stock at an
exercise price of $13.00 per share dated December 2, 1997. (Exhibit
10.3)(4)

-33-



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                       
|4.8         |  | Registration Rights Agreement by and among Packaged Ice, Culligan
Water Technologies, Inc. and Erica Jesselson. (Exhibit 10.5)(4)                                                                                                                                                     
|4.9         |  | Rights Agreement dated as of October 29, 1999, between the Company
and American Stock Transfer & Trust Company as Rights Agent. (Exhibit
1)(11)                                                                                                                                       
|4.10        |  | First Amendment to the Warrant Agreement, dated April 24, 2001,
between the Company and U.S. Trust Company of Texas, N.A. amending the
Warrant Agreement dated October 16, 1997. (Exhibit 4.1)(13)                                                                                    
|10.1        |  | Packaged Ice, Inc. 2000 Employee Stock Purchase Plan. (Exhibit 10.2)(10)                                                                                                                                                                                                              
|10.2        |  | 1994 Stock Option Plan, dated July 26, 1994. (Exhibit 10.10)(1)                                                                                                                                                                                                                       
|10.3        |  | 1998 Stock Option Plan, dated June 19, 1998. (Exhibit 10.34)(8)                                                                                                                                                                                                                       
|10.4        |  | 2001 Stock Option Plan, dated May 9, 2001. (Exhibit B)(12)                                                                                                                                                                                                                            
|10.5        |  | Form of Indemnification Agreement entered into by Packaged Ice in
favor of members of the Board of Directors. (Exhibit 10.31)(1)                                                                                                                                                      
|10.6        |  | Development and Manufacturing Agreement by and between Lancer
Corporation and Packaged Ice, dated April 13, 1993. (Exhibit 10.32)(1)                                                                                                                                                  
|10.7        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of William P. Brick and Jimmy C. Weaver, individually). (Exhibit
10.1)(13)                                                                          
|10.8        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of Graham D. Davis, Steven J. Janusek and Ben D. Key, individually).
(Exhibit 10.2)(13)                                                             
|10.9        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of Thomas L. Dann, Michael P. Busch, Billy W. Daniel, Joseph A.
Geloso, William A. Newberry and Neil D. Showalter, individually).
(Exhibit 10.3)(13)
|10.10       |  | Severance Agreement between the Company and James F. Stuart, dated
April 19, 2001. (Exhibit 10.5)(13)                                                                                                                                                                                 
|10.11       |  | Severance Agreement between the Company and Leonard A. Bedell,
dated June 1, 2001. (Exhibit 10.6)(13)                                                                                                                                                                                 
|10.12       |  | Agreement between the Company and A.J. Lewis III, dated June 19,
2001. (Exhibit 10.7)(13)                                                                                                                                                                                             
|10.13       |  | The Second Amended and Restated Credit Agreement dated as of
December 27, 2001 by and among Packaged Ice, Inc., as Borrower, the
Lenders from Time to Time Party Hereto, and Ableco Finance LLC, as
Collateral Agent and Administrative Agent. (Exhibit 4.1)(14)                      
|10.14       |  | Amended and Restated Subsidiary Guaranty dated as of December 27,
2001. (Exhibit 10.20)(15)                                                                                                                                                                                           
|10.15       |  | First Amendment to Second Amended and Restated Credit Agreement
dated as of January 30, 2002. (Exhibit 10.21)(15)                                                                                                                                                                     
|10.16       |  | Second Amendment to Second Amended and Restated Credit Agreement
dated as of February 19, 2002. (Exhibit 10.22) (15)                                                                                                                                                                  
|10.17      |  | Third Amendment to Second Amended and Restated Credit Agreement dated
as of March 4, 2003.                                                                                                                                                                                            
|10.18       |  | 2002 Senior Executive Restricted Stock Plan. (Exhibit 10.1)(16)                                                                                                                                                                                                                       
|10.19      |  | Form of First Amendment to Indemnification Agreement entered into by
Packaged Ice in favor of the Board of Directors.                                                                                                                                                                 
|21.1       |  | List of subsidiaries.                                                                                                                                                                                                                                                                 
|23.1       |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                     
|99.1       |  | William P. Brick Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              

-34-



---



##### Table of Contents



|            |  |                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                              
|            |  |                                                                                                                                          
|99.2       |  | Steven J. Janusek Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



|    
|----
|   
|    
|(1) 
|    
|(2) 
|    
|(3) 
|    
|(4) 
|    
|(5) 
|    
|(6) 
|    
|(7) 
|    
|(8) 
|    
|(9) 
|    
|(10)
|    
|(11)
|    
|(12)
|    
|(13)
|    
|(14)
|    
|(15)
|    
|(16)



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

Packaged Ice, Inc. filed a report on Form 8-K with the Securities &
Exchange Commission on January 21, 2003, which announced the appointment of
Credit Suisse First Boston of New York to assist the Company in evaluating
financial and strategic alternatives.

-35-



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.

|               |  |                                       
|-------------- |  | --------------------------------------
|               |  | PACKAGED ICE, INC                     
|               |  |                                       
|March 19, 2003 |  | /s/ STEVEN J. JANUSEK                 
|               |  |                                       
|               |  | Steven J. Janusek                     
|               |  | Chief Financial and Accounting Officer

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

|                                           |  |                                                   |  |               
|------------------------------------------ |  | ------------------------------------------------- |  | --------------
|Name                                       |  | Title                                             |  | Date          
|                                           |  |                                                   |  |               
|/s/  WILLIAM P. BRICKWilliam P. Brick      |  | Chairman of the Board and
Chief Executive Officer |  | March 19, 2003
|                                          
|/s/  JIMMY C. WEAVERJimmy C. Weaver        |  | President, Chief Operating
Officer and Director   |  | March 19, 2003
|                                          
|/s/  RICHARD A. COONRODRichard A. Coonrod  |  | Director                                          |  | March 19, 2003
|                                          
|/s/  A. J. LEWIS IIIA. J. Lewis III        |  | Director                                          |  | March 19, 2003
|                                          
|/s/  ROBERT G. MILLERRobert G. Miller      |  | Director                                          |  | March 19, 2003
|                                          
|/s/  TRACY L. NOLLTracy L. Noll            |  | Director                                          |  | March 19, 2003
|                                          
|/s/ STEVEN P. ROSENBERGSteven P. Rosenberg |  | Director                                          |  | March 19, 2003

-36-



---



##### Table of Contents






CERTIFICATION UNDER THE EXCHANGE ACT RULES

I, William P. Brick, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Packaged Ice, Inc.;                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 19, 2003

|                                         
|-----------------------------------------
|/s/ WILLIAM P. BRICK                     
|                                         
|William P. Brick, Chief Executive Officer

-37-



---



##### Table of Contents



CERTIFICATION UNDER THE EXCHANGE ACT RULES

I, Steven J. Janusek, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Packaged Ice, Inc.;                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 19, 2003

|                                          
|------------------------------------------
|/s/ STEVEN J. JANUSEK                     
|                                          
|Steven J. Janusek, Chief Financial Officer

-38-



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Shareholders of Packaged Ice, Inc.:

We have audited the accompanying consolidated balance sheets of Packaged
Ice, Inc. and its subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2002. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for its interest rate swap agreement
effective January 1, 2001, to conform with Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, and on January 1, 2002, the Company changed its method
of accounting for goodwill and other intangible assets to conform with
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

/s/ Deloitte & Touche LLP
Houston, Texas
February 26, 2003

F-1



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS

|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |         |        |        |        | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------- | ------ | -------------- | ------- | ------- | ------ | ------ | ------ | 
|                                               |  |                                                                                                                                                                                       |                                      |                           |        | December 31,  
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |               
|                                               |  |                                                                                                                                                                                       |                                      |                           |        | 2002           |         | 2001   
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  |                                                                                                                                                                                       |                                      |                           |        | (in thousands)
|CURRENT ASSETS:                                |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  | Cash and cash equivalents                                                                                                                                                             | $                                    | 6,500                     |        |                | $       | 10,213  |       
|                                               |  | Restricted cash                                                                                                                                                                       |                                     |                           |        |                | 6,700   |        
|                                               |  | Accounts receivable, net                                                                                                                                                              | 15,025                               |                           |        |                | 20,358  |        
|                                               |  | Inventories                                                                                                                                                                           | 7,244                                |                           |        |                | 7,691   |        
|                                               |  | Prepaid expenses                                                                                                                                                                      | 2,285                                |                           |        |                | 1,756   |        
|                                               |  | Assets held for sale                                                                                                                                                                  | 1,450                                |                           |        |                |        |        
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  | Total current assets                                                                                                                                                                  |                                      |                           | 32,504 |                |         |         | 46,718 |       
|PROPERTY AND EQUIPMENT, net                    |  |                                                                                                                                                                                       | 164,842                              |                           |        |                | 181,977 |        
|GOODWILL AND OTHER INTANGIBLES, net            |  |                                                                                                                                                                                       | 150,217                              |                           |        |                | 232,079 |        
|OTHER ASSETS                                   |  |                                                                                                                                                                                       | 10                                   |                           |        |                | 10      |        
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|TOTAL                                          |  | $                                                                                                                                                                                     | 347,573                              |                           |        | $              | 460,784 |        
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|CURRENT LIABILITIES:                           |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  | Current portion of long-term obligations                                                                                                                                              |                                      | $                         | 67     |                |         | $       | 188    |       
|                                               |  | Line of credit                                                                                                                                                                        |                                      |                           |       |                |         |         | 12,305 |       
|                                               |  | Accounts payable                                                                                                                                                                      |                                      |                           | 10,032 |                |         |         | 13,403 |       
|                                               |  | Accrued expenses                                                                                                                                                                      |                                      |                           | 28,484 |                |         |         | 25,056 |       
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  |                                                                                                                                                                                       |                                      | Total current liabilities |        |                | 38,583  |         |        |        | 50,952 | 
|LONG-TERM OBLIGATIONS                          |  |                                                                                                                                                                                       | 305,147                              |                           |        |                | 320,174 |        
|COMMITMENTS AND CONTINGENCIES (Note 13)        |  |                                                                                                                                                                                       |                                     |                           |        |                |        |        
|MANDATORILY REDEEMABLE PREFERRED STOCK:        |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  | 10% Exchangeable  403,181 shares issued and outstanding at
December 31, 2002 and 365,697 shares issued and outstanding at
December 31, 2001 liquidation preference of $100 per share |                                      |                           | 40,992 |                |         |         | 37,181 |       
|SHAREHOLDERS EQUITY (DEFICIT):                |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  | Common stock, $0.01 par value, 50,000,000 shares authorized; 20,655,535 shares
issued at December 31, 2002 and 20,438,568 shares issued at December 31, 2001                          |                                      |                           | 207    |                |         |         | 204    |       
|                                               |  | Additional paid-in capital                                                                                                                                                            |                                      | 115,356                   |        |                |         | 118,910 |       
|                                               |  | Less: 298,231 shares of treasury stock, at cost                                                                                                                                       |                                      | (1,491                    | )      |                |         | (1,491  | )     
|                                               |  | Unearned compensation                                                                                                                                                                 |                                      | (244                      | )      |                |         |        |       
|                                               |  | Accumulated deficit                                                                                                                                                                   |                                      | (149,672                  | )      |                |         | (64,884 | )     
|                                               |  | Accumulated other comprehensive loss                                                                                                                                                  |                                      | (1,305                    | )      |                |         | (262    | )     
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|                                               |  |                                                                                                                                                                                       | Total shareholders equity (deficit) |                           |        | (37,149        | )       |         |        | 52,477 |       
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        
|TOTAL                                          |  | $                                                                                                                                                                                     | 347,573                              |                           |        | $              | 460,784 |        
|                                               |  |                                                                                                                                                                                       |                                      |                           |        |                |         |        

See notes to consolidated financial statements.

