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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K

|           |  |                                                                                     
|---------- |  | ------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                     
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|           |  |                                                                                     
|           |  | For the fiscal year ended July 31, 2003                                             

Commission File Number 0-24287

BLUE RHINO CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization) |  | 56-1870472(I.R.S. Employer
Identification No.)

104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 659-6900
(Address of principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x  No o

At January 31, 2003, the aggregate market value of the registrants common
stock held by non-affiliates of the registrant was $217,847,026.

At September 30, 2003, the number of shares outstanding of registrants
common stock was 17,846,703.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants proxy statement with respect to the
2003 annual meeting of stockholders of the registrant to be filed with the
Securities and Exchange Commission have been incorporated by reference in Part
III of this Annual Report on Form 10-K.



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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that
relate to our plans, objectives, estimates, goals and future financial
performance. Words such as may, will, should, expects, intends,
plans, anticipates, believes, estimates, predicts, potential,
continue, and variations of such words and similar expressions, identify such
forward-looking statements. Such statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
speak only as of the date of this report. Our business is subject to numerous
risks and uncertainties, including: that its significant retail relationships
are generally nonexclusive and terminable at will; its ability to manage
growth; its ability to place Blue Rhino cylinder exchange at additional retail
locations; its ability to protect its intellectual property and to strengthen
its brand; risks that it will be found to have infringed the intellectual
property rights of others; its ability to mitigate the effects of high propane
commodity prices; its ability to integrate acquisitions; its ability to manage
its distributor operations; its ability to launch new products and services;
the effect of safety guidelines on consumer demand for cylinder exchange;
contingencies associated with the shareholder class action and shareholder
derivative lawsuits recently filed against the Company; and consumer confidence
and spending patterns, retailer inventory policies and the price of propane.
These and other risks and uncertainties, many of which are addressed in the
sections of this report entitled Business  Additional Factors that may Affect
our Business or Future Results and Managements Discussion and Analysis of
Financial Condition and Results of Operations or in future filings that we
make with the Securities and Exchange Commission, could cause our actual
results, performance and developments to be materially different from those
expressed or implied by any of these forward-looking statements. To the extent
permitted by applicable law, we make no commitment to update any
forward-looking statement or to disclose any facts, events or circumstances
after the date of this report that may affect the accuracy of any
forward-looking statement.

ADDITIONAL INFORMATION REGARDING TRADEMARKS

The Blue Rhino name and logo, the names RhinoTUFF®, Tri-Safe®, Bison® and
Bison design®, Uniflame®, UniGrill®, DuraClay®, GardenArt®, Americas Choice
For Grill Gas®, Endless Summer®, Endless Summer Comfort®, Grill Gas® and Grill
Gas design®, ShippingSpot® and Spot design®, SkeeterVac®, Grill Aficionado,
Fine Tune, Harmony, Spark Something Fun and Patriot are our registered and
pending trademarks. This Annual Report on Form 10-K may also include
trademarks of companies other than the registrant.

AVAILABILITY OF REPORTS

The registrants Internet website is www.bluerhino.com. The registrant
makes available, free of charge, through its website, via hyperlink to a third
party service that maintains filings made with the Securities and Exchange
Commission, its annual report on Form 10-K, its quarterly reports on Form 10-Q
and its current reports on Form 8-K, and all amendments to such reports, as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the SEC.





