##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
  FORM
    10-K
  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended June 30, 2006
 or
  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934  For the transition period
    from
    to
  Commission
    File Number 001-15191
  VALLEY
    NATIONAL GASES INCORPORATED
 (Exact name of registrant as
    specified in its charter)
  Pennsylvania

23-2888240(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)   200 West
    Beau Street, Suite 200
 Washington, Pennsylvania 15301
 (Address of principal executive
    offices)
  (724) 228-3000
 (Registrants telephone
    number, including area code)
    Name ofexchange onTitle of each class

which registeredCommon stock, $.001 par value
    per share

American Stock Exchange      o þ
   o þ
   þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ
  Rule 12b-2
 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



VALLEY
    NATIONAL GASES INCORPORATED
  TABLE OF
    CONTENTS
  
  PART I
   Item



Page No.1.


Business


12.


Properties


93.


Legal
    Proceedings


94.


Submission of
    Matters to a Vote of Security Holders


9PART II5.


Market for
    Valleys Common Stock and Related Stockholder
    Matters


106.


Selected Financial
    Data


117.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


127A.


Quantitative and
    Qualitative Disclosures About Market Risk


288.


Financial
    Statements and Supplementary Data


289.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosures


289A.


Controls and
    Procedures


299B.


Other
    Information


29PART III10.


Management


3011.


Executive
    Compensation


3212.


Security Ownership
    of Certain Beneficial Owners and Management


3213.


Certain
    Relationships and Related Transactions


3214.


Principal
    Accounting Fees and Services


32PART IV15.


Exhibits, Financial
    Statements and Schedules


32Signatures


33EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2     Cautionary
    Statements
    and/or




---



##### Table of Contents



PART I  ITEM 1.
    BUSINESS  Overview
  14-state
          Our
    Industry
  Markets
  Industrial, Medical and Specialty Gases.
  on-site on-site
   1




---



##### Table of Contents




    the industry has a broad and diverse customer base;
    gases frequently represent a fixed component of operating costs,
    which does not decline with production levels;
    gases are required for maintenance and renovation activities,
    which tend to increase during economic downturns; and
    gas purchases represent a small portion of operating expenses
    and, therefore, are not typically a large cost-cutting item for
    purchasers.  Propane.
       2




---



##### Table of Contents



Industry
    Consolidation
    
    Changes in technology are providing opportunities for more
    efficient and effective pricing, order entry, inventory and
    distribution management. Larger distributors are more likely to
    have the capital and human resources to take advantage of these
    opportunities, thereby creating greater margin, cost and service
    reliability advantages.
    Larger customers are demanding additional services from their
    suppliers in such areas as automated order entry, automated
    restocking and applications technology support. These services
    require an investment in technology and equipment that many
    smaller distributors are incapable or unwilling to make.
    The number and complexity of government regulations is
    increasing, especially for distributors who produce or package
    gas products. Complying with new regulations requires expertise
    and expense, which is difficult for smaller distributors to
    access, maintain or afford. Several major gas producers no
    longer provide full service support to distributors.      Growth
    Strategy
    
    Grow through acquisitions.  Prior to fiscal
    2003, acquisitions were the principal means of our growth. From
    fiscal 1997, the year of our initial public offering, through
    fiscal 2006, we completed over 33 acquisitions and grew from
    approximately $74 million in annual revenue to
    approximately $211 million in annual revenue. We believe
    our size and geographic reach, along with the fragmented
    competition in both the packaged gas and propane markets,
    position us well for continued growth. To implement this
    strategy we:  
    Focus on
    tuck-in
    acquisitions.  We focus our acquisition efforts on
    small packaged gas and propane distributors that operate in, or
    adjacent to, the geographic markets we serve. We believe that
    the numerous remaining small distributors of both packaged gas
    and propane in these markets present significant opportunities
    for additional acquisitions.     3




---



##### Table of Contents




    Pursue selective acquisitions to expand geographic
    reach.  We selectively consider acquisitions of
    larger, independent, regional packaged gas and non-pipeline
    propane distributors where such an acquisition would enable us
    to expand our presence into a new region of the United States
    and where the acquisition meets our criteria.    
    Grow operating profits.  We believe that the
    continued implementation of our process improvement strategy
    affords us the opportunity to increase our profitability by
    taking the following actions:  
    standardizing our marketing, pricing, staffing and operating
    practices throughout our network to offer consistent levels of
    service, gain economies of scale and achieve operating
    efficiencies; and
    improving our workforce through technical training and creating
    an environment emphasizing a high level of customer service.  
    Enhance internal revenue growth.  We believe
    that we can supplement our growth through acquisitions by
    selling a broader range of products to existing customers, by
    expanding our sales of small bulk gases to new and existing
    customers and by taking advantage of our size and geographic
    reach to gain market share with some multi-location accounts
    through better coordination of our marketing and distribution
    system.  Products
          Year Ended June 30,2004


2005


2006Packaged gases


35.0
%


33.6
%


34.7
%Hard goods


36.5



36.4



36.9Propane


28.5



30.0



28.4100.0
%


100.0
%


100.0
%  4




---



##### Table of Contents



Customers
    
      Sales and
    Marketing
  30-mile e-commerce,
   5




---



##### Table of Contents



Competition
      Suppliers
        Employees
      Regulatory
    Matters
   6




---



##### Table of Contents



Product
    Liability and Insurance
    Business
    Segments
  04-10
  No. 04-10 No. 04-10
    and/or and/or
   7




---



##### Table of Contents



Fiscal 2006Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
82,465


$
70,770


$
57,296


$
2,420


$



$
(2,420
)

$
210,531Cost of products sold


54,311



17,007



31,078















102,396Gross profit


28,154



53,763



26,218



2,420







(2,420
)


108,135Operating, distribution, and
    administrative expenses














945



71,011



(2,420
)


69,536Depreciation expense














563



7,316







7,879Amortization expense


















823







823Loss (gain) on sale of assets














(224
)


(46
)






(270
)Interest expense














424



3,911







4,335Interest, dividend and other income














289



376







665Minority interest














1,001











1,001Net earnings before taxes


























25,496   Fiscal 2005Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
63,636


$
55,307


$
48,756


$
2,136


$



$
(2,136
)

$
167,699Cost of products sold


41,357



12,037



24,951















78,345Gross profit


22,279



43,270



23,805



2,136







(2,136
)


89,354Operating, distribution, and
    administrative expenses














808



58,202



(2,136
)


56,874Depreciation expense














432



6,279







6,711Amortization expense


















1,108







1,108Loss (gain) on sale of assets














(135
)


127







(8
)Interest expense














240



4,066







4,306Interest, dividend and other income














280



242







522Minority interest














1,071











1,071Net earnings before taxes


























19,814   8




---



##### Table of Contents



Fiscal 2004Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
56,359


$
53,983


$
44,114


$
1,047


$



$
(1,047
)

$
154,456Cost of products sold


37,488



12,472



21,598















71,558Gross profit


18,871



41,511



27,516



1,047







(1,047
)


82,898Operating, distribution, and
    administrative expenses














347



57,931



(1,047
)


57,231Depreciation expense














98



5,713







5,811Amortization expense


















1,663







1,663Loss (gain) on sale of assets














(295
)


70







(225
)Interest expense














78



5,579







5,657Interest, dividend and other income














61



258







319Minority interest














880











880Net earnings before taxes


























12,200   ITEM 2.
    PROPERTIES        ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   9




---



##### Table of Contents



PART II  ITEM 5.
    MARKET
    FOR VALLEYS COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS      Year Ended June 30, 2006:

High


LowFourth quarter

$
27.87


$
21.05Third quarter

$
22.00


$
19.41Second quarter

$
22.31


$
16.20First quarter

$
17.23


$
14.90   Year Ended June 30, 2005:

High


LowFourth quarter

$
16.90


$
13.36Third quarter

$
17.69


$
14.05Second quarter

$
18.99


$
9.06First quarter

$
11.45


$
9.00          10




---



##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA    Years Ended June 30,2002


2003


2004


2005


2006(3)(in thousands except per share data)Operating Results:Net sales

$
144,523


$
151,232


$
154,456


$
167,699


$
210,531Cost of products sold, excluding
    depreciation and amortization


67,906



73,143



71,558



78,345



102,396Operating, distribution and
    administrative(1)


56,188



62,368



57,231



56,874



69,536Depreciation and amortization


7,708



8,900



7,474



7,819



8,702Income from operations


12,728



6,793



18,418



24,669



30,167Interest expense


5,947



6,623



5,657



4,306



4,335Provision for income taxes


2,994



151



4,520



7,443



9,983Net earnings before the cumulative
    effect of a change in accounting principle