F-2



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |       |   | 
|------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ---------------------------------------- | ----- | ---- | ------- | ----- | - | - | ------- | ----- | - | 
|                                                                    |                                                                                                      |                                                     |         | Year Ended December 31,                 
|                                                                    |                                                                                                      |                                                     |         |                                         
|                                                                    |                                                                                                      |                                                     |         | 2002                                     |       | 2001 |         | 2000 
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |      
|                                                                    |                                                                                                      |                                                     |         | (in thousands, except per share amounts)
|Revenues                                                            |                                                                                                      | $                                                   | 235,660 |                                          |       | $    | 244,247 |       |   | $ | 244,044 |      
|Cost of sales                                                       |                                                                                                      |                                                     | 144,852 |                                          |       |      | 156,434 |       |   |   | 149,889 |      
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Gross profit                                                        |                                                                                                      |                                                     | 90,808  |                                          |       |      | 87,813  |       |   |   | 94,155  |      
|Operating expenses                                                  |                                                                                                      |                                                     | 33,739  |                                          |       |      | 37,372  |       |   |   | 37,139  |      
|Depreciation and amortization expense                               |                                                                                                      |                                                     | 24,704  |                                          |       |      | 33,816  |       |   |   | 28,631  |      
|Loss (gain) on disposition of assets                                |                                                                                                      |                                                     | 4,345   |                                          |       |      | (49     | )     |   |   |        |      
|Impairment of assets                                                |                                                                                                      |                                                     | 7,363   |                                          |       |      |        |       |   |   |        |      
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Income from operations                                              |                                                                                                      |                                                     | 20,657  |                                          |       |      | 16,674  |       |   |   | 28,385  |      
|Other income, net                                                   |                                                                                                      |                                                     | 161     |                                          |       |      | 19      |       |   |   | 17      |      
|Gain on extinguishment of debt                                      |                                                                                                      |                                                     | 2,494   |                                          |       |      |        |       |   |   |        |      
|Interest expense                                                    |                                                                                                      |                                                     | (34,870 | )                                        |       |      | (36,686 | )     |   |   | (32,470 | )    
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Loss before income taxes                                            |                                                                                                      |                                                     | (11,558 | )                                        |       |      | (19,993 | )     |   |   | (4,068  | )    
|Income taxes                                                        |                                                                                                      |                                                     |        |                                          |       |      |        |       |   |   |        |      
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Net loss before cumulative effect of change in
accounting principle |                                                                                                      |                                                     | (11,558 | )                                        |       |      | (19,993 | )     |   |   | (4,068  | )    
|Cumulative effect of change in accounting principle                 |                                                                                                      |                                                     | (73,230 | )                                        |       |      |        |       |   |   |        |      
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Net loss before preferred dividends                                 |                                                                                                      |                                                     | (84,788 | )                                        |       |      | (19,993 | )     |   |   | (4,068  | )    
|Preferred dividends                                                 |                                                                                                      |                                                     | (3,810  | )                                        |       |      | (3,458  | )     |   |   | (3,134  | )    
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Net loss available to common shareholders                           |                                                                                                      | $                                                   | (88,598 | )                                        |       | $    | (23,451 | )     |   | $ | (7,202  | )    
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Basic and diluted net loss per share of common stock:               |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|                                                                    | Net loss available to common shareholders before
cumulative effect of change in accounting principle |                                                     | $       | (0.76                                    | )     |      | $       | (1.19 | ) |   | $       | (0.37 | )
|                                                                    |                                                                                                      | Cumulative effect of change in accounting principle |         |                                          | (3.64 | )    |         |       |  |   |         |       |  | 
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|                                                                    | Net loss available to common shareholders                                                            |                                                     | $       | (4.40                                    | )     |      | $       | (1.19 | ) |   | $       | (0.37 | )
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      
|Basic and diluted weighted average common shares outstanding        |                                                                                                      |                                                     | 20,157  |                                          |       |      | 19,756  |       |   |   | 19,340  |      
|                                                                    |                                                                                                      |                                                     |         |                                          |       |      |         |       |   |   |         |      

See notes to consolidated financial statements.

F-3



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
SHAREHOLDERS EQUITY (DEFICIT)

|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------- | ------ | ----- |  | ------- | --- | ---------- |  | ------------ | ------- | ----------- |  | ------------- | ------ | ----- |  | - | ---- | ----------- |  | ----- | -------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                  |  | Common Stock   |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |  
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      | Accumulated |  |       |          |   |  |   |        |  
|                                                                                  |  | Number         |        |       |  |         |     | Additional |  |              |         |             |  |               |        |       |  |   |      |             |  | Other |          |   |  |   |        |   |  |  
|                                                                                  |  | of             |        | Par   |  | Paid-In |     | Treasury   |  | Unearned     |         | Accumulated |  | Comprehensive |        |       |  |  
|                                                                                  |  | Shares         |        | Value |  | Capital |     | Stock      |  | Compensation |         | Deficit     |  | Loss          |        | Total
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |      
|                                                                                  |  | (in thousands)
|Balance at December 31, 1999                                                      |  |                | 19,607 |       |  | $       | 196 |            |  | $            | 124,487 |             |  | $             | (1,491 | )     |  | $ |     |             |  | $     | (40,823  | ) |  | $ |       |   |  | $ | 82,369  |  
|Issuance of common stock in
connection with the 2000
Employee Stock Purchase
Plan |  |                | 67     |       |  |         | 1   |            |  |              | 202     |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | 203     |  
|Conversion of warrants                                                            |  |                | 18     |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   |        |  
|Redemption of Series C
preferred stock                                            |  |                |       |       |  |         |    |            |  |              | (1      | )           |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (1      | )
|Dividends accumulated on 10%
exchangeable preferred stock                         |  |                |       |       |  |         |    |            |  |              | (3,134  | )           |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (3,134  | )
|Net loss                                                                          |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       | (4,068   | ) |  |   |       |   |  |   | (4,068  | )
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2000                                                      |  |                | 19,692 |       |  |         | 197 |            |  |              | 121,554 |             |  |               | (1,491 | )     |  |   |     |             |  |       | (44,891  | ) |  |   |       |   |  |   | 75,369  |  
|Issuance of common stock in
connection with the 2000
Employee Stock Purchase
Plan |  |                | 416    |       |  |         | 4   |            |  |              | 582     |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | 586     |  
|Conversion of warrants                                                            |  |                | 231    |       |  |         | 2   |            |  |              | (2      | )           |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   |        |  
|Exercise of employee stock
options                                                |  |                | 100    |       |  |         | 1   |            |  |              | 159     |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | 160     |  
|Dividends accumulated on 10%
exchangeable preferred stock                         |  |                |       |       |  |         |    |            |  |              | (3,458  | )           |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (3,458  | )
|Fair value of employee stock
options vested                                       |  |                |       |       |  |         |    |            |  |              | 75      |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | 75      |  
|Comprehensive loss:                                                               |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Net loss                                                                          |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       | (19,993  | ) |  |   |       |   |  |   | (19,993 | )
|Initial recognition of derivative
liability                                       |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   | (1,653 | ) |  |   | (1,653  | )
|Change in fair value of
derivative                                                |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   | (2,246 | ) |  |   | (2,246  | )
|Realized loss on interest rate
swap                                               |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   | 3,637  |   |  |   | 3,637   |  
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Total comprehensive loss                                                          |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (20,255 | )
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                                                      |  |                | 20,439 |       |  |         | 204 |            |  |              | 118,910 |             |  |               | (1,491 | )     |  |   |     |             |  |       | (64,884  | ) |  |   | (262   | ) |  |   | 52,477  |  
|Issuance of common stock
in connection with the
2000 Employee Stock
Purchase Plan |  |                | 17     |       |  |         | 1   |            |  |              | 14      |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | 15      |  
|Dividends accumulated on
10% exchangeable
preferred stock                         |  |                |       |       |  |         |    |            |  |              | (3,810  | )           |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (3,810  | )
|Grant of restricted stock                                                         |  |                | 200    |       |  |         | 2   |            |  |              | 242     |             |  |               |       |       |  |   | (244 | )           |  |       |         |   |  |   |       |   |  |   |        |  
|Comprehensive loss:                                                               |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Net loss                                                                          |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       | (84,788  | ) |  |   |       |   |  |   | (84,788 | )
|Change in fair value of
derivative liability                                      |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   | (1,043 | ) |  |   | (1,043  | )
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Total comprehensive loss                                                          |  |                |       |       |  |         |    |            |  |              |        |             |  |               |       |       |  |   |     |             |  |       |         |   |  |   |       |   |  |   | (85,831 | )
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                                      |  |                | 20,656 |       |  | $       | 207 |            |  | $            | 115,356 |             |  | $             | (1,491 | )     |  | $ | (244 | )           |  | $     | (149,672 | ) |  | $ | (1,305 | ) |  | $ | (37,149 | )
|                                                                                  |  |                |        |       |  |         |     |            |  |              |         |             |  |               |        |       |  |   |      |             |  |       |          |   |  |   |        |   |  |   |         |  

See notes to condensed consolidated financial statements.

F-4



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |         |         |        |        |  
|--------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------- | ------- | ----------------------- | ------ | -------- | ------- | -------------- | ------ | ------- | ------- | ------ | ------ | -
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         | Year Ended December 31,
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         | 2002                    |        | 2001     |         | 2000          
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |               
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         | (in thousands) |        |         |         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                 |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Net loss                                                                        |                                                     | $                                                     | (84,788 | )                       |        | $        | (19,993 | )              |        | $       | (4,068  | )     
|                                                                      |                                              | Adjustments to reconcile net loss to net cash provided by operating
activities: |                                                     |                                                       |         |                         |        |          |         |                |        |         |         |       
|                                                                      |                                              |                                                                                 | Depreciation and amortization                       |                                                       |         | 24,704                  |        |          |         | 33,816         |        |         |         | 28,631 |       
|                                                                      |                                              |                                                                                 | Amortization of debt discount, net                  |                                                       |         | 39                      |        |          |         | 40             |        |         |         | 40     |       
|                                                                      |                                              |                                                                                 | Loss (gain) on disposition of assets                |                                                       |         | 4,345                   |        |          |         | (49            | )      |         |         |       |       
|                                                                      |                                              |                                                                                 | Cumulative effect of change in accounting principle |                                                       |         | 73,230                  |        |          |         |               |        |         |         |       |       
|                                                                      |                                              |                                                                                 | Impairment of assets                                |                                                       |         | 7,363                   |        |          |         |               |        |         |         |       |       
|                                                                      |                                              |                                                                                 | Gain on extinguishment of debt                      |                                                       |         | (2,494                  | )      |          |         |               |        |         |         |       |       
|                                                                      |                                              |                                                                                 | Fair value of employee stock options vested         |                                                       |         |                        |        |          |         | 75             |        |         |         |       |       
|                                                                      |                                              |                                                                                 | Realized loss on interest rate swap                 |                                                       |         |                        |        |          |         | 3,637          |        |         |         |       |       
|                                                                      |                                              |                                                                                 | Change in assets and liabilities:                   |                                                       |         |                         |        |          |         |                |        |         |         |        |       
|                                                                      |                                              |                                                                                 |                                                     | Restricted cash                                       |         |                         | 6,700  |          |         |                | (6,700 | )       |         |        |       |  
|                                                                      |                                              |                                                                                 |                                                     | Accounts receivable, inventories and prepaid expenses |         |                         | 5,110  |          |         |                | 4,057  |         |         |        | (4,564 | )
|                                                                      |                                              |                                                                                 |                                                     | Accounts payable, accrued expenses and other          |         |                         | (1,519 | )        |         |                | 4,270  |         |         |        | (937   | )
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Net cash provided by operating activities                                       |                                                     |                                                       | 32,690  |                         |        |          | 19,153  |                |        |         | 19,102  |       
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                 |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Property and equipment additions                                                |                                                     |                                                       | (14,403 | )                       |        |          | (16,510 | )              |        |         | (23,165 | )     
|                                                                      |                                              | Proceeds from disposition of property and equipment                             |                                                     |                                                       | 3,378   |                         |        |          | 10,968  |                |        |         | 1,967   |       
|                                                                      |                                              | Cost of acquisitions                                                            |                                                     |                                                       |        |                         |        |          | (500    | )              |        |         | (7,993  | )     
|                                                                      |                                              | Increase in other noncurrent assets                                             |                                                     |                                                       | (570    | )                       |        |          | (1,560  | )              |        |         | (177    | )     
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Net cash used in investing activities                                           |                                                     |                                                       | (11,595 | )                       |        |          | (7,602  | )              |        |         | (29,368 | )     
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                 |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Proceeds from issuance of common and preferred stock                            |                                                     |                                                       | 15      |                         |        |          | 746     |                |        |         | 203     |       
|                                                                      |                                              | Repurchase of common and preferred stock                                        |                                                     |                                                       |        |                         |        |          |        |                |        |         | (1      | )     
|                                                                      |                                              | Borrowings (repayments) under the credit facility, net                          |                                                     |                                                       | (12,305 | )                       |        |          | (2,860  | )              |        |         | 7,728   |       
|                                                                      |                                              | Repayment of long-term obligations                                              |                                                     |                                                       | (12,518 | )                       |        |          | (251    | )              |        |         | (256    | )     
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      |                                              | Net cash provided by (used in) financing activities                             |                                                     |                                                       | (24,808 | )                       |        |          | (2,365  | )              |        |         | 7,674   |       
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  |                                              |                                                                                 | (3,713                                              | )                                                     |         |                         | 9,186  |          |         |                | (2,592 | )      
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          |                                              |                                                                                 | 10,213                                              |                                                       |         |                         | 1,027  |          |         |                | 3,619  |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|CASH AND CASH EQUIVALENTS, END OF YEAR                                |                                              | $                                                                               | 6,500                                               |                                                       |         | $                       | 10,213 |          |         | $              | 1,027  |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                     |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      | Cash payments for interest                   |                                                                                 | $                                                   | 34,668                                                |         |                         | $      | 32,909   |         |                | $      | 32,714  |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      | Borrowings from credit facility              |                                                                                 | $                                                   | 194,563                                               |         |                         | $      | 260,043  |         |                | $      | 61,782  |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      | Repayment of credit facility                 |                                                                                 | $                                                   | (206,868                                              | )       |                         | $      | (262,903 | )       |                | $      | (54,054 | )      
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES: |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      | Initial recognition of derivative liability  |                                                                                 | $                                                   |                                                      |         |                         | $      | 1,653    |         |                | $      |        |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        
|                                                                      | Change in fair value of derivative liability |                                                                                 | $                                                   | 1,043                                                 |         |                         | $      | 2,246    |         |                | $      |        |        
|                                                                      |                                              |                                                                                 |                                                     |                                                       |         |                         |        |          |         |                |        |        