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BLUE RHINO CORPORATION

INDEX

|         |  |                                                                                       |  |            |    |  |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---------- | -- |  | -- | 
|         |  |                                                                                       |  | PART I     |    |  |    | 
|Item 1:  |  | Business                                                                              |  |            | 1  | 
|Item 2:  |  | Properties                                                                            |  |            | 9  | 
|Item 3:  |  | Legal Proceedings                                                                     |  |            | 9  | 
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                   |  |            | 10 | 
|         |  |                                                                                       |  | PART II    |    |  |    | 
|Item 5:  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  |            | 11 | 
|Item 6:  |  | Selected Consolidated Financial Data                                                  |  |            | 12 | 
|Item 7:  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |            | 13 | 
|Item 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |            | 22 | 
|Item 8:  |  | Financial Statements and Supplementary Data                                           |  |            | 24 | 
|Item 9:  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |            | 49 | 
|Item 9A: |  | Controls and Procedures                                                               |  |            | 49 | 
|         |  |                                                                                       |  | PART III   |    |  |    | 
|Item 10: |  | Directors and Executive Officers of the Registrant                                    |  |            | 49 | 
|Item 11: |  | Executive Compensation                                                                |  |            | 49 | 
|Item 12: |  | Security Ownership of Certain Beneficial Owners and Management                        |  |            | 49 | 
|Item 13: |  | Certain Relationships and Related Transactions                                        |  |            | 49 | 
|         |  |                                                                                       |  | PART IV    |    |  |    | 
|Item 14: |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |            | 50 | 
|         |  |                                                                                       |  | SIGNATURES |    |  | 51 | 





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PART I

Item 1.Business

General

As used in this section, the terms we, us, and our may, as the
context requires, refer together to Blue Rhino Corporation and its wholly owned
subsidiaries, Rhino Services, L.L.C., CPD Associates, Inc., USA Leasing,
L.L.C., Uniflame Corporation, QuickShip, Inc., Blue Rhino Global Sourcing, LLC,
Platinum Propane, L.L.C. (Platinum), Ark Holding Company LLC (Ark) and Blue
Rhino Consumer Products, LLC. As a result of our acquisition of Platinum in
November 2002, we increased our ownership interest in R4 Technical Center -
North Carolina, LLC (R4 Tech) on a consolidated basis by 1% to 50%. We
consolidated the results of R4 Tech beginning in the second quarter of fiscal
2003 as a result of our increased ownership and financial control.

We believe we are the leading national provider of propane cylinder
exchange as well as a leading provider of complementary propane and non-propane
products to consumers through many of the worlds greatest retailers. Our
branded propane cylinder exchange service is offered at more than 28,000 retail
locations in 48 states and Puerto Rico at leading home improvement centers,
mass merchants, hardware, grocery and convenience stores. Our retail partners
include Home Depot, Lowes, Wal*Mart, Sears, Kmart, Kroger, Food Lion,
Winn-Dixie, SuperAmerica, Circle K and ExxonMobil. Propane cylinder exchange
provides consumers with a safe and convenient alternative to traditional
propane cylinder refilling.

Our cylinder exchange segment partners with retailers and distributors to
provide consumers with a nationally branded alternative to traditional cylinder
refill. We dedicate our efforts and capital to brand development, value-added
marketing, customer service, cylinders, displays, account growth, distributor
network management and management information systems. Our distributor network
is comprised of independent and company-owned distributorships that invest in
the vehicles and other operational infrastructure necessary to operate cylinder
exchange businesses. In November 2002, we acquired ten distributors whose
territories have historically represented approximately 45% of our cylinder
exchange revenues. We believe that our distributor network affords us the
opportunity to service approximately 90% of the cylinder exchange markets in
the United States.

Our products and other segment includes the design and import of consumer
products sold through mass retailers and home improvement centers. This
segments revenues are derived from products that use propane cylinders as
their fuel source, principally propane grills, patio heaters and mosquito
elimination devices and non-propane products such as charcoal grills, fireplace
accessories and garden products. This segments revenues have historically
been strongest in the fall and winter months, which is counterseasonal to the
strongest months for our cylinder exchange segment. QuickShip, Inc., a retail
shipping service, is included within the products and other segment as it is
not currently significant on a stand-alone basis.