4,220



236



7,680



12,371



15,513Cumulative effect of a change in
    accounting principle, net of tax


















303Net earnings


4,220



236



7,680



12,371



15,210BasicEarnings before the cumulative
    effect of a change in accounting principle

$
0.45


$
0.03


$
0.82


$
1.30


$
1.61Cumulative effect per share of a
    change in accounting principle(2)

















$
(0.03
)Net earnings per share

$
0.45


$
0.03


$
0.82


$
1.30


$
1.58DilutedEarnings before the cumulative
    effect of a change in accounting principle

$
0.45


$
0.03


$
0.81


$
1.28


$
1.59Cumulative effect per share of a
    change in accounting principle

















$
(0.03
)Net earnings per share

$
0.45


$
0.03


$
0.81


$
1.28


$
1.56Weighted Average Shares:Basic


9,348



9,350



9,381



9,525



9,616Diluted


9,399



9,393



9,444



9,689



9,775Balance Sheet Data:Working capital

$
15,410


$
10,702


$
9,881


$
10,858


$
12,747Total assets


154,613



149,215



157,335



175,086



210,174Current portion of long-term debt


6,319



5,916



2,652



3,674



3,862Long-term debt, less current
    maturities


74,659



67,642



62,286



60,926



66,679Other non-current liabilities


22,484



23,057



24,017



27,606



35,669Total stockholders equity


36,634



36,143



46,108



59,862



75,612     (1)
    
    Operating, distribution and administrative expenses for the
    twelve months ended June 30, 2006 include a reduction of
    $2.4 million in rent expense, partially offset by other
    expenses of $0.2 million and $0.9 million, 11




---



##### Table of Contents



respectively, as a result of consolidating under FIN 46R,
    Variable Interest Entities owned by a related party that leases
    properties to Valley.Operating, distribution and administrative expenses for the
    twelve months ended June 30, 2005 include a reduction of
    $2.1 million in rent expense, partially offset by other
    expenses of $0.2 million and $0.8 million,
    respectively, as a result of consolidating under FIN 46R
    the Variable Interest Entities owned by a related party that
    leases properties to Valley.Operating, distribution and administrative expenses for the year
    ended June 30, 2004 include a reduction of
    $0.8 million in rent expense, partially offset by other
    expenses of $0.3 million, as a result of consolidating
    under FIN 46R, Variable Interest Entities owned by a
    related party that leases properties to Valley, effective
    March 31, 2004.(2)
    
    Effective June 30, 2006, the Company adopted Financial
    Accounting Standards Board Interpretation No. 47,
    Accounting for Conditional Asset Retirement
    Obligations (FIN 47). The $0.3 million after tax
    charge was recorded as the cumulative effect of a change in
    accounting principle related to conditional asset retirement
    obligations.(3)
    
    Fiscal 2006 includes the results of the acquisition of Plymouth
    Wayne Welding made on June 30, 2005, Reynolds Welding on
    October 31, 2005 and United Propane on December 1,
    2005.  ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  You should read the following discussion and analysis
    together with the Selected Consolidated Financial
    Data and the consolidated financial statements and related
    notes included elsewhere in this report. This discussion
    contains forward-looking statements that involve risks and
    uncertainties. Our actual results may differ materially from
    those expressed or implied in these forward-looking statements
    as a result of various factors, including those discussed under
    the headings Risk Factors and Special
    Note Regarding Forward-Looking Statements.
  Overview
  Operations
       12




---



##### Table of Contents



quarter-to-quarter
  Acquisitions
    No. 04-10
    Variable
    Interest Entities
  and/or
 13




---



##### Table of Contents



Critical
    Accounting Policies
    Trade
    Receivables
    Inventories
  first-in,
  Goodwill
    and Other Intangible Assets
   14




---



##### Table of Contents



Employee
    Health Care Benefit Reserves
    Valuation
    of Long-Lived Assets
    Income
    Taxes
    Results
    of Operations
    As a Percentage of Net SalesYear Ended June 30,2004


2005


2006Net sales


100.0
%


100.0
%


100.0
%Cost of products sold, excluding
    depreciation and amortization


46.3



46.7



48.6Operating, distribution and
    administrative expenses


37.0



33.9



33.0Depreciation and amortization


4.8



4.7



4.1Income from operations


11.9



14.7



14.3Interest expense


3.6



2.6



2.1Other income


0.1



0.3



0.4Earnings before minority interest


8.4



12.4



12.6Minority interest


0.5



0.6



0.5Earnings before taxes


7.9



11.8



12.1Provision for income taxes


2.9



4.4



4.7Net earnings


5.0
%


7.4
%


7.4
%   Comparison
    of years ended June 30, 2006 and 2005
   15




---



##### Table of Contents



16




---



##### Table of Contents



Comparison
    of years ended June 30, 2005 and 2004
                   17




---



##### Table of Contents



Quarterly
    Operating Results
    Fiscal 2005


Fiscal 2006Quarter Ended


Quarter EndedSept.


Dec.


March


June


Sept.


Dec.


March


June30


31


31


30


30


31


31


30(thousands except per share data)Net sales

$
36,201


$
43,203


$
50,488


$
37,807


$
41,663


$
56,418


$
63,578


$
48,872Income from operations


3,711



6,927



10,080



3,951



4,280



8,350



11,802



5,735Net earnings


1,563



3,493



5,540



1,775



2,036



4,391



6,424



2,359Basic earnings per share


0.16



0.37



0.58



0.19



0.21



0.46



0.67



0.24Diluted earnings per share


0.16



0.37



0.57



0.18



0.21



0.45



0.66



0.24     Year Ended June 30,2004


2005


2006First quarter


21.1
%


21.6
%


19.8
%Second quarter


25.3
%


25.8
%


26.8
%Third quarter


31.0
%


30.1
%


30.2
%Fourth quarter


22.6
%


22.5
%


23.2
%100.0
%


100.0
%


100.0
%     Liquidity
    and Capital Resources
     18




---



##### Table of Contents



Payments Due By PeriodLess








MoreThan








Than1


2-3


4-5


5Contractual Obligations

Total


Year


Years


Years


Years(In Thousands)Long-Term Debt

$
70,541


$
3,862


$
62,808


$
1,612


$
2,259Estimated Interest Payments


16,937



4,649



11,872



320



96Interest Rate Swap Payments


1,845



1,025



820







Interest Rate Swap Receipts


(2,385
)


(1,325
)


(1,060
)






Operating Leases, net of
    intercompany eliminations


8,940



1,725



3,518



3,697



Purchase Obligations


2,518



2,518











Total Obligations

$
98,396


$
12,454


$
77,958


$
5,629


$
2,355     plus
 19




---



##### Table of Contents



per annum
    Variable InterestFiscal Year Ending June 30,

Valley


Entities


Company2007

$
647,832


$
3,214,083


$
3,861,9152008


295,106



847,896



1,143,0022009


60,783,875



881,354



61,665,2292010


93,623



827,131



920,7542011


32,025



659,413



691,438Thereafter






2,258,577



2,258,577Total

$
61,852,461


$
8,688,454


$
70,540,915        20




---



##### Table of Contents



Inflation
    New
    Accounting Standards
    No. 109-1
  04-10,
      Risk
    Factors
  n investment in our common stock involves a high degree of
    risk. You should carefully consider the following risks and the
    other information contained in this prospectus before purchasing
    our common stock. The risks and uncertainties described below
    are those that we currently believe may materially affect us.
    Additional risks and uncertainties not presently known to us or
    that we currently believe are immaterial also may impair our
    business operations.
  We may
    not be able to identify, consummate and integrate suitable
    acquisitions or achieve the benefits we expect from
    acquisitions.
   21




---



##### Table of Contents



day-to-day
  We may
    need additional capital to finance our acquisitions, which may
    limit our ability to successfully grow through acquisitions or
    require us to accept unfavorable financing terms in connection
    with a potential acquisition.
    An
    impairment of goodwill or other intangible assets could have a
    material adverse effect on our results of
    operations.
    If we
    are unable to effectively manage our growth, our financial and
    managerial resources may be stressed and our business may be
    harmed.
   22




---



##### Table of Contents



We
    might not be able to achieve continued improvements in, or avoid
    deterioration in, our operating results through our process
    improvement plan.
    We
    face competition in our industry and may have difficulty
    expanding and maintaining our customer base.
    Failure
    to retain our key employees or attract and retain qualified
    technical personnel could harm our competitive
    position.
    Increased
    energy and other costs could reduce our
    profitability.
   23