See notes to consolidated financial statements.

F-5



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Packaged Ice, Inc. and its wholly owned subsidiaries (the Company)
manufacture and distribute packaged ice products and bottled water and own and
operate refrigerated warehouses. Packaged ice products are distributed by
traditional delivery methods and stand-alone automated ice merchandising
systems (the Ice Factory) that produce, package, store and merchandise ice at
the point of sale. At December 31, 2002, the Company served approximately
73,000 customer locations in 31 states and the District of Columbia.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.The consolidated financial statements
include the accounts of Packaged Ice, Inc. and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Accounts Receivable.Accounts receivable are net of allowances for
doubtful accounts of $0.5 and $1.0 million at December 31, 2002 and 2001,
respectively. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make the
required payments on their accounts. The estimated losses are based on past
experience with similar accounts receivable. If the financial condition of the
Companys customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Bad debt
expense for the three years in the period ended December 31, 2002 was $0.5
million, $1.1 million and $0.5 million, respectively.

Inventories.Inventories consist of raw materials and supplies and
finished goods. Raw materials and supplies include ice packaging material,
spare parts, bottled water supplies and merchandiser parts. Finished goods
include packaged ice and bottled water. Inventories are valued at the lower of
cost or market. Cost is determined using the first-in, first-out and average
cost methods.

Property and equipment.Property and equipment is carried at cost and is
being depreciated on a straight-line basis over estimated lives of 2.5 to 40
years. Maintenance and repairs are charged to expense as incurred, while
capital improvements that extend the useful lives of the underlying assets are
capitalized.

Acquisitions.The Company has accounted for all of its historical
acquisitions using the purchase method of accounting. The Company did not
complete any acquisitions during the three years in the period ended December
31, 2002 which had a material effect on its consolidated financial position,
results of operations or cash flows.

Goodwill and Other Intangibles.Upon adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
on January 1, 2002, the Company ceased amortization of its goodwill and certain
intangible assets with an indefinite life (see New Accounting Pronouncements).
Amortization expense related to these items was $6.0 million in 2001 and $6.1
million in 2000. Other intangible assets include the following that are
amortized over their useful lives:

|                           |  |                                     |  | 
|-------------------------- |  | ----------------------------------- |  | 
|Intangible Assets          |  | Useful Life                        
|                           |  |                                    
|Goodwill                   |  | Indefinite life                    
|Trade names                |  | Indefinite life                    
|Ice factory system patents |  | Straight line method over 17 years 
|Debt issue costs           |  | Interest method over the terms of  
|                           |  | the debt                           
|Other intangibles          |  | Straight line method over the terms
|                           |  | of the agreements                  

F-6



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Impairment of Long-Lived Assets.In accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, long-lived assets
and certain identifiable intangible assets to be held and used are reviewed for
impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
determination of recoverability of long-lived assets and certain other
identifiable intangible assets is based on an estimate of undiscounted future
cash flows resulting from the use of the asset or its disposition. Measurement
of an impairment loss for long-lived assets and other intangible assets that
management expects to hold and use are based on the fair value of the asset.
Long-lived assets to be disposed of are reported at the lower of carrying
amount or net realizable value.

In accordance with
SFAS No. 142, goodwill is evaluated using a market valuation approach, based on the
valuations of comparable businesses, on annual basis or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. As a result of this annual evaluation, an additional impairment
charge of $4.1 million was recognized at December 31, 2002 in the Companys
non-ice segment.

Income Taxes.The Company accounts for income taxes under the liability
method, which requires, among other things, recognition of deferred income tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Companys consolidated financial statements or tax
returns. Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and the
recognition of available tax carryforwards.

Revenue Recognition.Revenue is recognized when product (packaged ice,
ice packaging bags, bottled water and ice equipment) is delivered to and
accepted by customers. There is no right of return with respect to the
packaged ice, bags delivered and bottled water. Revenue resulting from Ice
Factory management agreements and cold storage services is recognized as earned
under contract terms.

Cash and Cash Equivalents.The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.

Fair Values of Financial Instruments.The Companys financial instruments
consist primarily of cash and cash equivalents (restricted and unrestricted),
accounts receivable, accounts payable, debt obligations and an interest rate
swap agreement. The carrying amount of cash, cash equivalents, trade accounts
receivable and trade accounts payable are representative of their respective
fair values due to the short-term maturity of these instruments. The fair
value of the Companys credit facility is representative of its carrying value
based upon the variable rate terms and managements opinion that the current
rates offered to the Company with the same maturity and security structure are
equivalent to that of the credit facility. See Note 7 regarding the fair
value of the Companys 9 3/4% Senior Notes and interest rate swap agreement.

Interest Rate Swap Agreement.The differential to be paid or received on
the interest rate swap agreement is accrued as interest rates change and is
recognized over the life of the agreement as an increase or decrease in
interest expense. The Company does not use this instrument for trading
purposes. The Company has entered into this swap arrangement for the purpose of
hedging its anticipated cash payments for interest associated with its variable
rate debt.

Stock Options.At December 31, 2002, the Company had three stock-based
employee compensation plans, which are described more fully in Note 11. The
Company accounts for those plans under the intrinsic value method proscribed by
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income (loss), as all stock options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss

F-7



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

and loss per share if the Company had applied the fair value recognition
provisions of stock-based compensation as described in SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting
for Stock-Based Compensation   Transition and Disclosure.

|                                                                                                               |             |   |                                          |       |      |   |         |       |   |   |        |       |  
|-------------------------------------------------------------------------------------------------------------- | ----------- | - | ---------------------------------------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                               |             |   | 2002                                     |       | 2001 |   | 2000   
|                                                                                                               |             |   |                                          |       |      |   |        
|                                                                                                               |             |   | (in thousands, except per share amounts)
|Net loss available to common shareholders, as reported                                                         |             | $ | (88,598                                  | )     |      | $ | (23,451 | )     |   | $ | (7,202 | )    
|Less: Total stock-based employee compensation expense
determined under fair value based methods for all awards |             |   | (830                                     | )     |      |   | (597    | )     |   |   | (582   | )    
|                                                                                                               |             |   |                                          |       |      |   |         |       |   |   |        |      
|Proforma net loss available to common shareholders                                                             |             | $ | (89,428                                  | )     |      | $ | (24,048 | )     |   | $ | (7,784 | )    
|                                                                                                               |             |   |                                          |       |      |   |         |       |   |   |        |      
|Basic and diluted net loss per share of common stock:                                                          |             |   |                                          |       |      |   |         |       |   |   |        |      
|                                                                                                               | As reported |   | $                                        | (4.40 | )    |   | $       | (1.19 | ) |   | $      | (0.37 | )
|                                                                                                               | Proforma    |   | $                                        | (4.44 | )    |   | $       | (1.22 | ) |   | $      | (0.40 | )

Use of Estimates.The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America 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.

New Accounting Pronouncements.On January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 changed
the accounting for goodwill from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill recorded in past
business combinations, ceased upon adoption of this statement. Adoption of
this statement resulted in a charge to net income of $73.2 million (net of $0
tax). The allocation of the charge to the Companys ice and non-ice segments
was $70.1 million and $3.1 million, respectively.

On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting requirements for the impairment and disposal of
long-lived assets. In November 2002, the Board of Directors approved a plan to
sell certain fixed assets within the following twelve months. At December 31,
2002, these assets were classified as Assets Held for Sale in the balance
sheet and were reported at their fair value in accordance with SFAS No. 144. A
non-cash charge of $3.3 million was recognized to reduce the carrying value of
the assets to their fair value. Such charge is included in Impairment of
Assets in the statement of operations.

In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other
things, amends SFAS No. 4 and SFAS No. 64 to require that gains and losses from
the extinguishment of debt generally be classified within continuing
operations. The
provisions of SFAS No. 145 are effective for fiscal years beginning after
May 15, 2002 and early application is encouraged. The Company adopted SFAS No.
145 upon issuance and as a result, has reflected gains on the extinguishment of
debt within continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, Liability

F-8



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. This standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. This statement is effective for
exit or disposal activities that are initiated after December 31, 2002.
Adoption of this statement on January 1, 2003 did not have a significant effect
on the Companys consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide
alternate methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the effects
of stock-based compensation on reported results. The provisions of SFAS No. 148
are effective for years ending after December 15, 2002 and interim periods
beginning after December 15, 2002. The Company adopted SFAS No. 148 upon issuance
and the adoption did not have any impact on the Companys results of operations
or financial position. The disclosures in Note 11 related the Companys
stock-based employee compensation plans have been modified to be in conformity
with this statement.

Reclassifications.Certain amounts from previous years have been
reclassified to conform to the current year presentation.

3. INVENTORIES

|                           |       |   |                |       |      |   |       |       | 
|-------------------------- | ----- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                           |       |   | December 31,  
|                           |       |   |               
|                           |       |   | 2002           |       | 2001
|                           |       |   |                |       |     
|                           |       |   | (in thousands)
|Raw materials and supplies |       | $ | 5,538          |       |      | $ | 6,468 |      
|Finished goods             |       |   | 1,706          |       |      |   | 1,223 |      
|                           |       |   |                |       |      |   |       |      
|                           | Total |   | $              | 7,244 |      |   | $     | 7,691 | 
|                           |       |   |                |       |      |   |       |      

4. PROPERTY AND EQUIPMENT

|                               |       |   |                |         |      |   |         |         | 
|------------------------------ | ----- | - | -------------- | ------- | ---- | - | ------- | ------- | 
|                               |       |   | December 31,  
|                               |       |   |               
|                               |       |   | 2002           |         | 2001
|                               |       |   |                |         |     
|                               |       |   | (in thousands)
|Land                           |       | $ | 14,954         |         |      | $ | 16,913  |        
|Buildings                      |       |   | 58,791         |         |      |   | 65,133  |        
|Plant, equipment and machinery |       |   | 182,942        |         |      |   | 177,801 |        
|Construction in progress       |       |   |               |         |      |   | 791     |        
|                               |       |   |                |         |      |   |         |        
|Total property and equipment   |       |   | 256,687        |         |      |   | 260,638 |        
|Less: Accumulated depreciation |       |   | 91,845         |         |      |   | 78,661  |        
|                               |       |   |                |         |      |   |         |        
|                               | Total |   | $              | 164,842 |      |   | $       | 181,977 | 
|                               |       |   |                |         |      |   |         |        

Depreciation expense for the three years in the period ended December 31,
2002 was $19.9 million, $20.6 million and $20.1 million, respectively.