Our Market

Cylinder Exchange. The market for consumer propane cylinder exchange is a
large and growing market, which we currently estimate to be a $1 billion annual
market opportunity. We believe we can increase our market opportunity by
selling new propane appliance products like patio heaters and mosquito
elimination devices. Based on the most recently published Barbecue Grill Usage
and Attitude Study conducted in 2001 on behalf of the Hearth, Patio and
Barbecue Association (HPBA), we believe that approximately 49 million United
States households own a propane grill. The HPBA reports that, from 1997 to
2001, sales of propane grills exceeded the combined annual sales of charcoal,
natural gas and electric grills.

The HPBA study estimates that the average propane grill owner uses 1.8
cylinders of propane per year, which results in an estimated 88 million
cylinder transactions per year. According to the HPBA study, propane cylinder
exchange, as opposed to the traditional refilling of empty cylinders,
represented approximately 30% of all cylinder transactions in 2001, up from 25%
in 1999 and 21% in 1997. Our growth has primarily resulted from converting
consumers from the traditional refilling of empty cylinders to our convenient
and safe alternative of propane cylinder exchange.

Products. Our products group focuses on selling an assortment
propane-fueled appliances, including grills, patio heaters and mosquito
elimination devices. According to HPBA data, 76% of United States households
own a grill, 3 out of 5 barbecue grills are used year round and more than 9
million propane grills were shipped to retailers in 2002. Based on research
published by the HPBA, the market for grills and other propane appliances
exceeds $1.7 billion annually.

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Our Strategy

Our objective is to strengthen our position as the leading national
provider of propane cylinder exchange by providing the greatest value to
consumers and providing a return to our stakeholders. The key elements of our
strategy to achieve this objective are: converting refill consumers to
exchange, increasing cylinder exchange demand and leveraging our
infrastructure.



| |  | Converting Refillers to Propane Cylinder Exchange. According to the 2001
HPBA study, propane cylinder exchange as opposed to traditional refilling of
empty cylinders represents approximately 30% of all consumer cylinder
transactions, up from less than 10% in 1995.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Promote the Blue Rhino Brand and Consumer Awareness of Cylinder
Exchange.We have created a distinctive Blue Rhino brand name and logo
that we prominently feature on cylinder sleeves and display racks. In
addition, we undertake brand marketing and promotional initiatives,
including point of purchase displays, print media and cooperative
advertising, and engage in cross-marketing promotions with other
grilling-related products. We have also selectively placed targeted
broadcast and print media advertising campaigns that focus on raising
consumer awareness of our cylinder exchange program and are actively
involved with consumer, trade and regulatory associations in an effort
to promote the growth of cylinder exchange.                                                                                                                                                                                                                                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Capitalize on Recent Guidelines Requiring Overfill Prevention
Device (OPD) Valves.Beginning April 1, 2002, National Fire
Protection Association (NFPA) guidelines require that all propane
cylinders refilled be fitted with an OPD valve. As a result of this
new safety standard, many of the cylinders that are presented at refill
centers are obsolete, forcing the consumer to purchase or exchange for
a new cylinder to meet the safety standard. We currently believe that
this new safety standard will positively affect the demand for cylinder
exchange through our fiscal year 2005 as we estimate that approximately
40% of the cylinders in use still need to be upgraded as of July 31,
2003. While we expect the rate of upgrades to slow during fiscal 2004
and fiscal 2005, we still expect a positive impact on our business as
consumers who previously refilled turn to cylinder exchange to upgrade
their obsolete cylinders. Our data shows that approximately 80% of
those who try cylinder exchange remain with the program.
|
| |  |  | Develop and Selectively Expand our Retailer Relationships.We
target the following four categories of retailers for cylinder
exchange: home centers/hardware stores, mass merchants, grocery stores
and convenience stores. Our relationships with major retailers such as
Home Depot, Lowes, Wal*Mart, Sears, Kmart, Kroger, Food Lion,
Winn-Dixie, SuperAmerica, Circle K and ExxonMobil allow us to place
cylinders in a large number of convenient, high-traffic locations. We
seek to develop and selectively expand our relationships with retailers
in the following ways:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |  |  | Expand into New Locations of our Existing Retailers.We work
closely with our largest retail accounts to coordinate the rollout of
our cylinder exchange service in conjunction with the opening of their
new locations and further penetration into locations where we do not
have cylinder exchange today.                                                                                                                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Selectively Establish Relationships with New Retailers.We
believe there are approximately 225,000 potential cylinder exchange
locations in our targeted markets, of which we currently service more
than 28,000. We establish new retail relationships through direct
sales to retailers and by acquisition of other suppliers of cylinder
exchange service. We continually review our existing locations to
ensure they meet our performance criteria and we de-install
non-performing locations and relocate those assets to more suitable
locations.