---



##### Table of Contents



General
    economic and business factors that are largely out of our
    control may adversely affect our results of
    operations.
    Because
    the distribution and sale of propane is weather-related, changes
    in the weather could adversely affect our
    revenues.
    We
    could be adversely affected by increases in health care
    costs.
    The
    unionization of part of our workforce may adversely affect our
    operating results.
  and/or
  We are
    dependent upon relatively few suppliers and if one or more of
    these suppliers discontinued sales to us, our operations might
    be temporarily interrupted.
   24




---



##### Table of Contents



Our
    inability to comply with certain financial covenants in our
    revolving credit facility could have an adverse effect on our
    business and the price of our common stock.
    Our
    business is subject to product liability claims, any of which
    could have a material adverse effect on our
    business.
    We
    have been subject to litigation on other matters that could, if
    resolved unfavorably, adversely impact our operating
    results.
    There
    are transactions with related parties that may result in
    conflicts of interest.
   25




---



##### Table of Contents



Our
    financial statements reflect assets, liabilities and results of
    several entities controlled by our Chairman and in which we have
    no economic interest.
    
    less operating, distribution and administrative expense because
    the rent expense we pay to these entities is reduced in
    consolidation;
    more interest and depreciation expense because the properties
    these entities hold are financed and generate considerable
    depreciation;
    more other income because we report the rental income that these
    entities generate;
    higher balances of buildings and equipment representing the
    principal asset of these entities; and
    higher indebtedness because of the outstanding mortgage loans on
    those properties.    We are
    subject to a right of first refusal agreement which may delay or
    restrict future equity financings and
    transactions.
    
    to match any third party offer to purchase all or a material
    part of our assets;
    to match any offer to purchase shares from Mr. West and his
    affiliates that would cause their ownership of our common stock
    to drop below 51% on a fully-diluted basis; and
    to purchase all of the shares held by Mr. West and his
    affiliates if Mr. West proposes to dispose of his shares in
    a transaction prior to the expiration of the agreement that
    would result in his controlling less than 51% of our shares, or
    if we issue additional shares that would cause his ownership to
    drop below that percentage.  Provisions
    of our charter documents and Pennsylvania law could restrict
    certain actions that you may consider favorable and could
    deprive you of opportunities to sell your shares of our common
    stock at prices higher than prevailing market
    prices.
   26




---



##### Table of Contents



If we
    fail to maintain an effective system of internal controls, we
    may not be able to accurately report our financial results or
    prevent fraud. As a result, current and potential stockholders
    could lose confidence in our financial reporting, which would
    harm our business and the trading price of our
    stock.
  Form 10-K
 27




---



##### Table of Contents



ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Fair2007


2008


2009


2010


2011


Thereafter


Total


Value(In Thousands)LiabilitiesLong-term debt  ValleyFixed rate

$
648


$
295


$
216


$
94


$
31


$



$
1,284


$
1,146Weighted average interest rate


7.10
%


5.93
%


4.49
%


5.22
%


5.96
%


Variable rate









$
60,568














$
60,568


$
60,568Average interest rate










6.35
%










Long-term debt 
    Variable interestEntities mortgage debtFixed rate

$
3,214


$
848


$
881


$
827


$
659


$
2,259


$
8,688


$
7,125Weighted average interest rate


6.86
%


7.00
%


6.36
%


6.39
%


6.28
%


5.97
%Interest rate swapsVariable to fixed









$
25,000











Weighted average pay rate










4.10
%










Weighted average receive rate










5.30
%










CommitmentsOperating leases

$
4,348


$
4,426


$
4,537


$
4,650


$
4,768


$



$
22,729Intercompany elimination


(2,623
)


(2,689
)


(2,756
)


(2,825
)


(2,896
)






(13,789
)Company total

$
1,725


$
1,737


$
1,781


$
1,825


$
1,872


$



$
8,940   ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURES   28




---



##### Table of Contents



ITEM 9A.
    CONTROLS
    AND PROCEDURES  Rule 13a-15(e) 15d-15(e)
  Changes
    In Internal Control Over Financial Reporting
  Rule 13a-15(f) 15d-15(f)
  ITEM 9B.
    OTHER
    INFORMATION   29




---



##### Table of Contents



PART III  ITEM 10.
    MANAGEMENT    Years ExperienceName

Age

in Industry

PositionGary E. West


69



36


Chairman of the Board of DirectorsWilliam A. Indelicato


67



37


Vice Chairman of the Board of
    Directors and Chief Executive OfficerJames P. Hart


52



10


President, Chief Financial Officer
    and DirectorGerald W. Zehala


60



29


Executive Vice President and Chief
    Operating OfficerAugust E. Maier


77



28


DirectorBen Exley, IV


59



10


DirectorF. Walter Riebenack


67



7


DirectorRobert P. Hespe


57



15


Director   Background
    and Experience of Directors and Executive Officers
         30




---



##### Table of Contents



Regulation S-K
  Regulation S-K
  Regulation S-K
 31




---



##### Table of Contents



ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT      Number ofsecurities to





Number ofbe issued


Weighted-average exercise


securities remainingupon exercise


price of


available forof outstanding


outstanding options,


future issuanceoptions, warrants


warrants and


under equityPlan category

and rights


rights


compensation plansEquity compensation plans approved
    by security holders


277,735


$
9.39



372,265Equity compensation plans not
    approved by security holders










Total


277,735


$
9.39



372,265   ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   PART IV  ITEM 15.
    EXHIBITS,
    FINANCIAL STATEMENTS AND SCHEDULES            page E-1.
 32




---



##### Table of Contents



SIGNATURES      William
    A. Indelicato
   Chief Executive Officer
     Signature

Title

Date/s/  Gary
    E. West(Gary
    E. West)

Chairman of the Board (principal
    executive officer)

September 26, 2006/s/  William
    A.
    Indelicato(William
    A. Indelicato)

Vice Chairman, Chief Executive
    Officer, Director

September 26, 2006/s/  James
    P. Hart(James
    P. Hart)

President, Director, Chief
    Financial Officer (principal financial and accounting officer)

September 26, 2006/s/  August
    E. Maier(August
    E. Maier)

Director

September 26, 2006/s/  Ben
    Exley, IV(Ben
    Exley, IV)

Director

September 26, 2006/s/  F.
    Walter
    Riebenack(F.
    Walter Riebenack)

Director

September 26, 2006/s/  Robert
    Hespe(Robert
    Hespe)

Director

September 26, 2006  33




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets as of June 30, 2005 and 2006


F-2Consolidated
    Statements of Operations for the years ended June 30, 2004,
    2005 and 2006


F-3Consolidated
    Statements of Changes in Stockholders Equity for the years
    ended June 30, 2004, 2005 and 2006


F-4Consolidated
    Statements of Cash Flows for the years ended June 30, 2004,
    2005 and 2006


F-5Notes to
    Consolidated Financial Statements


F-6




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           
      F-1




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  CONSOLIDATED BALANCE SHEETS
  June 30, 2005 and 2006
  2005


2006ASSETSCURRENT ASSETS:Cash and cash equivalents

$
1,322,397


$
1,601,458Accounts receivable, net of
    allowance for doubtful accounts of $672,822 and $1,006,754,
    respectively


16,956,510



20,809,098Inventory


9,868,974



12,910,680Prepaids and other


1,036,410



1,705,700Current deferred tax asset


1,774,379



2,466,329Refundable taxes


1,471,519



296,843Total current assets


32,430,189



39,790,108PROPERTY, PLANT AND EQUIPMENT:Land


2,099,915



2,229,691Buildings and improvements


21,416,658



23,535,809Equipment


100,332,506



118,795,861Transportation equipment


19,249,082



21,545,468Furniture and fixtures


8,756,310



9,613,891Total property, plant and equipment


151,854,471



175,720,720Accumulated depreciation


(57,737,096
)


(63,854,868
)Net property, plant and equipment


94,117,375



111,865,852OTHER ASSETS:Intangible assets, net of
    accumulated amortization of $7,329,315 and $8,152,506,
    respectively


2,607,058



5,023,597Goodwill


45,482,910



54,197,285Deposits and other assets


448,429



531,770Total other assets


48,538,397



59,752,652TOTAL ASSETS

$
175,085,961


$
211,408,612LIABILITIES AND
    STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt

$
3,674,444


$
3,861,915Accounts payable


8,679,057



12,522,911Accrued compensation and employee
    benefits


4,181,792



4,967,701Interest rate derivatives


196,741



Other current liabilities


4,840,217



5,690,648Total current liabilities


21,572,251



27,043,175LONG-TERM DEBT, less current
    maturities


60,925,763



66,679,000DEFERRED TAX LIABILITY


26,935,848



34,042,445OTHER LONG-TERM LIABILITIES


670,615



2,861,058Total liabilities


110,104,477



130,625,678COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN VARIABLE
    INTEREST ENTITIES


5,118,999



5,171,333STOCKHOLDERS EQUITY:Common stock, par value,
    $.001 per share Authorized, 30,000,000 shares;
    Issued, 9,620,084 and 9,661,724 shares; Outstanding,
    9,574,999 shares and 9,661,724 shares, respectively


9,620



9,662Paid-in-capital


19,160,327



19,867,665Retained earnings


41,185,428



55,434,415Accumulated other comprehensive
    (loss) income


(118,806
)


299,859Treasury stock at cost, 45,085 and
    0 shares, respectively


(374,084
)


Total stockholders equity


59,862,485



75,611,601TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
175,085,961


$
211,408,612    F-2




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  CONSOLIDATED STATEMENTS OF OPERATIONS
  For the years ended June 30, 2004, 2005 and 2006
  2004


2005


2006NET SALES

$
154,455,606


$
167,698,695


$
210,531,409COSTS AND EXPENSESCost of products sold, excluding
    depreciation and amortization


71,557,747



78,345,074



102,395,711Operating, distribution and
    administrative


57,231,034



56,873,856



69,536,363Depreciation


5,811,143



6,711,035



7,879,436Amortization of intangibles


1,662,980



1,108,275



823,191Loss (gain) on disposal of assets


(225,419
)


(8,420
)


(270,174
)Total costs and expenses


136,037,485



143,029,820



180,364,527INCOME FROM OPERATIONS


18,418,121



24,668,875



30,166,882INTEREST EXPENSE


5,657,066



4,305,575



4,334,776OTHER INCOME:Interest and dividend income


225,716



202,690



219,784Other income


93,250



319,102



445,198Total other income


318,966



521,792



664,982EARNINGS BEFORE MINORITY INTEREST


13,080,021



20,885,092



26,497,088MINORITY INTEREST


880,235



1,070,588



1,000,631NET EARNINGS BEFORE TAXES


12,199,786



19,814,504



25,496,457PROVISION FOR INCOME TAXES


4,519,927



7,443,834



9,982,903NET EARNINGS BEFORE THE CUMULATIVE
    EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

$
7,679,859


$
12,370,670


$
15,513,554Cumulative effect of a change in
    accounting principle, net of tax










303,190NET EARNINGS

$
7,679,859


$
12,370,670


$
15,210,364BASICEarnings before the cumulative
    effect of a change in accounting principle

$
0.82


$
1.30


$
1.61Cumulative effect per share of a
    change in accounting principle









$
(0.03
)NET EARNINGS PER SHARE

$
0.82


$
1.30


$
1.58DILUTEDEarnings before the cumulative
    effect of a change in accounting principle

$
0.81


$
1.28


$
1.59Cumulative effect per share of a
    change in accounting principle









$
(0.03
)NET EARNINGS PER SHARE

$
0.81


$
1.28


$
1.56WEIGHTED AVERAGE SHARES:Basic


9,381,447



9,524,598



9,616,195Diluted


9,444,086



9,689,267



9,775,284    F-3




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  CONSOLIDATED STATEMENTS OF CHANGES IN
    STOCKHOLDERS EQUITY
  For the years ended June 30, 2004, 2005 and 2006
  AccumulatedOther





TotalCommon Stock


Treasury Stock


Paid-in-


Comprehensive


Retained


Stockholders


ComprehensiveShares


Amount


Shares


Amount


Capital


Loss


Earnings


Equity


IncomeBALANCE, June 30, 2003


9,620,084


$
9,620



263,250


$
(2,186,561
)

$
19,221,378


$
(2,890,059
)

$
21,988,827


$
36,143,205


$
Net earnings


























7,679,859



7,679,859


$
7,679,859Exercise of stock options










(107,750
)


894,928



(315,617
)










579,311



Unrealized gains on derivatives
    designated and qualified as cash flow hedges, net of tax
    provision of $1,080,357






















1,620,535







1,620,535



1,620,535Reclassification of unrealized
    gains on derivatives, net of tax provision of $56,810






















85,215







85,215



85,215BALANCE, June 30, 2004


9,620,084



9,620



155,500



(1,291,633
)


18,905,761



(1,184,309
)


29,668,686



46,108,125


$
9,385,609Net earnings


























12,370,670



12,370,670


$
12,370,670Dividend paid, per share $0.09


























(853,928
)


(853,928
)


Exercise of stock options










(110,415
)


917,549



(142,575
)










774,974



Tax benefit from exercise of stock
    options


















397,141











397,141



Unrealized gains on derivatives
    designated and qualified as cash flow hedges, net of tax
    provision of $665,159






















997,739







997,739



997,739Reclassification of unrealized
    gains on derivatives, net of tax provision of $45,176






















67,764







67,764



67,764BALANCE, June 30, 2005


9,620,084



9,620



45,085



(374,084
)


19,160,327



(118,806
)


41,185,428



59,862,485


$
13,436,173Net earnings


























15,210,364



15,210,364


$
15,210,364Dividend paid, per share $0.10


























(961,377
)


(961,377
)


Exercise of stock options


41,640



42



(45,085
)


374,084



205,064











579,190



Tax benefit from exercise of stock
    options


















317,728











317,728



Non-cash stock compensation expense


















184,546











184,546



Unrealized gains on derivatives
    designated and qualified as cash flow hedges, net of tax
    provision of $278,603






















417,905







417,905



417,905Reclassification of unrealized
    gains on derivatives, net of tax provision of $507






















760







760



760BALANCE, June 30, 2006


9,661,724


$
9,662






$



$
19,867,665


$
299,859


$
55,434,415


$
75,611,601


$
15,932,219    F-4




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  For the years ended June 30, 2004, 2005 and 2006
  2004


2005


2006CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
7,679,859


$
12,370,670


$
15,210,364Adjustments to reconcile net
    income to net cash provided by operating activities Amortization of
    SFAS No. 133 transition amount


85,215



(145,864
)


(1,266
)Depreciation


5,524,489



6,711,035



7,879,436Amortization


1,662,980



1,108,275



823,191Minority interest


880,235



1,070,588



1,000,631Loss (gain) on disposal of assets


107,565



(8,420
)


(270,174
)Share based compensation expense










184,546Provision for allowance on
    doubtful accounts


640,554



377,444



999,264Disposition of doubtful accounts


(708,091
)


(451,931
)


(665,332
)Disposition of inventory


143,421







Deferred taxes


1,911,411



2,065,415



1,322,354Cumulative effect of change in
    accounting principle










303,190Changes in operating assets and
    liabilities Accounts receivable


554,008



(515,417
)


(2,115,537
)Inventory


454,413



515,222



(641,675
)Prepaids and other


165,241



(152,729
)


(166,990
)Refundable taxes


404,357



(288,195
)


1,174,676Deposits and other assets


1,871,790



86,459



(83,341
)Accounts payable


1,244,408



(607,812
)


2,346,237Accrued compensation and employee
    benefits


193,473



259,599



618,575Other current liabilities


(273,559
)


2,211,714



42,700Other long-term liabilities


(1,998,303
)


(1,011,081
)


(1,308,612
)Net cash provided by operating
    activities


20,543,466



23,594,972



26,652,241CASH FLOWS FROM INVESTING
    ACTIVITIES:Proceeds from disposal of assets


51,229



1,163,011



819,627Cash from consolidation of
    variable interest entities


443,303



249,368



Purchases of property and equipment


(7,334,486
)


(10,206,302
)


(8,255,741
)Business acquisitions, net of cash
    acquired


(272,617
)


(6,744,630
)


(23,665,018
)Net cash used by investing
    activities


(7,112,571
)


(15,538,553
)


(31,101,132
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from borrowings


32,764,775



59,596,676



79,409,880Principal payments on borrowings


(48,676,738
)


(65,618,126
)


(73,669,172
)Repayment of bank overdraft.