F-9



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. GOODWILL AND OTHER INTANGIBLES

|                               |       |   |                |         |      |   |         |         | 
|------------------------------ | ----- | - | -------------- | ------- | ---- | - | ------- | ------- | 
|                               |       |   | December 31,  
|                               |       |   |               
|                               |       |   | 2002           |         | 2001
|                               |       |   |                |         |     
|                               |       |   | (in thousands)
|Goodwill                       |       | $ | 136,638        |         |      | $ | 214,239 |        
|Trade names                    |       |   | 27,500         |         |      |   | 27,500  |        
|Debt issue costs               |       |   | 11,709         |         |      |   | 12,093  |        
|Other intangibles              |       |   | 8,158          |         |      |   | 8,225   |        
|                               |       |   |                |         |      |   |         |        
|                               |       |   | 184,005        |         |      |   | 262,057 |        
|Less: Accumulated amortization |       |   | 33,788         |         |      |   | 29,978  |        
|                               |       |   |                |         |      |   |         |        
|                               | Total |   | $              | 150,217 |      |   | $       | 232,079 | 
|                               |       |   |                |         |      |   |         |        

Amortization expense for the three years in the period ended December 31,
2002 was $4.8 million, $13.2 million and $8.5 million, respectively.

6. ACCRUED EXPENSES

|                                           |       |   |                |        |      |   |        |        | 
|------------------------------------------ | ----- | - | -------------- | ------ | ---- | - | ------ | ------ | 
|                                           |       |   | December 31,  
|                                           |       |   |               
|                                           |       |   | 2002           |        | 2001
|                                           |       |   |                |        |     
|                                           |       |   | (in thousands)
|Accrued interest                           |       | $ | 11,424         |        |      | $ | 11,222 |       
|Accrued compensation and employee benefits |       |   | 8,689          |        |      |   | 4,697  |       
|Derivative liability                       |       |   | 4,942          |        |      |   | 3,899  |       
|Accrued property and sales taxes           |       |   | 1,861          |        |      |   | 1,652  |       
|Other                                      |       |   | 1,568          |        |      |   | 3,586  |       
|                                           |       |   |                |        |      |   |        |       
|                                           | Total |   | $              | 28,484 |      |   | $      | 25,056 | 
|                                           |       |   |                |        |      |   |        |       

7. LINE OF CREDIT AND LONG-TERM OBLIGATIONS

The Company had
$270 million aggregate principal amount of 9 3/4% Senior
Notes outstanding as of December 31, 2001. On each of January 30, 2002 and
June 24, 2002, the Company repurchased and retired 9 3/4% Senior Notes with a
principal amount of $2.5 million. On each of July 30, 2002 and November 6,
2002, the Company repurchased and retired 9 3/4% Senior Notes with a principal
amount of $5 million, for a total of $15 million. These purchases resulted in
a total gain on extinguishment of debt of $2.5 million. The 9 3/4% Senior
Notes were issued pursuant to the indenture dated January 28, 1998, as amended
(the Indenture). The 9 3/4% Senior Notes have a final maturity date of
February 1, 2005. The 9 3/4% Senior Notes are general unsecured obligations
of the Company and are senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passuto all senior
indebtedness of the Company. The 9 3/4% Senior Notes are effectively
subordinated to the Companys bank credit facility. The 9 3/4% Senior Notes
contain certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to pay any cash dividends or make
distributions with respect to the Companys capital stock, to incur
indebtedness or to create liens. At December 31, 2002, the fair value of the
9 3/4% Senior Notes was $199.2 million, based on market quotations.

The Companys 9 3/4% Senior Notes are guaranteed, fully, jointly and
severally, and unconditionally, on a senior subordinated basis by all of the
Companys current and future, direct and indirect subsidiaries (the Subsidiary
Guarantors). There are currently no restrictions on the ability of the
Subsidiary Guarantors to transfer funds to Packaged Ice, Inc. (the Parent) in
the form of cash dividends, loans or advances. Condensed consolidating
financial statements for the Parent and its subsidiaries, all of which are
wholly owned, are not presented as the Parent has no significant independent
assets or operations.

F-10



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On December 27, 2001, the Companys bank credit facility was refinanced
with a new lender. The total commitment under the new facility is $88 million
(the Credit Facility), consisting a $38 million revolving loan (the Line of
Credit) and a $50 million term loan (the Term Loan). Costs incurred to
refinance the Credit Facility were paid through draws on the Line of Credit.
At December 31, 2002, the Company had $22.3 million of availability under the
Line of Credit, net of outstanding standby letters of credit.

Principal balances outstanding under the Line of Credit bear interest per
annum, at the Companys option, at the London Inter-Bank Offered Rate (LIBOR)
plus 3.5% or the prime rate (as announced from time to time by JPMorgan Chase
Bank) plus 1.5%. There was no balance outstanding on the Line of Credit at
December 31, 2002. The outstanding balance at December 31, 2001 was classified
as a current liability because of the Companys intention to use the Line of
Credit to fund its working capital. No principal payments are required until
the final maturity date of October 31, 2004. Principal balances outstanding
under the Term Loan bear interest per annum, at the Companys option, at LIBOR
plus 4% or the prime rate plus 2%, with a minimum of 9.5%. At December 31,
2002, the weighted average interest rate of borrowings outstanding under the
Credit Facility was 9.5%. Interest is payable monthly. The Company pays a
monthly fee on the average availability under the Credit Facility based on an
annual rate of 0.5%, a $20,000 per quarter loan servicing fee and a $360,000
annual fee on the anniversary date of the Credit Facility.

For fiscal years beginning on or after January 1, 2002, there is a
mandatory principal payment on the Term Loan equal to 65% of the Companys
Excess Cash Flow (as defined in the Credit Facility). This principal payment
is due within 10 days of delivery of the annual audited financial statements to
the lenders, which may occur no later than 90 days after a fiscal year end. In
accordance with the Credit Facility, the principal payment can be waived if
certain conditions are met and the Company pays the Amortization Waiver Fee (as
defined in the Credit Facility). The Company anticipates obtaining a waiver
for the 2002 principal payment and paying the related Amortization Waiver Fee
of $0.4 million in March 2003. The Amortization Waiver Fee was accrued as of
December 31, 2002. Any balance outstanding under the Term Loan is due upon the
final maturity date of October 31, 2004.

The Credit Facility contains financial covenants which include limitations
on capital expenditures and the maintenance of certain financial ratios, as
defined in the Credit Facility, and is collateralized by substantially all of
the Companys assets and the capital stock of all of the Companys significant
subsidiaries. At December 31, 2002, the Company was in compliance with these
covenants.

At December 31, 2002, the Company had $7.1 million of standby letters of
credit outstanding, primarily to secure certain insurance obligations. Due to
the timing of the refinancing of the Credit Facility in December 2001, the
Company was required to cash collateralize the letters of credit outstanding at
that time at a rate of 105% of the face amount. This collateral was reported
as restricted cash in the balance sheet as of December 31, 2001.

On November 28, 2000, the Company entered into an interest rate collar
agreement (the Collar Agreement). If the Index Rate (30-day LIBOR, as
defined in the Collar Agreement) exceeds 7.75%, the Company will receive the
difference between the Index Rate and 7.75%. If the Index Rate falls below
5.75%, the Company will pay the difference plus 1%. Any amounts payable or
receivable are settled monthly. The Collar Agreement has a notional amount of
$50 million and a term of 4 years. When the Credit Facility was refinanced on
December 27, 2001, $3.6 million of amounts previously deferred in accumulated
other comprehensive loss on the balance sheet were realized in current period
income as the original hedged, forecasted transaction was no longer deemed
probable of occurring. The Collar Agreement was redesignated as a hedge of the
new Credit Facility with subsequent changes in fair value deferred in other
comprehensive income or loss. During 2002 and 2001, interest expense included
$2.5
F-11Table of ContentsPACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)million and $5.0 million, respectively, related to the Collar Agreement.
During 2000, there was no financial statement impact as the Index Rate was
between 5.75% and 7.75%.If the Company had been required to settle the Collar Agreement as of
December 31, 2002, the Company would have had to pay $4.9 million. The Company
is exposed to credit risk in the event of nonperformance by the counterparty to
the Collar Agreement, however the Company anticipates that the counterparty
will fully perform its obligations under the Collar Agreement.At December 31, 2002 and 2001, long-term obligations consisted of the
following:

|                                                 |                            |   |                |         |      |   |         |         | 
|------------------------------------------------ | -------------------------- | - | -------------- | ------- | ---- | - | ------- | ------- | 
|                                                 |                            |   | December 31,  
|                                                 |                            |   |               
|                                                 |                            |   | 2002           |         | 2001
|                                                 |                            |   |                |         |     
|                                                 |                            |   | (in thousands)
|9 3/4% Senior Notes                              |                            | $ | 255,000        |         |      | $ | 270,000 |        
|Unamortized debt discount on 9 3/4% Senior Notes |                            |   | (79            | )       |      |   | (123    | )      
|Term Loan                                        |                            |   | 50,000         |         |      |   | 50,000  |        
|Other                                            |                            |   | 293            |         |      |   | 485     |        
|                                                 |                            |   |                |         |      |   |         |        
|Total long-term obligations                      |                            |   | 305,214        |         |      |   | 320,362 |        
|Less: Current maturities                         |                            |   | 67             |         |      |   | 188     |        
|                                                 |                            |   |                |         |      |   |         |        
|                                                 | Long-term obligations, net |   | $              | 305,147 |      |   | $       | 320,174 | 
|                                                 |                            |   |                |         |      |   |         |        

As of December 31, 2002, principal maturities of long-term obligations for
the next five years are as follows:

|               |  |  |  |  |  |  |                |         | 
|-------------- |  |  |  |  |  |  | -------------- | ------- | 
|               |  |  |  |  |  |  | (in thousands)
|2003           |  |  |  |  |  |  | $              | 67      | 
|2004           |  |  |  |  |  |  |                | 50,045  | 
|2005           |  |  |  |  |  |  |                | 254,971 | 
|2006           |  |  |  |  |  |  |                | 50      | 
|2007           |  |  |  |  |  |  |                | 56      | 
|And thereafter |  |  |  |  |  |  | 25             |        
|               |  |  |  |  |  |  |                |         | 
|Total          |  |  |  |  |  |  | $              | 305,214 | 
|               |  |  |  |  |  |  |                |         | 

8. INCOME TAXES

The Company incurred losses for each of the three years ended December 31,
2002, 2001 and 2000 for both financial reporting and tax return purposes. Due
to the uncertainty of being able to utilize such losses to reduce future taxes,
a valuation allowance has been provided to reduce to zero the net deferred tax
assets resulting primarily from the loss carryforwards available.