| |  | Increasing Demand for Cylinder Exchange. We have the ability to provide the
consumer with the initial appliance purchase that uses a cylinder as its
fuel source and the necessary, recurring purchase of fuel through propane
cylinder exchange.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market Propane Appliances that Use Cylinders as Their Fuel Source.
We currently offer propane grills, patio heaters, portable patio
heaters and mosquito elimination devices that are sold through major
retailers such as Home Depot, Lowes, Wal*Mart, Sams and Sears. These
products are manufactured by third parties primarily in Asia. In
addition, we expect to identify additional quality-manufactured,
propane-fueled products to sell through major retailers, in many
instances the same retailers that offer the branded Blue Rhino cylinder
exchange service.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Patio Heaters.We began selling our Endless Summer® patio
heaters in December 1998. Our patio heaters use the same cylinders as
propane grills, and we believe they will increase the counterseasonal
demand for cylinder exchange.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Mosquito Eliminators.We successfully introduced our
SkeeterVac®, a propane-powered mosquito elimination device in March
2003. This product is being sold through major retailers. This
product category has begun to receive retail and consumer acceptance
and the category has grown significantly in the past few years. These
products use propane cylinders to create carbon dioxide that, when
combined with other sensory attractants, attracts blood-seeking
insects such as mosquitoes, black flies and no see-ums. The devices
then trap the insects where they dehydrate and die. If operated
continuously throughout the mosquito season, we currently expect that
mosquito exterminators will use as many as six propane cylinders. We
have developed a high performance mosquito exterminator that we
believe will help expand market acceptance of this product more
quickly and create even greater demand for cylinder exchange. We are
developing new models of our SkeeterVac® product that have added
features and benefits that we expect to begin selling to retailers for
the 2004 season.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leverage our Infrastructure.In the last five years, we have developed
what we believe to be one of the most advanced and efficient direct-store
delivery infrastructure servicing retailers. We will continue to invest in
distribution and administrative processes and systems to enhance our ability
to handle significant growth while minimizing incremental costs.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverage National Distributor Network.We have established a
network of 51 independent and company-owned distributors and we believe
our distributor network covers approximately 90% of the cylinder
exchange markets in the United States. In November 2002, we acquired
ten distributors whose territories have historically represented
approximately 45% of our revenues. We plan to leverage this network by
increasing each distributors market penetration through increased
consumer demand for cylinder exchange and the selective addition of new
retail locations. We assist our distributors ability to service
accounts by providing cylinder and cylinder display leasing, by
providing electronic billing systems through handheld terminals, by
providing other information technology and by arranging for
consolidated propane purchasing, store training and retail
merchandising.                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Investment in Refilling, Refurbishing and Recertifying Capacity.
We have made a significant investment in the specialized equipment
required to increase our refilling, refurbishing and recertifying
capacity, in an effort to satisfy the expected increase in demand of
cylinder exchange and reduce our costs. We operate a refilling,
refurbishing and recertifying facility, R4 Technical Center  North
Carolina, LLC (R4 Tech). We currently believe this facility utilizes
the most advanced technology in the industry, and is the only facility
of its kind in North America. We will lease three additional plants
that are under construction. These three plants will be smaller in scale
than our R4 Tech facility, and located in different regions of the
country. We expect to begin operations in Chicago, Denver and Los
Angeles by the spring of 2004. We
expect these facilities to provide cost efficiencies and quality
control for refilling and refurbishing cylinders. We are also
investing in two mobile filling and refurbishing facilities that will
be installed on a semi-permanent basis at company-owned distributors by
the spring of 2004. We expect the equipment costs for the three plant
facilities and two mobile filling and refurbishing facilities to be
approximately $4.4 million.
|
| |  |  | Utilize Proprietary Management Information Systems (MIS) to
Enhance Efficiency. We have developed and intend to continue to
enhance our sophisticated data and technology infrastructure to
streamline our operations. We furnish each distributor with handheld
devices that utilize Blue Rhino developed custom software to serve as
the data collection point for every delivery. This data is seamlessly
integrated with our delivery, imaging and financial databases to allow
us to provide the retailer and the distributor with a detailed
transactional and inventory history as well as demand forecasts. This
system also allows us to bill and collect from retailers through an
electronic gateway, thereby eliminating data entry of transactions and
the handling of paper documents. The reporting system enables the
distributor to better manage inventory and forecast sales volumes and
reduces errors and administrative costs for both the retailer and the
distributor.                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Market Products and Services that Leverage our Infrastructure and
Offset our Seasonality. Additional product and services allow us to
leverage our existing corporate infrastructure and offset the
seasonality of our core propane cylinder exchange business. These
include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| |  |  | Barbecue grills and fireplace accessories. Our products group
currently offers the propane-fueled products described above, as well
as non-propane products like charcoal grills and fireplace
accessories, that are sold through major retailers such as Home Depot,
Lowes, Wal*Mart and Sears. These products provide leverage with
manufacturers and offset our fixed infrastructure costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Retail Shipping Services.QuickShip, Inc., another of our wholly
owned subsidiaries, offers in-store, retail shipping services that
provide consumers with a convenient, full-service, in-store postal and
parcel shipping depot and retailers with a new revenue source. We are
exploring strategic growth alternatives with regard to this business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Competition