668,046



(668,046
)


Dividend paid






(853,928
)


(961,377
)Proceeds from exercise of stock
    options


579,311



774,974



579,190Tax benefit from exercise of stock
    options






397,141



317,728Variable interest entity
    distribution






(911,715
)


(948,297
)Net cash provided (used) by
    financing activities


(14,664,606
)


(7,283,024
)


4,727,952NET CHANGE IN CASH AND CASH
    EQUIVALENTS


(1,233,711
)


773,395



279,061CASH AND CASH EQUIVALENTS,
    beginning of year


1,782,713



549,002



1,322,397CASH AND CASH EQUIVALENTS, end of
    year

$
549,002


$
1,322,397


$
1,601,458      F-5




---



##### Table of Contents



VALLEY
    NATIONAL GASES INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  June 30, 2005 and 2006
  1.
    BASIS OF
    PRESENTATION:    2.
    ORGANIZATION:    3.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES:  Principles
    of Consolidation
    Use of
    Estimates
    Cash
    Equivalents
    Trade
    Receivables
   F-6




---



##### Table of Contents



2004


2005


2006Beginning of the year

$
814,846


$
747,309


$
672,822Charges


640,554



302,957



1,333,196Deductions


(708,091
)


(377,444
)


(999,264
)End of the year

$
747,309


$
672,822


$
1,006,754   Inventory
      2005


2006Hard goods

$
8,258,169


$
10,913,055Gases


2,010,299



2,345,903Reserves


(399,494
)


(348,278
)$
9,868,974


$
12,910,680   Property,
    Plant and Equipment
    YearsBuildings and improvements

10-25Cylinders

12-30Equipment other than cylinders

5-7Transportation equipment

3-7Furniture fixtures

3-7     Goodwill
    and Other Intangible Assets
   F-7




---



##### Table of Contents



Valuation
    of Long-Lived Assets
    Employee
    Health Care Benefits Reserves
    Income
    Taxes
    Segments
  04-10,
    and/or
  Earnings
    Per Share
   F-8




---



##### Table of Contents



Accounting
    For Stock-Based Compensation
        Comprehensive
    Income
    Major
    Customers and Concentrations of Credit Risk:
      Revenue
    Recognition
   F-9




---



##### Table of Contents



Shipping
    and Handling Fees and Distribution Costs
        Disclosures
    About Fair Value of Financial Instruments
    Cash and Cash Equivalents
  Long-Term Debt
    As of June 30, 2005

As of June 30, 2006Fair



FairCarrying Amount

Value

Carrying Amount

ValueCash and cash equivalents

$
1,322,397


$
1,322,397


$
1,601,458


$
1,601,458Debt

$
64,600,207


$
63,139,483


$
70,540,915


$
68,839,306        F-10




---



##### Table of Contents



Asset
    Retirement Obligations
        June 30,


June 30,2006


2005(In Thousands)Balance at beginning of year

$
836


$
731Accretion expense


62



54Liabilities incurred


56



51Balance at end of year

$
954


$
836   New
    Accounting Standards
    No. 109-1
  04-10,
 F-11




---



##### Table of Contents



Supplemental
    Cash Flow Information
  For the Year Ended June 30,2004


2005


2006Cash paid for certain
    items Cash payments for interest

$
5,698,788


$
4,116,584


$
3,769,869Cash payments for income taxes,
    net of income tax refunds


820,966



5,334,512



7,842,350Non-cash financing and investing
    activity Issuance of consulting agreement


150,000







Adjustment of seller notes


(82,080
)






Fixed asset purchases in accounts
    payable


196,169



355,378



655,316Deposits used for business
    acquisition






1,000,000



Debt assumed through acquisition






3,584,675



3,875,192Debt assumed through the VIE
    consolidation


6,755,078



2,099,008



Net property, plant and equipment
    assumed through the VIE consolidation


11,744,710



1,428,266



   Reclassifications
    4.
    ACQUISITIONS:       F-12




---



##### Table of Contents



Cash and cash equivalents

$
424Accounts receivable


2,194Inventory


2,400Fixed assets, including cylinders,
    bulk tanks and other equipment


16,818Non-compete agreements


374Customer relationships


2,770Goodwill


8,714Accounts payable


(842
)Accrued compensation


(167
)Other liabilities


(2,545
)Deferred income taxes


(5,599
)Debt


(374
)Net assets acquired


24,167Professional fees paid


(78
)Cash acquired


(424
)Total purchase price

$
23,665     Years Ended June 30,2006


2005Net sales

$
218,811,000


$
190,871,000Net earnings before income taxes


25,402,000



20,846,000Pro forma net earnings


15,152,000



13,375,000Pro forma diluted earnings per
    share

$
1.55


$
1.38    F-13




---



##### Table of Contents



Cash and cash equivalents

$
61Accounts receivable


1,323Inventory


968Fixed assets including cylinders,
    bulk tanks and other equipment


7,324Customer lists


1,004Goodwill


4,485Accounts payable


(696
)Accrued compensation


(187
)Other


(137
)Deferred income taxes


(2,755
)Debt


(3,585
)Net assets acquired

$
7,805     5.
    GOODWILL
    AND OTHER INTANGIBLE ASSETS:    Gross


Accumulated





AccumulatedAmount


Amortization


Gross Amount


Amortizationas


as


as


as


Weightedof


of


of


of


AverageJune


June


June


June


Amortization30,


30,


30,


30,


Period2005


2005


2006


2006


(Years)Non-competition Agreements

$
8,443,480


$
7,196,332


$
8,816,980


$
7,791,134



9.0Consulting agreements


150,000



70,833



150,000



120,833



3.0Customer relationships


1,342,893



62,150



4,209,123



240,539



15.0Total

$
9,936,373


$
7,329,315


$
13,176,103


$
8,152,506     Fiscal Year Ending June 30,2007

$
672,4972008

$
631,2472009

$
360,0322010

$
250,9952011

$
237,884  F-14




---



##### Table of Contents



Balance as of June 30, 2005

$
45,482,910Goodwill acquired


8,714,375Balance as of June 30, 2006

$
54,197,285     Balance as of June 30, 2004

$
40,997,738Goodwill acquired


4,485,172Balance as of June 30, 2005

$
45,482,910     6.
    LONG-TERM
    DEBT:    2005


2006Revolving note, interest at LIBOR
    plus 1.0%, payable monthly through April 2009, collateralized by
    the assets of Valley

$
53,868,241


$
60,568,241Individuals and corporations,
    mortgages and notes, interest at 5.75% to 10.0%, payable at
    various dates through 2010


2,441,975



1,314,00456,310,216



61,882,245Original issue discount


(43,012
)


(29,784
)Current maturities


(1,434,427
)


(647,832
)Total long-term debt before
    Variable Interest Entities mortgage debt


54,832,777



61,204,629Total Variable Interest Entities
    mortgage debt


8,333,003



8,688,454Current maturities


(2,240,017
)


(3,214,083
)Total Variable Interest Entities
    long-term debt


6,092,986



5,474,371Total long-term debt

$
60,925,763


$
66,979,000        F-15




---



##### Table of Contents



VariableFiscal Year Ending June 30,

Valley


Interest Entities


Company2007

$
647,832


$
3,214,083


$
3,861,9152008


295,106



847,896



1,143,0022009


60,783,875



881,354



61,665,2292010


93,623



827,131



920,7542011


32,025



659,413



691,438Thereafter






2,258,577



2,258,577Total

$
61,852,461


$
8,688,454


$
70,540,915   7.
    PENSION
    PLANS:  (401-k) 401-k
  8.
    EARNINGS
    PER SHARE:    F-16




---



##### Table of Contents



Year Ended June 30,2004


2005


2006Net earnings available for common
    stock

$
7,679,859


$
12,370,670


$
15,210,364Basic earnings per common share:Weighted average common shares


9,381,447



9,524,598



9,616,195Basic earnings per common shares
    before the cumulative effect of a change in accounting principle

$
0.82


$
1.30


$
1.61Cumulative effect per share of a
    change in accounting principle










(0.03
)Basic earnings per common share

$
0.82


$
1.30


$
1.58Diluted earnings per common share:Weighted average common shares


9,381,447



9,524,598



9,616,195Shares issuable from assumed
    conversion of common stock equivalents


62,639



164,669



159,089Weighted average common and common
    equivalent shares


9,444,086



9,689,267



9,775,284Diluted earnings per common share
    before the cumulative effect of a change in accounting principle

$
0.81


$
1.28


$
1.59Cumulative effect per share of a
    change in accounting principle










(0.03
)Diluted earnings per common share

$
0.81


$
1.28


$
1.56     9.
    LEASE
    OBLIGATIONS:       F-17




---



##### Table of Contents



Fiscal Year Ending June 30,

Real Estate


Equipment


SubTotal


Elimination(1)