The total provision for income taxes varied from the U.S. federal
statutory rate due to the following:

|                                                       |                                  |   |                         |   |      |   |                |   |  |   |        |   | 
|------------------------------------------------------ | -------------------------------- | - | ----------------------- | - | ---- | - | -------------- | - |  | - | ------ | - | 
|                                                       |                                  |   | Year Ended December 31,
|                                                       |                                  |   |                        
|                                                       |                                  |   | 2002                    |   | 2001 |   | 2000          
|                                                       |                                  |   |                         |   |      |   |               
|                                                       |                                  |   |                         |   |      |   | (in thousands) |   |  |   |       
|Federal income tax benefit at statutory rate           |                                  | $ | (28,828                 | ) |      | $ | (6,798         | ) |  | $ | (1,383 | )
|State income taxes, net of federal income tax benefits |                                  |   | (2,798                  | ) |      |   | (660           | ) |  |   | (134   | )
|Increase (decrease) in valuation allowance             |                                  |   | 18,347                  |   |      |   | 5,367          |   |  |   | (5,056 | )
|Non-deductible goodwill                                |                                  |   | 12,095                  |   |      |   |               |   |  |   |       |  
|Change in deferred taxes due to acquisitions           |                                  |   |                        |   |      |   |               |   |  |   | 5,276  |  
|Non-deductible expenses and other                      |                                  |   | 1,184                   |   |      |   | 2,091          |   |  |   | 1,297  |  
|                                                       |                                  |   |                         |   |      |   |                |   |  |   |        |  
|                                                       | Total provision for income taxes |   | $                       |  |      |   | $              |  |  |   | $      |  | 
|                                                       |                                  |   |                         |   |      |   |                |   |  |   |        |  

F-12



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences were as follows:

|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |         |         |  
|----------------------- | -------------------------------- | ------------------------------ | ------- | ----------------------- | ------- | ---- | ------ | -------------- | ------- | - | ------ | ------- | ------- | -
|                        |                                  |                                |         | Year Ended December 31,
|                        |                                  |                                |         |                        
|                        |                                  |                                |         | 2002                    |         | 2001 |        | 2000          
|                        |                                  |                                |         |                         |         |      |        |               
|                        |                                  |                                |         |                         |         |      |        | (in thousands) |         |   |        |        
|Deferred Tax Liability: |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|                        | Intangible assets                |                                | $       | 4,394                   |         |      | $      | (8,484         | )       |   | $      | (6,741  | )      
|                        | Property
and equipment           |                                |         | (17,100                 | )       |      |        | (18,374        | )       |   |        | (16,266 | )      
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|                        |                                  | Total deferred tax liabilities |         | $                       | (12,706 | )    |        | $              | (26,858 | ) |        | $       | (23,007 | )
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|Deferred Tax Asset:     |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|                        | Other assets                     |                                | $       | 2,999                   |         |      | $      | 3,254          |         |   | $      | 1,507   |        
|                        | Net operating loss carryforwards |                                |         | 37,985                  |         |      |        | 33,535         |         |   |        | 26,064  |        
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|                        |                                  | Total deferred tax assets      |         | $                       | 40,984  |      |        | $              | 36,789  |   |        | $       | 27,571  |  
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|Net deferred tax assets |                                  | $                              | 28,278  |                         |         | $    | 9,931  |                |         | $ | 4,564  |        
|Valuation allowance     |                                  |                                | (28,278 | )                       |         |      | (9,931 | )              |         |   | (4,564 | )      
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        
|                        | Total deferred taxes             |                                | $       |                        |         |      | $      |               |         |   | $      |        |        
|                        |                                  |                                |         |                         |         |      |        |                |         |   |        |        

At December 31, 2002, the Company had approximately $102 million of net
operating loss carryforwards that expire between 2005 and 2022. There will be
an annual limitation on the utilization of the outstanding net operating loss
carryforwards due to an ownership change, as defined by Section 382 of Internal
Revenue Code, as amended.

9. CAPITAL STOCK

Preferred Stock.The Companys Board of Directors has authorized the
designation of 500,000 shares of $0.01 par value 10% exchangeable preferred
stock. Holders of the 10% exchangeable preferred stock are entitled to receive
dividends equal to 10% of the liquidation preference of $100 per share, and all
dividends are fully cumulative. Dividends may be paid in cash or in kind by
issuing a number of additional shares of the 10% exchangeable preferred stock.
Dividend payments made after December 2, 2001, are required to be made in cash,
except to the extent prohibited by the Companys 9 3/4% Senior Note Indenture
and Credit Facility. Both the Indenture and the Credit Facility prohibit the
payment of any cash dividends during the terms of the agreements. If
dividends are paid in kind, the Company shall also issue to holders of the 10%
exchangeable preferred stock additional warrants to purchase common stock at an
exercise price of $13.00 per share. The warrants are valid until the earlier
to occur of (a) April 15, 2005 or (b) the first anniversary of the last day of
the first period of 20 consecutive days following a qualifying initial public
offering, as defined in the securities purchase agreement, during which there
is a closing price on each such trading day and the closing price on each such
trading day equals or exceeds the threshold price, as defined. Holders of the
10% exchangeable preferred stock have no voting rights other than approval
rights with respect to the issuance of parity or senior securities, and as
otherwise provided by the Texas Business Corporation Act. The Company may
redeem the 10% exchangeable preferred stock at any time subject to contractual
and other restrictions. The Company is obligated to redeem the 10%
exchangeable preferred stock for cash on April 15, 2005.

During 2002, 2001 and 2000, the Company paid no cash dividends on the 10%
exchangeable preferred stock, electing to pay in kind dividends on the
respective dividend dates. In kind dividends for the years ended December 31,
2002, 2001 and 2000 totaled 37,484, 33,998 and 30,838 shares, respectively, of
10% exchangeable preferred stock and warrants to purchase 288,337, 261,525 and
237,217 shares of common stock, respectively, at $13 per share.

F-13



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Common Stock.Holders of the Companys common stock are entitled to one
vote per share on all matters to be voted on by shareholders and are entitled
to receive dividends, if any, as may be declared from time to time by the Board
of Directors of the Company. Upon any liquidation or dissolution of the
Company, the holders of common stock are entitled, subject to any preferential
rights of the holders of preferred stock, to receive a pro rata share of all of
the assets remaining available for distribution to shareholders after payment
of all liabilities.

10. LOSS PER SHARE

The computation of loss per share is based on net loss, after deducting
the dividend requirement of preferred stock ($3.8 million in 2002, $3.5 million
in 2001 and $3.1 million in 2000), divided by the weighted average number of
shares outstanding. Options to purchase 2.0 million shares and warrants to
purchase 3.2 million shares of common stock that are outstanding but
exercisable at prices above the Companys average common stock price have not
been included in the computation of diluted net loss per share and weighted
average common shares outstanding. For the years ended December 31, 2002, 2001
and 2000, there are 0.59 million, 0.49 million and 0.70 million shares,
respectively, of dilutive securities which are not included in the computation
of diluted loss per share as their effect would be anti-dilutive.

|                                            |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |        |  
|------------------------------------------- | ------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                            |                                                                                             |  | Year Ended December 31,                 
|                                            |                                                                                             |  |                                         
|                                            |                                                                                             |  | 2002                                     |         | 2001 |  | 2000
|                                            |                                                                                             |  |                                          |         |      |  |     
|                                            |                                                                                             |  | (in thousands, except per share amounts)
|Net loss per share of common stock:         |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       
|                                            | Basic and diluted weighted average common shares outstanding                                |  |                                          | 20,157  |      |  |      | 19,756  |   |  |   | 19,340 |  
|                                            |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       
|                                            | Basic and diluted net loss available to common shareholders                                 |  | $                                        | (4.40   | )    |  | $    | (1.19   | ) |  | $ | (0.37  | )
|                                            |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       
|Net loss for basic and diluted computation: |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       
|                                            | Net loss before cumulative effect of change in accounting
principle and preferred dividends |  | $                                        | (11,558 | )    |  | $    | (19,993 | ) |  | $ | (4,068 | )
|                                            | Cumulative effect of change in accounting principle                                         |  |                                          | (73,230 | )    |  |      |        |   |  |   |       |  
|                                            | Preferred share dividends                                                                   |  |                                          | (3,810  | )    |  |      | (3,458  | ) |  |   | (3,134 | )
|                                            |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       
|                                            | Net loss available to common shareholders                                                   |  | $                                        | (88,598 | )    |  | $    | (23,451 | ) |  | $ | (7,202 | )
|                                            |                                                                                             |  |                                          |         |      |  |      |         |   |  |   |       

11. EMPLOYEE BENEFIT PLANS

401(k) Plan.The Company has established a 401(k) defined contribution
savings plan for the benefit of all employees who have completed one year of
service and have met the eligibility requirements to participate. Employees
may contribute up to the maximum amount allowed by the Internal Revenue
Service, while Company contributions are made at the discretion of the Board of
Directors. The Company contributed $204,899, $481,582 and $476,351 in 2002,
2001 and 2000, respectively.

1994 Stock Option Plan.During 1994, the shareholders approved the
Packaged Ice, Inc. 1994 Stock Option Plan that reserved for issuance 400,000
shares of common stock. This plan provides for the granting of incentive
awards in the form of stock options to employees, outside directors and
consultants and advisors to the Company or any of its subsidiaries. Stock
options have an exercise price equal to the fair market value of the shares of
common stock at the date of grant, vest in equal annual installments over five
years and expire 10 years from the date of grant. All outstanding options
became fully vested at the date of the Companys initial public offering.

F-14



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table indicates share and exercise price information with
respect to the 1994 Stock Option Plan for the three years ended December 31,
2002, 2001 and 2000:

|                                                               |  |        |         |       |  |          |       |       |  |        |         |          |  |   |       |  |  |          |         |   |  |   |       | 
|-------------------------------------------------------------- |  | ------ | ------- | ----- |  | -------- | ----- | ----- |  | ------ | ------- | -------- |  | - | ----- |  |  | -------- | ------- | - |  | - | ----- | 
|                                                               |  | 2002   |         | 2001  |  | 2000    
|                                                               |  |        |         |       |  |         
|                                                               |  |        |         |       |  | Weighted |       |       |  |        |         | Weighted |  |   |       |  |  | Weighted
|                                                               |  |        |         |       |  | Average  |       |       |  |        |         | Average  |  |   |       |  |  | Average 
|                                                               |  |        |         |       |  | Exercise |       |       |  |        |         | Exercise |  |   |       |  |  | Exercise
|                                                               |  | Shares |         | Price |  | Shares   |       | Price |  | Shares |         | Price   
|                                                               |  |        |         |       |  |          |       |       |  |        |         |         
|Outstanding at beginning of year                               |  |        | 313,950 |       |  | $        | 11.32 |       |  |        | 335,200 |          |  | $ | 11.24 |  |  |          | 385,700 |   |  | $ | 11.01 | 
|Granted                                                        |  |        |        |       |  |          | 0.00  |       |  |        |        |          |  |   | 0.00  |  |  |          |        |   |  |   | 0.00  | 
|Exercised                                                      |  |        |        |       |  |          | 0.00  |       |  |        |        |          |  |   | 0.00  |  |  |          |        |   |  |   | 0.00  | 
|Forfeited                                                      |  |        | (85,500 | )     |  |          | 12.97 |       |  |        | (21,250 | )        |  |   | 9.93  |  |  |          | (50,500 | ) |  |   | 9.56  | 
|                                                               |  |        |         |       |  |          |       |       |  |        |         |          |  |   |       |  |  |          |         |   |  |   |       | 
|Outstanding at end of year                                     |  |        | 228,450 |       |  | $        | 10.71 |       |  |        | 313,950 |          |  | $ | 11.32 |  |  |          | 335,200 |   |  | $ | 11.24 | 
|                                                               |  |        |         |       |  |          |       |       |  |        |         |          |  |   |       |  |  |          |         |   |  |   |       | 
|Weighted average fair value of
options granted during the year |  |        |         |       |  | $        | 0.00  |       |  |        |         |          |  | $ | 0.00  |  |  |          |         |   |  | $ | 0.00  | 
|                                                               |  |        |         |       |  |          |       |       |  |        |         |          |  |   |       |  |  |          |         |   |  |   |       | 

Options outstanding at December 31, 2002 consisted of the following:

|                |        |           |        |                |  |                  |          |         |          |           |           |  | 
|--------------- | ------ | --------- | ------ | -------------- |  | ---------------- | -------- | ------- | -------- | --------- | --------- |  | 
|                |        |           |        |                |  |                  | Weighted |         | Weighted
|Range of        |        |           |        |                |  | Average          |          | Average
|Exercise Prices |        | Number of |        | Exercise Price |  | Remaining       
|per Share       |        | Options   |        | per Share      |  | Contractual Life
|                |        |           |        |                |  |                 
|$6.22-$7.50     |        |           | 29,500 |                |  | $                | 6.68     |         |          | 2.7 years
|                | $10.00 |           |        | 120,000        |  |                  | $        | 10.00   |          |           | 4.0 years
|$13.00-$15.00   |        |           | 78,950 |                |  | $                | 13.29    |         |          | 3.8 years

All options outstanding under the 1994 Stock Option Plan were exercisable
as of December 31, 2002.