Cylinder exchange.The consumer propane cylinder refilling industry is
highly fragmented and competitive. Competition is based primarily upon
convenience, quality of product, service, historical relationships, perceived
safety and price. We believe that we are the leading national provider of
consumer propane cylinder exchange, but the 2001 HPBA study states that 70% of
consumers refill their cylinders rather than exchange them. Accordingly, our
primary competition currently comes from the approximately 20,000 bulk
refilling stations owned and operated by propane dealers, as well as certain
rental outlets, recreational vehicle centers and hardware stores.

Products.The $1.7 billion barbecue grill and patio heater market is
extremely competitive. In the barbecue grill industry, five of our competitors
control 90% of the market share. Competition in the direct import products
business is primarily based on price, quality and performance of products and
product features. We estimate the mosquito elimination market to be
approximately $150 million, but rapidly growing at an estimated 40% annual
rate. We believe a few competitors dominate the mosquito elimination market
today. We entered the mosquito elimination market in fiscal 2003 and believe
we have less than 10% market share.

Regulations and Standards

Cylinder exchange.The storing and dispensing of propane is covered by
guidelines published by the National Fire Protection Association in Pamphlets
54 and 58. National Fire Protection Association standards include a
requirement that all cylinders refilled after April 1, 2002 must be fitted with
an overfill prevention device. Our distributors are also governed by local
laws and regulations that vary by municipality and state. Typically, a
distributor must obtain permits from a local fire marshal for each propane
sales location. We are actively involved with the National Propane Gas
Association, an industry association that participates in the drafting of model
industry standards designed to promote uniform state and local legislation to
provide consumers, retailers and distributors with up-to-date safety
regulations. With respect to the transportation of propane by truck, we are
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation.