Final Total2007

$
4,318,442


$
29,532


$
4,347,974


$
2,623,345


$
1,724,6292008


4,426,403







4,426,403



2,688,929



1,737,4742009


4,537,064







4,537,064



2,756,152



1,780,9122010


4,650,490







4,650,490



2,825,056



1,825,4342011


4,766,752







4,766,752



2,895,682



1,871,070Thereafter


















Totals

$
22,699,151


$
29,532


$
22,728,683


$
13,789,l64


$
8,939,519     (1)
    
    Reflects the elimination of intercompany rent as a result of the
    adoption of FIN 46R, Consolidation of Variable
    Interest Entities effective March 31, 2004.  10.
    RELATED
    PARTY TRANSACTIONS:    2004

2005

2006Transactions Lease of buildings and equipment

$
2,774,824


$
2,135,677


$
2,420,282     out-of-pocket
  11.
    STOCK
    OPTIONS:   F-18




---



##### Table of Contents



Number of


Range of

Weighted AverageShares


Exercise Price

Exercise PriceOutstanding, June 30, 2003


481,750


$3.125 - $10.750

$
6.54Granted


50,000


$8.000


8.00Exercised


107,750


$3.125 - $8.00


5.38Cancelled


5,825


$3.75 - $6.85


6.85Outstanding, June 30, 2004


418,175


$3.125 - $10.750

$
6.09Granted


60,000


$16.000


16.00Exercised


110,415


$3.750 - $10.750


7.02Cancelled


8,300


$3.750 - $6.85


6.85Outstanding, June 30, 2005


359,460


$3.125 - $16.000

$
8.57Granted


5,000


$21.280


21.28Exercised


86,725


$3.125 - $10.750


6.68Cancelled








Outstanding, June 30, 2006


277,735


$3.125 - $21.280

$
9.39   Number of


Weighted AverageOptions Exercisable at:

Shares


Exercise PriceJune 30, 2004


192,175


$
6.73June 30, 2005


113,460


$
6.49June 30, 2006


212,735


$
7.25     As of June 30, 2006Stock Options Outstanding


Stock Options ExercisableShares Underlying


Weighted Average





Shares UnderlyingOptions


Remaining Contractual


Weighted Average


OptionsExercise Price

Outstanding


Life


Exercise Price


Outstanding_$ 3.125


12,500



3.5


$
3.125



12,5003.750


11,750



4.5



3.750



11,7505.625


10,985



2.5



5.625



10,9856.850


19,500



5.5



6.85



19,5008.000


158,000



6.1



8.000



158,00016.000


60,000



8.6







21.280


5,000



9.6







$ 9.393


277,735



6.3


$
7.251



212,735    F-19




---



##### Table of Contents



2004


2005


2006Risk-Free Interest Rate


3.8
%


3.8
%


4.0
%Expected Lives


7 years



7 years



7 yearsExpected Dividend Yield


0.00
%


0.00
%

$
0.10Expected Volatility


22.43
%


23.78
%


20.30
%   12.
    INCOME
    TAXES:      2004Amount


RateFederal statutory rate

$
4,147,927



34.0
%State taxes, net of federal benefit


617,939



5.0
%Other


(245,939
)


(2.0
)%Provision for income taxes

$
4,519,927



37.0
%   2005Amount


RateFederal statutory rate

$
6,736,931



34.0
%State taxes, net of federal benefit


990,725



5.0
%Other


(283,822
)


(1.4
)%Provision for income taxes

$
7,443,834



37.6
%   F-20




---



##### Table of Contents



2006Amount


RateFederal statutory rate

$
8,923,760



35.0
%State taxes, net of federal benefit


1,274,823



5.0
%Other


(215,680
)


(0.8
)%Provision for income taxes

$
9,982,903



39.2
%       2004


2005


2006Current provision Federal

$
773,714


$
4,423,091


$
7,004,792State


106,605



955,328



1,567,219Total current provision

$
880,319


$
5,378,419


$
8,572,011Deferred provisionFederal provision

$
3,172,992


$
1,755,603


$
1,152,939State provision


466,616



309,812



257,953Total deferred provision


3,639,608



2,065,415



1,410,892Provision for income taxes

$
4,519,927


$
7,443,834


$
9,982,903     2004


2005


2006Deferred tax assets

$
2,346,484


$
1,774,379


$
2,466,329Deferred tax liabilities


(21,977,647
)


(26,935,848
)


(34,042,445
)Net deferred tax liability

$
(19,631,163
)

$
(25,161,469
)

$
(31,576,116
)Consisting of Basis difference of property

$
(22,554,826
)

$
(26,388,142
)

$
(31,074,781
)Basis difference of inventory


289,686



182,366



247,648Derivatives designated as cash
    flow hedges


789,539



79,202



(199,908
)Financial reserves not currently
    deductible for tax purposes


1,253,536



1,291,565



1,762,926Amortization of intangibles


143,744



(730,072
)


(3,417,439
)Unearned customer deposits


447,158



403,612



1,105,438$
(19,631,163
)

$
(25,161,469
)

$
(31,576,116
)   13.
    COMMITMENTS
    AND CONTINGENCIES   F-21




---



##### Table of Contents



14.
    VARIABLE
    INTEREST ENTITIES  and/or
 F-22




---



##### Table of Contents



Revenue
    Recognition
    Property,
    Plant and Equipment
    YearsBuildings and improvements


15-40Equipment


5-10Furniture and fixtures


7  F-23




---



##### Table of Contents



As of June 30, 2006Variable InterestValley


Entities


Eliminations


CompanyASSETSCURRENT ASSETS:Cash and cash equivalents

$
558,599


$
1,042,859


$



$
1,601,458Accounts receivable, net of
    allowance for doubtful accounts of $1,006,754


20,676,689



281,990



(149,581
)


20,809,098Inventory


12,910,680











12,910,680Prepaids and other current assets


1,695,700



10,000







1,705,700Current deferred tax asset


2,466,329











2,466,329Refundable taxes


296,843











296,843Total current assets


38,604,840



1,334,849



(149,581
)


39,790,108PROPERTY, PLANT AND EQUIPMENT:Land


175,000



2,054,691







2,229,691Buildings and improvements


9,161,331



14,374,478







23,535,809Equipment


117,395,829



1,400,032







118,795,861Transportation equipment


21,372,219



173,249







21,545,468Furniture and fixtures


9,428,384



185,507







9,613,891Total property, plant and equipment


157,532,763



18,187,957







175,720,720Accumulated depreciation


(58,654,352
)


(5,200,516
)






(63,854,868
)Net property, plant and equipment


98,878,411



12,987,441







111,865,852OTHER ASSETS:Intangible assets, net of
    accumulated amortization of $8,152,506


5,022,376



1,221







5,023,597Goodwill


54,197,285











54,197,285Deposits and other assets


511,987



19,783







531,770Total other assets


59,731,648



21,004







59,752,652TOTAL ASSETS

$
197,214,899


$
14,343,294


$
(149,581
)

$
211,408,612LIABILITIES AND
    STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt

$
647,832


$
3,214,083


$



$
3,861,915Accounts payable


12,189,031



333,880







12,522,911Accrued compensation and employee
    benefits


4,967,701











4,967,701Other current liabilities


5,690,603



149,626



(149,581
)


5,690,648Total current liabilities


23,495,167



3,697,589



(149,581
)


27,043,175LONG-TERM DEBT, less current
    maturities


61,204,628



5,474,372







66,679,000DEFERRED TAX LIABILITY


34,042,445











34,042,445OTHER LONG-TERM LIABILITIES


2,861,058











2,861,058Total liabilities


121,603,298



9,171,961



(149,581
)


130,625,678COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN VARIABLE
    INTEREST ENTITIES










5,171,333



5,171,333STOCKHOLDERS EQUITY:Common stock, par value,
    $.001 per share Authorized, 30,000,000 shares;Issued and outstanding,
    9,661,724 shares


9,662



3,800



(3,800
)


9,662Paid-in-capital


19,867,665



335,985



(335,985
)


19,867,665Retained earnings


55,434,415



4,831,548



(4,831,548
)


55,434,415Accumulated other comprehensive
    income


299,859











299,859Total stockholders equity


75,611,601



5,171,333



(5,171,333
)


75,611,601TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
197,214,899


$
14,343,294


$
(149,581
)