1998 Stock Option Plan.During 1998, the shareholders approved the
Packaged Ice, Inc. 1998 Stock Option Plan that reserved for issuance 1,000,000
shares of common stock. This plan provides for the granting of incentive
awards in the form of stock options, stock appreciation rights, restricted
stock and stock bonuses to officers, employees, outside directors and
consultants and advisors to the Company or any of its subsidiaries at the
discretion of the Compensation Committee of the Board of Directors. The plan
provides for the underlying shares that are no longer subject to purchase
pursuant to an option previously granted to be reoptioned. Stock options have
an exercise price equal to the fair market value of the shares of common stock
at the date of grant, become exercisable in annual increments for up to five
years commencing one year after the date of grant and expire not more than 10
years from the date of grant. Certain option grants also provide for vesting
based on the appreciation of the Companys common stock price.

F-15



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table indicates share and exercise price information with
respect to the 1998 Stock Option Plan for the three years ended December 31,
2002, 2001 and 2000:

|                                                               |  |        |          |       |  |          |       |       |  |        |         |          |  |   |      |  |  |          |         |   |  |   |       | 
|-------------------------------------------------------------- |  | ------ | -------- | ----- |  | -------- | ----- | ----- |  | ------ | ------- | -------- |  | - | ---- |  |  | -------- | ------- | - |  | - | ----- | 
|                                                               |  | 2002   |          | 2001  |  | 2000    
|                                                               |  |        |          |       |  |         
|                                                               |  |        |          |       |  | Weighted |       |       |  |        |         | Weighted |  |   |      |  |  | Weighted
|                                                               |  |        |          |       |  | Average  |       |       |  |        |         | Average  |  |   |      |  |  | Average 
|                                                               |  |        |          |       |  | Exercise |       |       |  |        |         | Exercise |  |   |      |  |  | Exercise
|                                                               |  | Shares |          | Price |  | Shares   |       | Price |  | Shares |         | Price   
|                                                               |  |        |          |       |  |          |       |       |  |        |         |         
|Outstanding at beginning of year                               |  |        | 976,452  |       |  | $        | 6.18  |       |  |        | 836,951 |          |  | $ | 7.45 |  |  |          | 415,289 |   |  | $ | 11.94 | 
|Granted                                                        |  |        | 20,000   |       |  |          | 2.00  |       |  |        | 211,300 |          |  |   | 2.09 |  |  |          | 480,800 |   |  |   | 4.13  | 
|Exercised                                                      |  |        |         |       |  |          | 0.00  |       |  |        |        |          |  |   | 0.00 |  |  |          |        |   |  |   | 0.00  | 
|Forfeited                                                      |  |        | (109,979 | )     |  |          | 10.84 |       |  |        | (71,799 | )        |  |   | 8.91 |  |  |          | (59,138 | ) |  |   | 11.97 | 
|                                                               |  |        |          |       |  |          |       |       |  |        |         |          |  |   |      |  |  |          |         |   |  |   |       | 
|Outstanding at end of year                                     |  |        | 886,473  |       |  | $        | 5.51  |       |  |        | 976,452 |          |  | $ | 6.18 |  |  |          | 836,951 |   |  | $ | 7.45  | 
|                                                               |  |        |          |       |  |          |       |       |  |        |         |          |  |   |      |  |  |          |         |   |  |   |       | 
|Weighted average fair value of
options granted during the year |  |        |          |       |  | $        | 1.60  |       |  |        |         |          |  | $ | 0.95 |  |  |          |         |   |  | $ | 2.28  | 
|                                                               |  |        |          |       |  |          |       |       |  |        |         |          |  |   |      |  |  |          |         |   |  |   |       | 

Options outstanding at December 31, 2002 consisted of the following:

|                |        |           |         |                |         |                  |      |           |      |                |           |           |        |         |         |                     |      |       |      |  |  | 
|--------------- | ------ | --------- | ------- | -------------- | ------- | ---------------- | ---- | --------- | ---- | -------------- | --------- | --------- | ------ | ------- | ------- | ------------------- | ---- | ----- | ---- |  |  | 
|                |        |           |         |                |         |                  |      |           |      |                |           |           |        |         |         | Exercisable Options
|                |        |           |         |                |         |                  |      |           |      |                |           |           |        |         |         |                    
|                |        |           |         |                |         |                  |      | Weighted  |      | Weighted       |           |           |        |         |         | Weighted           
|Range of        |        |           |         |                |         | Average          |      | Average   |      |                |           |           |        | Average
|Exercise Prices |        | Number of |         | Exercise Price |         | Remaining        |      | Number of |      | Exercise Price
|per Share       |        | Options   |         | per Share      |         | Contractual Life |      | Options   |      | Per Share     
|                |        |           |         |                |         |                  |      |           |      |               
|$1.70-$2.00     |        |           | 198,100 |                |         | $                | 1.99 |           |      | 7.0 years      |           |           | 63,620 |         |         | $                   | 1.98 |      
|                |        | $4.13     |         |                | 445,075 |                  |      | $         | 4.13 |                |           | 5.1 years |        |         | 178,030 |                     |      | $     | 4.13 | 
|                |        | $8.00     |         |                | 142,032 |                  |      | $         | 8.00 |                |           | 5.1 years |        |         | 85,219  |                     |      | $     | 8.00 | 
|                | $15.00 |           |         | 101,266        |         |                  | $    | 15.00     |      |                | 3.8 years |           |        | 81,013  |         |                     | $    | 15.00 |     

2001 Stock Option Plan.During 2001, the shareholders approved the
Packaged Ice, Inc. 2001 Stock Option Plan that reserved for issuance 1,000,000
shares of common stock. This plan provides for the granting of incentive
awards in the form of stock options, stock appreciation rights, restricted
stock and stock bonuses to officers, employees, outside directors and
consultants and advisors to the Company or any of its subsidiaries at the
discretion of the Compensation Committee of the Board of Directors. The plan
provides for the underlying shares that are no longer subject to purchase
pursuant to an option previously granted to be reoptioned. Stock options have
an exercise price equal to the fair market value of the shares of common stock
at the date of grant and expire not more than 10 years from the date of grant.
Options become exercisable in annual increments for up to five years
commencing one year after the date of grant, with the exception of one grant of
100,000 shares in 2001 which were vested upon issuance. Certain option grants
also provide for vesting based on the appreciation of the Companys common
stock price.

F-16



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table indicates share and exercise price information with
respect to the 2001 Stock Option Plan for the years ended December 31, 2002 and
2001:

|                                                               |  |        |         |       |  |          |      |       |  |  |           |          |  |   |      | 
|-------------------------------------------------------------- |  | ------ | ------- | ----- |  | -------- | ---- | ----- |  |  | --------- | -------- |  | - | ---- | 
|                                                               |  | 2002   |         | 2001 
|                                                               |  |        |         |      
|                                                               |  |        |         |       |  | Weighted |      |       |  |  |           | Weighted
|                                                               |  |        |         |       |  | Average  |      |       |  |  |           | Average 
|                                                               |  |        |         |       |  | Exercise |      |       |  |  |           | Exercise
|                                                               |  | Shares |         | Price |  | Shares   |      | Price
|                                                               |  |        |         |       |  |          |      |      
|Outstanding at beginning of year                               |  |        | 865,000 |       |  | $        | 1.97 |       |  |  |          |          |  | $ | 0.00 | 
|Granted                                                        |  |        | 25,000  |       |  |          | 2.00 |       |  |  | 1,009,000 |          |  |   | 1.94 | 
|Exercised                                                      |  |        |        |       |  |          | 0.00 |       |  |  | (100,000  | )        |  |   | 1.60 | 
|Forfeited                                                      |  |        | (31,900 | )     |  |          | 2.00 |       |  |  | (44,000   | )        |  |   | 2.00 | 
|                                                               |  |        |         |       |  |          |      |       |  |  |           |          |  |   |      | 
|Outstanding at end of year                                     |  |        | 858,100 |       |  | $        | 1.97 |       |  |  | 865,000   |          |  | $ | 1.97 | 
|                                                               |  |        |         |       |  |          |      |       |  |  |           |          |  |   |      | 
|Weighted average fair value of
options granted during the year |  |        |         |       |  | $        | 1.63 |       |  |  |           |          |  | $ | 1.42 | 
|                                                               |  |        |         |       |  |          |      |       |  |  |           |          |  |   |      | 

Options outstanding at December 31, 2002 consisted of the following:

|                |  |           |         |                |  |                  |          |           |          |                |  |  |         |         |                     |   |      |  |  |  | 
|--------------- |  | --------- | ------- | -------------- |  | ---------------- | -------- | --------- | -------- | -------------- |  |  | ------- | ------- | ------------------- | - | ---- |  |  |  | 
|                |  |           |         |                |  |                  |          |           |          |                |  |  |         |         | Exercisable Options
|                |  |           |         |                |  |                  |          |           |          |                |  |  |         |         |                    
|                |  |           |         |                |  |                  | Weighted |           | Weighted |                |  |  |         |         | Weighted           
|Range of        |  |           |         |                |  | Average          |          | Average   |          |                |  |  |         | Average
|Exercise Prices |  | Number of |         | Exercise Price |  | Remaining        |          | Number of |          | Exercise Price
|per Share       |  | Options   |         | per Share      |  | Contractual Life |          | Options   |          | Per Share     
|                |  |           |         |                |  |                  |          |           |          |               
|$1.60-$1.85     |  |           | 80,000  |                |  | $                | 1.69     |           |          | 8.4 years      |  |  | 16,000  |         |                     | $ | 1.69 | 
|$2.00           |  |           | 778,100 |                |  | $                | 2.00     |           |          | 8.5 years      |  |  | 150,620 |         |                     | $ | 2.00 | 

For purposes of estimating the fair value of stock options issued in 1998,
the minimum value method for option-pricing was used as there was no public
market for the Companys common stock. The Black-Scholes method was used
determine the fair value of options issued subsequent to 1998. The
Black-Scholes calculations used the following weighted average assumptions:

|                        |  |          |       |          |  |          |       |   |  |  |       |  
|----------------------- |  | -------- | ----- | -------- |  | -------- | ----- | - |  |  | ----- | -
|                        |  | 2002     |       | 2001     |  | 2000    
|                        |  |          |       |          |  |         
|Dividend yield          |  |          | 0.00  | %        |  |          | 0.00  | % |  |  | 0.00  | %
|Volatility              |  |          | 72.75 | %        |  |          | 59.21 | % |  |  | 58.35 | %
|Risk free interest rate |  |          | 5.03  | %        |  |          | 5.17  | % |  |  | 6.03  | %
|Expected lives          |  | 10 years |       | 10 years |  | 10 years

2000 Employee Stock Purchase Plan. During 2000, the shareholders approved
the 2000 Employee Stock Purchase Plan (the ESPP). The ESPP is designed to be
a tax qualified plan under Section 423 of the Internal Revenue Code, as
amended, and offers employees of the Company the right to purchase shares of
the Companys common stock each quarter. The purchase price is the lesser of
85% of the closing market price on the first or last trading day of each
quarter. In January 2000, 250,000 shares of common stock was reserved for
issuance under the ESPP. An additional 250,000 shares were reserved for
issuance as a result of a shareholder vote in June 2001. During 2002, 2001 and
2000, the Company issued 16,967, 415,906 and 66,936 shares, respectively, at an
average price of $0.91, $1.41 and $3.02 per share, respectively. Contributions
to the ESPP were suspended in the fourth quarter of 2001 pending the
authorization of additional shares by the Companys shareholders.

2002 Senior Executive Restricted Stock Plan.In May 2002, the Company
adopted the 2002 Senior Executive Restricted Stock Plan (the Restricted Stock
Plan). The Restricted Stock Plan was approved by the Board of Directors, but
was not submitted for a shareholder vote. Upon adoption of the Restricted
Stock Plan, certain executives were granted a total of 200,000 shares of the
Companys common

F-17



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

stock. Such restricted shares were not transferable by the executive and
had no voting rights. The market value of the Companys common stock at the
date of issuance was $1.22 per share. The removal of the restriction was
contingent upon the Company achieving certain performance goals for the fiscal
year ended December 31, 2002. Subsequent to year end, it was determined that
the performance goals were not met and the shares of restricted stock were
forfeited and cancelled in February 2003.