$
211,408,612  F-24




---



##### Table of Contents



As of June 30, 2005Variable InterestValley


Entities


Eliminations


CompanyASSETSCURRENT ASSETS:Cash and cash equivalents

$
548,925


$
773,472


$



$
1,322,397Accounts receivable, net of
    allowance for doubtful accounts of $672,822


16,825,355



248,851



(117,696
)


16,956,510Inventory


9,868,974











9,868,974Prepaids and other current assets


1,026,410



10,000







1,036,410Current deferred tax asset


1,774,379











1,774,379Refundable taxes


1,471,519











1,471,519Total current assets


31,515,562



1,032,323



(117,696
)


32,430,189PROPERTY, PLANT AND EQUIPMENT:Land


75,000



2,024,915







2,099,915Buildings and improvements


7,512,593



13,904,065







21,416,658Equipment


99,138,620



1,193,886







100,332,506Transportation equipment


19,075,833



173,249







19,249,082Furniture and fixtures


8,581,988



174,322







8,756,310Total property, plant and equipment


134,384,034



17,470,437







151,854,471Accumulated depreciation


(53,073,285
)


(4,663,811
)






(57,737,096
)Net property, plant and equipment


81,310,749



12,806,626







94,117,375OTHER ASSETS:Intangible assets, net of
    accumulated amortization of $7,329,315


2,607,058











2,607,058Goodwill


45,482,910











45,482,910Deposits and other assets


434,687



13,742







448,429Total other assets


48,524,655



13,742







48,538,397TOTAL ASSETS

$
161,350,966


$
13,852,691


$
(117,696
)

$
175,085,961LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent maturities of long-term debt

$
1,434,427


$
2,240,017


$



$
3,674,444Bank overdraft.














Accounts payable


8,390,239



288,818







8,679,057Accrued compensation and employee
    benefits


4,181,792











4,181,792Interest rate derivatives


196,741











196,741Other current liabilities


4,846,043



111,870



(117,696
)


4,840,217Total current liabilities


19,049,242



2,640,705



(117,696
)


21,572,251LONG-TERM DEBT, less current
    maturities


54,832,776



6,092,987







60,925,763DEFERRED TAX LIABILITY


26,935,848











26,935,848OTHER LONG-TERM LIABILITIES


670,615











670,615INTEREST RATE DERIVATIVES














Total liabilities


101,488,481



8,733,692



(117,696
)


110,104,477COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN VARIABLE
    INTEREST ENTITIES










5,118,999



5,118,999STOCKHOLDERS EQUITY:Common stock, par value
    $.001 per share Authorized, 30,000,000 shares;
    Issued,9,620,084 shares, Outstanding,
    9,574,999 shares


9,620



3,800



(3,800
)


9,620Paid-in-capital


19,160,327



335,985



(335,985
)


19,160,327Retained earnings


41,185,428



4,779,214



(4,779,214
)


41,185,428Accumulated other comprehensive loss


(118,806
)










(118,806
)Treasury stock at cost,
    45,085 shares


(374,084
)










(374,084
)Total stockholders equity


59,862,485



5,118,999



(5,118,999
)


59,862,485TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
161,350,966


$
13,852,691


$
(117,696
)

$
175,085,961  F-25




---



##### Table of Contents



For the Year Ended June 30, 2006VariableValley


Interest Entities


Eliminations


CompanyNET SALES

$
210,531,409


$
2,420,282


$
(2,420,282
)

$
210,531,409COSTS AND EXPENSES:Cost of products sold, excluding
    depreciation and amortization


102,395,711











102,395,711Operating, distribution and
    administrative


71,011,663



944,982



(2,420,282
)


69,536,363Depreciation


7,315,939



563,497







7,879,436Amortization of intangibles


823,191











823,191Loss (gain) on disposal of assets


(46,314
)


(223,860
)






(270,174
)Total costs and expenses


181,500,190



1,284,619



(2,420,282
)


180,364,527INCOME FROM OPERATIONS


29,031,219



1,135,663







30,166,882INTEREST EXPENSE


3,910,968



423,808







4,334,776OTHER INCOME/(EXPENSE):Interest and dividend income


203,252



16,532







219,784Other income (expense)


172,954



272,244







445,198Total other income


376,206



288,776







664,982EARNINGS BEFORE MINORITY INTEREST


25,496,457



1,000,631







26,497,088MINORITY INTEREST






1,000,631







1,000,631NET EARNINGS BEFORE TAXES


25,496,457











25,496,457PROVISION FOR INCOME TAXES


9,982,903











9,982,903NET EARNINGS BEFORE THE CUMULATIVE
    EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE


15,513,554











15,513,554Cumulative effect of a change in
    accounting principle, net of tax


303,190











303,190NET EARNINGS

$
15,210,364


$



$



$
15,210,364  F-26




---



##### Table of Contents



For the Year Ended June 30, 2005VariableValley


Interest Entities


Eliminations


CompanyNET SALES

$
167,698,695


$
2,135,677


$
(2,135,677
)

$
167,698,695COSTS AND EXPENSES:Cost of products sold, excluding
    depreciation and amortization


78,345,074











78,345,074Operating, distribution and
    administrative


58,201,287



808,246



(2,135,677
)


56,873,856Depreciation


6,278,804



432,231







6,711,035Amortization of intangibles


1,108,172



103







1,108,275Loss (gain) on disposal of assets


126,284



(134,704
)






(8,420
)Total costs and expenses


144,059,621



1,105,876



(2,135,677
)


143,029,820INCOME FROM OPERATIONS


23,639,074



1,029,801







24,668,875INTEREST EXPENSE


4,066,401



239,174







4,305,575OTHER INCOME/(EXPENSE):Interest and dividend income


186,098



16,592







202,690Other income (expense)


55,733



263,369







319,102Total other income


241,831



279,961







521,792EARNINGS BEFORE MINORITY INTEREST


19,814,504



1,070,588







20,885,092MINORITY INTEREST






1,070,588







1,070,588NET EARNINGS BEFORE TAXES


19,814,504











19,814,504PROVISION FOR INCOME TAXES


7,443,834











7,443,834NET EARNINGS

$
12,370,670


$



$



$
12,370,670  F-27




---



##### Table of Contents



For the Year Ended June 30, 2004VariableValley


Interest Entities


Eliminations


CompanyNET SALES

$
154,455,606


$
1,046,559


$
(1,046,559
)

$
154,455,606COSTS AND EXPENSES:Cost of products sold, excluding
    depreciation and amortization


71,557,747











71,557,747Operating, distribution and
    administrative


57,930,774



346,819



(1,046,559
)


57,231,034Depreciation


5,713,067



98,076







5,811,143Amortization of intangibles


1,662,980











1,662,980(Loss) gain on disposal of assets


69,783



(295,202
)






(225,419
)Total costs and expenses


136,934,351



149,693



(1,046,559
)


136,037,485INCOME FROM OPERATIONS


17,521,255



896,866







18,418,121INTEREST EXPENSE


5,579,162



77,904







5,657,066OTHER INCOME/(EXPENSE):Interest and dividend income


220,147



5,569







225,716Other income (expense)


37,546



55,704







93,250Total other income


257,693



61,273







318,966EARNINGS BEFORE MINORITY INTEREST


12,199,786



880,235







13,080,021MINORITY INTEREST






880,235







880,235NET EARNINGS BEFORE TAXES


12,199,786











12,199,786PROVISION FOR INCOME TAXES


4,519,927











4,519,927NET EARNINGS

$
7,679,859


$



$



$
7,679,859   15.
    ASSET
    RETIREMENT OBLIGATIONS       F-28




---



##### Table of Contents



June 30,


June 30,2006


2005(In Thousands)Balance at beginning of year

$
836


$
731Accretion expense


62



54Liabilities incurred


56



51Balance at end of year

$
954


$
836   16.
    SUMMARY
    BY BUSINESS SEGMENT  04-10
  No. 04-10 No. 04-10
      and/or
   F-29




---



##### Table of Contents



Fiscal 2006Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
82,465


$
70,770


$
57,296


$
2,420


$



$
(2,420
)

$
210,531Cost of products sold


54,311



17,007



31,078















102,396Gross profit


28,154



53,763



26,218



2,420







(2,420
)


108,135Operating, distribution, and
    administrative expenses














945



71,011



(2,420
)


69,536Depreciation expense














563



7,316







7,879Amortization expense


















823







823Loss (gain) on sale of assets














(224
)


(46
)