12. SEGMENT INFORMATION

The Company has two reportable segments: (1) ice products and (2) non-ice
products and services. Ice products include the manufacture and distribution
of packaged ice products through traditional ice manufacturing and delivery and
the Ice Factory. Non-ice products and services include refrigerated warehouses
and the manufacturing and distribution of bottled water. During 2001, the
Company sold the majority of its ice production equipment sale and leasing
business and two small refrigerated warehouses.

The accounting policies of the segments are the same as those described in
Note 2. The Company evaluates performance of each segment based on earnings
before interest, taxes, depreciation, amortization, gain or loss on disposition
of assets, impairment of assets, gain on extinguishment of debt and
the cumulative effect of
changes in accounting principles (EBITDA). Segment assets are not a factor
in the evaluation of performance. During the years ended December 31, 2002,
2001 and 2001, there were no intersegment sales. Segment information for the
years ended December 31, 2002, 2001 and 2000 is as follows:

For the Year Ended December 31, 2002:

|                         |  |                |         |         |  |       |        |   |  |   |         | 
|------------------------ |  | -------------- | ------- | ------- |  | ----- | ------ | - |  | - | ------- | 
|                         |  | Ice            |         | Non-Ice |  | Total
|                         |  |                |         |         |  |      
|                         |  | (in thousands)
|Revenues                 |  | $              | 216,654 |         |  | $     | 19,006 |   |  | $ | 235,660 | 
|Cost of sales            |  |                | 131,592 |         |  |       | 13,260 |   |  |   | 144,852 | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 
|Gross profit             |  |                | 85,062  |         |  |       | 5,746  |   |  |   | 90,808  | 
|Operating expenses       |  |                | 31,127  |         |  |       | 2,612  |   |  |   | 33,739  | 
|Other income (loss), net |  |                | 164     |         |  |       | (3     | ) |  |   | 161     | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 
|EBITDA                   |  | $              | 54,099  |         |  | $     | 3,131  |   |  | $ | 57,230  | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 

For the Year Ended December 31, 2001:

|                         |  |                |         |         |  |       |        |   |  |   |         | 
|------------------------ |  | -------------- | ------- | ------- |  | ----- | ------ | - |  | - | ------- | 
|                         |  | Ice            |         | Non-Ice |  | Total
|                         |  |                |         |         |  |      
|                         |  | (in thousands)
|Revenues                 |  | $              | 223,019 |         |  | $     | 21,228 |   |  | $ | 244,247 | 
|Cost of sales            |  |                | 143,378 |         |  |       | 13,056 |   |  |   | 156,434 | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 
|Gross profit             |  |                | 79,641  |         |  |       | 8,172  |   |  |   | 87,813  | 
|Operating expenses       |  |                | 34,026  |         |  |       | 3,346  |   |  |   | 37,372  | 
|Other income (loss), net |  |                | 26      |         |  |       | (7     | ) |  |   | 19      | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 
|EBITDA                   |  | $              | 45,641  |         |  | $     | 4,819  |   |  | $ | 50,460  | 
|                         |  |                |         |         |  |       |        |   |  |   |         | 

F-18



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For the Year Ended December 31, 2000:

|                   |  |                |         |         |  |       |        |  |  |   |         | 
|------------------ |  | -------------- | ------- | ------- |  | ----- | ------ |  |  | - | ------- | 
|                   |  | Ice            |         | Non-Ice |  | Total
|                   |  |                |         |         |  |      
|                   |  | (in thousands)
|Revenues           |  | $              | 224,034 |         |  | $     | 20,010 |  |  | $ | 244,044 | 
|Cost of sales      |  |                | 138,341 |         |  |       | 11,548 |  |  |   | 149,889 | 
|                   |  |                |         |         |  |       |        |  |  |   |         | 
|Gross profit       |  |                | 85,693  |         |  |       | 8,462  |  |  |   | 94,155  | 
|Operating expenses |  |                | 33,376  |         |  |       | 3,763  |  |  |   | 37,139  | 
|Other income, net  |  |                | 17      |         |  |       |       |  |  |   | 17      | 
|                   |  |                |         |         |  |       |        |  |  |   |         | 
|EBITDA             |  | $              | 52,334  |         |  | $     | 4,699  |  |  | $ | 57,033  | 
|                   |  |                |         |         |  |       |        |  |  |   |         | 

A reconciliation of EBITDA to net loss before preferred dividends for the
three years ended December 31, 2001, 2000 and 1999 is as follows:

|                                                    |                                     |   |                         |         |      |   |         |         |   |   |         |        |  
|--------------------------------------------------- | ----------------------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------ | -
|                                                    |                                     |   | Year Ended December 31,
|                                                    |                                     |   |                        
|                                                    |                                     |   | 2002                    |         | 2001 |   | 2000   
|                                                    |                                     |   |                         |         |      |   |        
|                                                    |                                     |   | (in thousands)         
|EBITDA                                              |                                     | $ | 57,230                  |         |      | $ | 50,460  |         |   | $ | 57,033  |       
|Depreciation and amortization                       |                                     |   | (24,704                 | )       |      |   | (33,816 | )       |   |   | (28,631 | )     
|(Loss) gain on disposition of assets                |                                     |   | (4,345                  | )       |      |   | 49      |         |   |   |        |       
|Impairment of assets                                |                                     |   | (7,363                  | )       |      |   |        |         |   |   |        |       
|Gain on extinguishment of debt                      |                                     |   | 2,494                   |         |      |   |        |         |   |   |        |       
|Interest expense                                    |                                     |   | (34,870                 | )       |      |   | (36,686 | )       |   |   | (32,470 | )     
|Income taxes                                        |                                     |   |                        |         |      |   |        |         |   |   |        |       
|Cumulative effect of change in accounting principle |                                     |   | (73,230                 | )       |      |   |        |         |   |   |        |       
|                                                    |                                     |   |                         |         |      |   |         |         |   |   |         |       
|                                                    | Net loss before preferred dividends |   | $                       | (84,788 | )    |   | $       | (19,993 | ) |   | $       | (4,068 | )
|                                                    |                                     |   |                         |         |      |   |         |         |   |   |         |       

13. COMMITMENTS AND CONTINGENCIES

The Company has an agreement to purchase the bagging component of the Ice
Factory from an exclusive manufacturer until a minimum of 3,600
components is
purchased. Since inception of this agreement, the Company has purchased
approximately 3,070 components. Expenditures related to this agreement were
$0.4 million in 2002, $0.6 million in 2001 and $3.9 million in 2000.

The Company has an exclusive agreement to purchase ice makers for the Ice
Factory from a related party. Expenditures related to this agreement were $0.1
million in 2002, $0.7 million in 2001 and $2.3 million in 2000.

The Company has leased certain facilities and equipment. Under these and
other operating leases, future minimum annual rentals at December 31, 2002 were
approximately $12.6 million in 2003, $9.9 million in 2004, $7.5 million in
2005, $5.7 million in 2006, $3.5 million in 2007 and $5.0 million thereafter.
Rent expense was $12.3 million, $11.9 million and $8.1 million for the years
ended December 31, 2002, 2001 and 2000, respectively. Certain of these
facilities are leased from a related party. Rent expense related to these
properties was $0.4 million per year in 2002, 2001 and 2000.

In June 1999, the Company entered into an exclusive supply agreement with
a merchandiser manufacturer (the Supply Agreement) in which the Company
committed to purchase 4,000 merchandisers and/or Ice Factory merchandisers and
a minimum of $1.5 million of replacement parts per twelve-month period
commencing June 1, 1999. As of May 31, 2002, the Company had not purchased the

F-19



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

minimum quantities required by the Supply Agreement and was in default.
Effective June 1, 2002, the Supply Agreement was amended to cure the default.
Certain terms of the Supply Agreement were modified, including extending the
term of the Supply Agreement to May 31, 2012 and reducing the annual
merchandiser and replacement parts commitments to 2,000 units and $0.75
million, respectively. Management believes the Company will be in compliance
with the amended Supply Agreement at May 31, 2003.

The Company is involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management
believes the resolution of such uncertainties and the incurrence of such costs
will not have a material adverse effect on the Companys consolidated financial
position, results of operations or cash flows.

The Company is a party to a lawsuit in connection with an ammonia release
at its Baton Rouge, Louisiana manufacturing facility in June 2001. The case,
which is a consolidation of seven lawsuits, is titled Wallace Acey, Jr. et al
vs. Reddy Ice Corporation. This lawsuit was filed August 30, 2001 in the 19th
Judicial District Court, Parish of East Baton Rouge, Louisiana and has been
assigned docket number 487373 Division N. There are multiple plaintiffs who
have primarily alleged injuries consisting of inconvenience, watery eyes and
offensive odors. The plaintiffs have not made a specific request for relief in
the lawsuit. The Company maintains insurance to cover such events and
its insurance
carrier is contesting the suit and plans to vigorously defend against any
claims. This lawsuit is still in a preliminary stage and the ultimate outcome
is impossible to determine at this time. An unfavorable result in excess of
the available insurance coverage could have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows.

14. QUARTERLY INFORMATION (UNAUDITED)

The following table summarizes the unaudited quarterly information for the
years ended December 31, 2002 and 2001. In the opinion of management, all
adjustments necessary for a fair presentation of the unaudited results for the
periods are included.

|                                                                                                              |  |     |         |     |  |                                          |        |     |  |      |        |  |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | --- | ------- | --- |  | ---------------------------------------- | ------ | --- |  | ---- | ------ |  |  | - | ------- | - |  | - | ------- | -
|2002                                                                                                          |  | 1st |         | 2nd |  | 3rd                                      |        | 4th |  | Year
|                                                                                                              |  |     |         |     |  |                                          |        |     |  |     
|                                                                                                              |  |     |         |     |  | (in thousands, except per share amounts) |        |     |  |     
|Revenues                                                                                                      |  | $   | 32,780  |     |  | $                                        | 73,459 |     |  | $    | 86,452 |  |  | $ | 42,969  |   |  | $ | 235,660 |  
|Gross profit                                                                                                  |  |     | 6,627   |     |  |                                          | 32,373 |     |  |      | 38,035 |  |  |   | 13,773  |   |  |   | 90,808  |  
|Net income (loss) available to common
shareholders before cumulative
effect of change in accounting
principle |  |     | (17,191 | )   |  |                                          | 8,154  |     |  |      | 13,353 |  |  |   | (19,684 | ) |  |   | (15,368 | )
|Net income (loss) available to
common shareholders                                                            |  |     | (90,421 | )   |  |                                          | 8,154  |     |  |      | 13,353 |  |  |   | (19,684 | ) |  |   | (88,598 | )

F-20



---



##### Table of Contents



PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|                                 |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |       |  
|-------------------------------- | ------------------------------------------------------------------------------------------------------------- |  | - | ----- | - |  | - | ---- |  |  | - | ---- |  |  | - | ----- | - |  | - | ----- | -
|Basic income (loss) per share:   |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      
|                                 | Net income (loss) available to
common shareholders before
cumulative effect of change in
accounting principle |  | $ | (0.85 | ) |  | $ | 0.40 |  |  | $ | 0.66 |  |  | $ | (0.98 | ) |  | $ | (0.76 | )
|                                 | Cumulative effect of change in
accounting principle                                                           |  |   | (3.64 | ) |  |   |     |  |  |   |     |  |  |   |      |   |  |   | (3.64 | )
|                                 |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      
|                                 | Net income (loss) available to
common shareholders                                                            |  | $ | (4.49 | ) |  | $ | 0.40 |  |  | $ | 0.66 |  |  | $ | (0.98 | ) |  | $ | (4.40 | )
|                                 |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      
|Diluted income (loss) per share: |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      
|                                 | Net income (loss) available to
common shareholders before
cumulative effect of change in
accounting principle |  | $ | (0.85 | ) |  | $ | 0.39 |  |  | $ | 0.64 |  |  | $ | (0.98 | ) |  | $ | (0.76 | )
|                                 | Cumulative effect of change in
accounting principle                                                           |  |   | (3.64 | ) |  |   |     |  |  |   |     |  |  |   |      |   |  |   | (3.64 | )
|                                 |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      
|                                 | Net income (loss) available to
common shareholders                                                            |  | $ | (4.49 | ) |  | $ | 0.39 |  |  | $ | 0.64 |  |  | $ | (0.98 | ) |  | $ | (4.40 | )
|                                 |                                                                                                               |  |   |       |   |  |   |      |  |  |   |      |  |  |   |       |   |  |   |      

During the first quarter of 2002, the Company recognized an extraordinary
gain on extinguishment of debt of $0.439 million, or $0.02 per basic and
diluted share. Upon adoption of SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
in the second quarter of 2002, the Company reclassified the extraordinary gain
to continuing operations.

|                                                   |         |     |                                          |       |   |     |        |      |  |      |        |      |  |   |         |       |   |   |         |       |  
|-------------------------------------------------- | ------- | --- | ---------------------------------------- | ----- | - | --- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | ----- | - | - | ------- | ----- | -
|2001                                               |         | 1st |                                          | 2nd   |   | 3rd |        | 4th  |  | Year
|                                                   |         |     |                                          |       |   |     |        |      |  |     
|                                                   |         |     | (in thousands, except per share amounts)
|Revenues                                           |         | $   | 32,518                                   |       |   | $   | 77,472 |      |  | $    | 88,328 |      |  | $ | 45,929  |       |   | $ | 244,247 |      
|Gross profit                                       |         |     | 4,824                                    |       |   |     | 32,625 |      |  |      | 37,720 |      |  |   | 12,644  |       |   |   | 87,813  |      
|Net income (loss) available to
common shareholders |         |     | (20,728                                  | )     |   |     | 6,220  |      |  |      | 11,928 |      |  |   | (20,871 | )     |   |   | (23,451 | )    
|Earnings per share:                                |         |     |                                          |       |   |     |        |      |  |      |        |      |  |   |         |       |   |   |         |      
|                                                   | Basic   |     |                                          | (1.07 | ) |     |        | 0.32 |  |      |        | 0.60 |  |   |         | (1.04 | ) |   |         | (1.19 | )
|                                                   | Diluted |     |                                          | (1.07 | ) |     |        | 0.31 |  |      |        | 0.58 |  |   |         | (1.04 | ) |   |         | (1.19 | )

The sum of the individual quarters earnings per share do not agree with
year-to-date earnings per share as each quarters computation is based on the
weighted average number of shares outstanding during the quarter, the weighted
average stock price during the quarter and the dilutive effects of options and
warrants in each quarter. In periods of loss, dilutive effects become
antidilutive and are not considered in the computation of loss per share.

F-21



---



##### Table of Contents



Exhibit Index

|            |  |                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                       
|2.1         |  | Stock Purchase Agreement between Packaged Ice, Inc. and Suiza Foods
Corporation dated March 27, 1998. (Exhibit 2.1)(5)                                                                                                                                                                
|2.2         |  | Stock Purchase Agreement between Packaged Ice, Inc., WLR Foods,
Inc. and Cassco Ice & Cold Storage, Inc. dated July 31, 1998. (Exhibit
2.1)(7)                                                                                                                                        
|3.1         |  | Restated Articles of Incorporation of Packaged Ice filed with the
Secretary of State of the State of Texas on February 5, 1992. (Exhibit
3.2)(1)                                                                                                                                      
|3.2         |  | Articles of Amendment to the Restated Articles of Incorporation of
Packaged Ice filed with the Secretary of State of the State of Texas on
August 11, 1998. (Exhibit 3.2) (6)                                                                                                         
|3.3         |  | Amended and Restated Bylaws of Packaged Ice, effective as of
January 20, 1997. (Exhibit 3.5)(1)                                                                                                                                                                                       
|4.1         |  | Amended and Restated Certificate of Designation of 10% Exchangeable
Preferred Stock. (Exhibit 4.12)(5)                                                                                                                                                                                
|4.2         |  | Indenture by and among Packaged Ice, as Issuer, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A. as Trustee dated as of
January 28, 1998, Amended and Restated as of April 30, 1998. (Exhibit
4.1)(5)                                                                  
|4.3         |  | Common Stock Purchase Warrant, dated July 17, 1997, executed by
Packaged Ice for the benefit of SV Capital Partners LP. (Exhibit
10.39)(2)                                                                                                                                            
|4.4         |  | Registration Rights Agreement by and between Packaged Ice and
Silver Brands Partners, L.P. (formerly SV), dated February 3, 1999.
(Exhibit 4.7)(9)                                                                                                                                    
|4.5         |  | Warrant Agreement among Packaged Ice and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent, dated as
of April 17, 1997. (Exhibit 10.12)(1)                                                                                                          
|4.6         |  | Warrant Agreement among Packaged Ice and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent, dated as
of October 16, 1997. (Exhibit 10.7)(3)                                                                                                         
|4.7         |  | Common Stock Purchase Warrant Agreement issued by Packaged Ice and
issued to Culligan Water Technologies, Inc. issuing 1,807,692 fully
paid and nonassessable shares of Packaged Ices common stock at an
exercise price of $13.00 per share dated December 2, 1997. (Exhibit
10.3)(4)
|4.8         |  | Registration Rights Agreement by and among Packaged Ice, Culligan
Water Technologies, Inc. and Erica Jesselson. (Exhibit 10.5)(4)                                                                                                                                                     
|4.9         |  | Rights Agreement dated as of October 29, 1999, between the Company
and American Stock Transfer & Trust Company as Rights Agent. (Exhibit
1)(11)                                                                                                                                       
|4.10        |  | First Amendment to the Warrant Agreement, dated April 24, 2001,
between the Company and U.S. Trust Company of Texas, N.A. amending the
Warrant Agreement dated October 16, 1997. (Exhibit 4.1)(13)                                                                                    
|10.1        |  | Packaged Ice, Inc. 2000 Employee Stock Purchase Plan. (Exhibit
10.2)(10)                                                                                                                                                                                                              
|10.2        |  | 1994 Stock Option Plan, dated July 26, 1994. (Exhibit 10.10)(1)                                                                                                                                                                                                                       
|10.3        |  | 1998 Stock Option Plan, dated June 19, 1998. (Exhibit 10.34)(8)                                                                                                                                                                                                                       
|10.4        |  | 2001 Stock Option Plan, dated May 9, 2001. (Exhibit B)(12)                                                                                                                                                                                                                            
|10.5        |  | Form of Indemnification Agreement entered into by Packaged Ice in
favor of members of the Board of Directors. (Exhibit 10.31)(1)                                                                                                                                                      
|10.6        |  | Development and Manufacturing Agreement by and between Lancer
Corporation and Packaged Ice, dated April 13, 1993. (Exhibit 10.32)(1)                                                                                                                                                  
|10.7        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of William P. Brick and Jimmy C. Weaver, individually). (Exhibit
10.1)(13)                                                                          





---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                       
|10.8        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of Graham D. Davis, Steven J. Janusek and Ben D. Key, individually).
(Exhibit 10.2)(13)                                                             
|10.9        |  | Form of Strategic Management Team Change of Control Bonus
Agreement, dated May 9, 2001 (entered into between the Company and each
of Thomas L. Dann, Michael P. Busch, Billy W. Daniel, Joseph A.
Geloso, William A. Newberry and Neil D. Showalter, individually).
(Exhibit 10.3)(13)
|10.10       |  | Severance Agreement between the Company and James F. Stuart, dated
April 19, 2001. (Exhibit 10.5)(13)                                                                                                                                                                                 
|10.11       |  | Severance Agreement between the Company and Leonard A. Bedell,
dated June 1, 2001. (Exhibit 10.6)(13)                                                                                                                                                                                 
|10.12       |  | Agreement between the Company and A.J. Lewis III, dated June 19,
2001. (Exhibit 10.7)(13)                                                                                                                                                                                             
|10.13       |  | The Second Amended and Restated Credit Agreement dated as of
December 27, 2001 by and among Packaged Ice, Inc., as Borrower, the
Lenders from Time to Time Party Hereto, and Ableco Finance LLC, as
Collateral Agent and Administrative Agent. (Exhibit 4.1)(14)                      
|10.14       |  | Amended and Restated Subsidiary Guaranty dated as of December 27,
2001. (Exhibit 10.20)(15)                                                                                                                                                                                           
|10.15       |  | First Amendment to Second Amended and Restated Credit Agreement
dated as of January 30, 2002. (Exhibit 10.21)(15)                                                                                                                                                                     
|10.16       |  | Second Amendment to Second Amended and Restated Credit Agreement
dated as of February 19, 2002. (Exhibit 10.22) (15)                                                                                                                                                                  
|10.17      |  | Third Amendment to Second Amended and Restated Credit Agreement dated
as of March 4, 2003.                                                                                                                                                                                            
|10.18       |  | 2002 Senior Executive Restricted Stock Plan. (Exhibit 10.1)(16)                                                                                                                                                                                                                       
|10.19      |  | Form of First Amendment to Indemnification Agreement entered into by
Packaged Ice in favor of the Board of Directors.                                                                                                                                                                 
|21.1       |  | List of subsidiaries.                                                                                                                                                                                                                                                                 
|23.1       |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                     
|99.1       |  | William P. Brick Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              
|99.2       |  | Steven J. Janusek Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                             



---

|   |  | Filed herewith.                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Filed as an Exhibit to Packaged Ices Registration Statement on
Form S-4 (File No. 333-29357), filed with the Commission on June 16,
1997.                     
|   
|(2) |  | Filed as an Exhibit to the Amendment No. 1 to Packaged Ices
Registration Statement on Form S-4 (No. 333-29357), filed with the
Commission on July 29, 1997.   
|   
|(3) |  | Filed as an Exhibit to Packaged Ices Third Quarter Disclosure on
Form 10-Q with the Commission on November 14, 1997.                                          
|   
|(4) |  | Filed as an Exhibit to Form 8-K filed on behalf of Packaged Ice
with the Commission on December 15, 1997.                                                      
|   
|(5) |  | Filed as an Exhibit to Form 8-K/A filed on behalf of Packaged Ice
with the Commission on May 12, 1998.                                                         
|   
|(6) |  | Filed as an Exhibit to Amendment No. 1 to Packaged Ices
Registration Statement on Form S-1 (File No. 333-60627), filed with the
Commission on October 2, 1998.
|   
|(7) |  | Filed as an Exhibit to Packaged Ices Form 8-K filed with the
Commission on October 14, 1998.                                                                  





---



##### Table of Contents



|(8)  |  | Filed as an Exhibit to Amendment No. 2 to Packaged Ices
Registration Statement on Form S-1 (File No. 333-60627), filed with the
Commission on January 4, 1999.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(9)  |  | Filed as an Exhibit to Packaged Ices Form 10-K filed with the
Commission on March 30, 1999.                                                                   
|    
|(10) |  | Filed as an Exhibit to Packaged Ices Form 10-K filed with the
Commission on March 28, 2000.                                                                   
|    
|(11) |  | Filed as an Exhibit to Form 8-A12G filed on behalf of Packaged Ice
with the Commission on November 1, 1999.                                                    
|    
|(12) |  | Filed as an Exhibit to Packaged Ices Definitive Proxy Statement
filed with the Commission on May 17, 2001.                                                    
|    
|(13) |  | Filed as an Exhibit to Packaged Ices Second Quarter Disclosure on
Form 10-Q with the Commission on August 9, 2001.                                            
|    
|(14) |  | Filed as an Exhibit to Packaged Ices Form 8-K filed with the
Commission on January 10, 2002.                                                                  
|    
|(15) |  | Filed as an Exhibit to Packaged Ices Form 10-K filed with the
Commission on March 28, 2002.                                                                   
|    
|(16) |  | Filed as an Exhibit to Packaged Ices Second Quarter Disclosure on
Form 10-Q with the Commission on August 9, 2002.                                            

(b) Reports on Form 8-K.

Packaged Ice, Inc. filed a report on Form 8-K with the Securities &
Exchange Commission on January 21, 2003, which announced the appointment of
Credit Suisse First Boston of New York to assist the Company in evaluating
financial and strategic alternatives.