(270
)Interest expense














424



3,911







4,335Interest, dividend and other income














289



376







665Minority interest














1,001











1,001Net earnings before taxes


























25,496   Fiscal 2005Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
63,636


$
55,307


$
48,756


$
2,136


$



$
(2,136
)

$
167,699Cost of products sold


41,357



12,037



24,951















78,345Gross profit


22,279



43,270



23,805



2,136







(2,136
)


89,354Operating, distribution, and
    administrative expenses














808



58,202



(2,136
)


56,874Depreciation expense














432



6,279







6,711Amortization expense


















1,108







1,108Loss (gain) on sale of assets














(135
)


127







(8
)Interest expense














240



4,066







4,306Interest, dividend and other income














280



242







522Minority interest














1,071











1,071Net earnings before taxes


























19,814   F-30




---



##### Table of Contents



Fiscal 2004Hard


PackagedGoods


Gases


Propane


VIEs


Unallocated


Eliminations


Combined(In Thousands)Sales

$
56,359


$
53,983


$
44,114


$
1,047


$



$
(1,047
)

$
154,456Cost of products sold


37,488



12,472



21,598















71,558Gross profit


18,871



41,511



27,516



1,047







(1,047
)


82,898Operating, distribution, and
    administrative expenses














347



57,931



(1,047
)


57,231Depreciation expense














98



5,713







5,811Amortization expense


















1,663







1,663Loss (gain) on sale of assets














(295
)


70







(225
)Interest expense














78



5,579







5,657Interest, dividend and other income














61



258







319Minority interest














880











880Net earnings before taxes


























12,200   17.
    QUARTERLY
    FINANCIAL INFORMATION (UNAUDITED):  Quarter EndedSeptember 30


December 31


March 31


June 30(1)(In Thousands)Fiscal 2006 Net sales

$
41,663


$
56,418


$
63,578


$
48,872Income from operations


4,280



8,350



11,802



5,735Net earnings


2,036



4,391



6,424



2,359Basic earnings per share


0.21



0.46



0.67



0.24Diluted earnings per share


0.21



0.45



0.66



0.24Fiscal 2005 Net sales

$
36,201


$
43,203


$
50,488


$
37,807Income from operations


3,711



6,927



10,080



3,951Net earnings


1,563



3,493



5,540



1,775Basic earnings per share


0.16



0.37



0.58



0.19Diluted earnings per share


0.16



0.37



0.57



0.18     (1)
    
    Operating, distribution and administrative expenses for the
    twelve months ended June 30, 2006 include a reduction of
    $2.4 million in rent expense, partially offset by other
    expenses of $0.2 million and $0.9 million,
    respectively, as a result of consolidating under FIN 46R
    the Variable Interest Entities owned by a related party that
    leases properties to Valley.(2)
    
    Operating, distribution and administrative expenses for the
    twelve months ended June 30, 2005 include a reduction of
    $2.1 million in rent expense, partially offset by other
    expenses of $0.2 million and $0.8 million,
    respectively, as a result of consolidating under FIN 46R
    the Variable Interest Entities owned by a related party that
    leases properties to Valley. F-31




---



##### Table of Contents



3.1
    
    Articles of Amendment (a)3.2
    
    Bylaws (a)4.1
    
    Form of Certificate for Common Stock (a)10.1
    
    Master Lease Agreement dated as of May 1, 2001 between the Company and West Rentals, Inc. (d)10.2
    
    Amended and Restated Right of First Refusal Agreement dated March 12, 1997 among the Company, Valley
National Gases Delaware, Inc., Valley National Gases, Inc., West Rentals, Inc., Gary E. West, Phyllis J.
West, The Gary E. West Grantor Retained Annuity Trust #1, The Gary E. West Grantor Retained Annuity
Trust #2, The Gary E. West Grantor Retained Annuity Trust #3, The Gary E. West Grantor Retained Annuity
Trust #4, The Gary E. West Grantor Retained Annuity Trust #5, The Gary E. West Grantor Retained Annuity
Trust #6 and Praxair, Inc. (a)10.3
    
    Agreement dated October 5, 1992 between the Company and John R. Bushwack providing for death,
disability and retirement benefits (a)+10.4
    
    Lease Agreement dated as of April 1, 1998 between the Company and Acetylene Products, Inc. (d)10.5
    
    1997 Stock Option Plan as amended (d)+10.6
    
    Second Amendment and Restated Credit Agreement dated May 1, 2000 between the Company and Bank
One, Indiana NA, as agent (c)10.7
    
    Agreement dated July 1, 2001 between the Company and William A. Indelicato providing for certain
Consulting payments (d)+10.8
    
    Lease Agreement dated as of April 1, 2000 between the Company and Real Equip-Lease, LLC (d)10.9
    
    Amendment dated June 28, 2002 to Second Amendment and Restated Credit Agreement dated May 1,
2000 between the Company and Bank One, Indiana NA, as agent (f)10.10
    
    Agreement dated July 1, 2002 between the Company and William A. Indelicato providing for certain
Consulting payments (f)+10.11
    
    Agreement dated February 11, 2002 between the Company and August E. Maier providing for certain
Consulting payments (f)+10.12
    
    Agreement dated June 30, 2002 between the Company and John R. Bushwack relating to assignment of
life insurance policy (f)+10.13
    
    Agreement dated June 30, 2002 between the Company and Robert D. Scherich relating to assignment of
life insurance policy (f)+10.14
    
    Lease Agreement dated as of November 5, 1997 between the Company and EquipLease Corp (f)10.15
    
    Lease Agreement dated as of September 24, 2001 between the Company and GEW Realty LLC (f)10.16
    
    Amendment dated October 28, 2002 to Second Amendment and Restated Credit Agreement dated May 1,
2000 between the Company and Bank One, Indiana NA, as agent (g)10.17
    
    Agreement dated October 15, 2002 between the Company and Michael L. Tyler (g)+10.18
    
    Agreement dated November 22, 2002 between the Company and John R. Bushwack (h)+10.19
    
    Lease Agreement dated as of May 1, 2003 between the Company and EquipLease Corp (i)10.20
    
    Amendment dated May 13, 2003 to Lease Agreement dated as of November 5, 1997 between the Company
and West Rentals, Inc. (i)10.21
    
    Amendment dated June 30, 2003 to Second Amendment and Restated Credit Agreement dated May 1,
2000 between the Company and Bank One, Indiana NA, as agent (i)10.22
    
    Agreement dated June 1, 2003 between the Company and Michael L. Tyler (i)+
 E-1




---



##### Table of Contents



10.23
    
    Agreement dated June 1, 2003 between the Company and Gerald W. Zehala (i)+10.24
    
    Agreement dated June 1, 2003 between the Company and James P. Hart (i)+10.25
    
    Agreement dated July 1, 2003 between the Company and William A. Indelicato providing for certain
Consulting payments (i)+10.26
    
    Fourth Amendment dated October 23, 2003 to Second Amended and Restated Credit Agreement dated
May 1, 2000 between the Company and Bank One, Indiana NA, as agent10.27
    
    Addendum #19 dated March 31, 2004 to Lease Agreement dated as of November 5, 1997 between the
Company and West Rentals, Inc.10.28
    
    Third Amended and Restated Credit Agreement dated April 30, 2004 between the Company and Bank One,
Indiana NA, as agent10.29
    
    Agreement dated June 1, 2004 between the Company and Gerald W. Zehala +10.30
    
    Addendum #18 dated June 7, 2004 to Lease Agreement dated as of November 5, 1997 between the
Company and West Rentals, Inc.10.31
    
    Addendum #20 dated June 30, 2004 to Lease Agreement dated as of November 5, 1997 between the
Company and West Rentals, Inc.10.32
    
    Agreement dated July 1, 2004 between the Company and William A. Indelicato providing for certain
Consulting payments+10.33
    
    Agreement dated March 9, 2005 between the Company and James P. Hart +10.34
    
    Agreement dated March 9, 2005 between the Company and Gerald W. Zehala +14.1
    
    Code of Business Conduct and Ethics21.1
    
    Subsidiaries of Registrant (a)23.1
    
    Consent of PricewaterhouseCoopers LLP (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)31.2
    
    Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)32.1
    
    Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)32.2
    
    Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
 
 (a)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1, Reg. No. 333-19973.(b)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K filed September 28, 1999.(c)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed May 15, 2000.(d)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K filed September 28, 2001.(e)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed May 15, 2002.(f)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K filed September 27, 2002.(g)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed November 14, 2002.(h)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed February 13, 2003.(i)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K filed September 29, 2003.+
    
    A management or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item
14(c) of Form 10-K. E-2