Products. Propane grills are tested and designed to standards determined
by the American National Standards Institute. Patio heaters are tested and
designed to standards determined by the Canadian Standards Association.
Electric grills are listed with Underwriters Laboratories and designed to
standards determined by Underwriters Laboratories. Octenol used in
conjunction with the SkeeterVac® as a sensory attractant is registered with the
Environmental Protection Agency and is classified as a pesticide.

Proprietary Rights

We have invested substantial time, effort and capital in establishing the
Blue Rhino brand and believe that our trademarks are an important part of our
business strategy. The Blue Rhino name and logo, the names RhinoTUFF®,
Tri-Safe®, Bison® and Bison design®, Uniflame®, UniGrill®, DuraClay®,
GardenArt®, Americas Choice For Grill Gas®, Endless Summer®, Endless Summer
Comfort®, Grill Gas® and Grill Gas design®, ShippingSpot® and Spot design®,
SkeeterVac®, Grill Aficionado, Fine Tune, Harmony, Spark Something Fun and
Patriot are our registered and pending trademarks. In addition, we have
patents issued for an Overflow Protection Valve Assembly and a Method for
Reconditioning a Propane Gas Tank, which expire in 2018 and 2017, respectively,
as well as certain other patents and patent applications pending. The
protection afforded by our patents is critical to our ability to provide our
cylinder exchange service cost-effectively and to maintain our competitive
advantage. In particular, we expect our Overflow Protection Valve Assembly
patent to help enable us to capitalize on the NFPA guidelines that became
effective April 1, 2002.

While we may apply for additional trademarks, patents or copyrights in the
future, we cannot be sure that any trademark, patent or copyright will be
issued, that any of our trademarks, patents or copyrights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
our intellectual property or other proprietary rights.

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Seasonality

We have experienced and currently expect to continue to experience
seasonal fluctuations in our revenues and operating income. Our revenues and
operating income have historically been highest in the spring and summer, which
includes the majority of the grilling season, and lowest in the fall and
winter. Our cylinder exchange segment, which generally achieves higher margins
than our products and other segment, experiences higher revenues and operating
income in the spring and summer. Conversely, our products and other segment
experiences higher revenues and operating income in the fall and winter.
Sustained periods of poor weather, particularly in the spring and summer, can
negatively impact our revenues. Accordingly, our results of operations in any
quarter will not necessarily be indicative of the results that we may achieve
for a full fiscal year or any future quarter.

Employees

As of September 30, 2003, we had 355 employees, of whom 224 were engaged
in distributor operations, 69 in administration and finance, 28 in sales and
marketing, 14 in information systems, and 20 in product warehouse functions.
We have not experienced any work stoppages and believe we generally have good
relations with our employees.

Financial Information About Segments and Geographic Areas

In fiscal 2003, approximately $170.9 million, or 66.2%, of our revenues
were derived from cylinder transactions and approximately $87.3 million, or
33.8%, of our revenues were derived from product sales. In fiscal 2002,
approximately $128.0 million, or 62.2%, of our revenues were derived from
cylinder transactions and approximately $77.6 million, or 37.8%, of our
revenues were derived from product sales. In fiscal 2001, approximately $85.7
million, or 62.1%, of our revenues were derived from cylinder transactions and
approximately $52.3 million, or 37.9%, of our revenues were derived from
product sales. For additional financial information regarding our individual
business segments, see Note 20 of the Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K. In fiscal 2003, 2002
and 2001, respectively, approximately $255.0 million (98.8%), approximately
$203.4 million (98.9%) and approximately $134.3 million (97.3%) of our revenues
were derived from customers in the United States. For each year, the balance
of our revenues was derived from customers located in other countries,
primarily Canada and the United Kingdom. At July 31, 2003 and 2002,
approximately $151,000 and $400,000 of our long-lived assets were located in
countries other than the United States.

Availability of Information

Our Internet website is www.bluerhino.com. We make available, free of
charge, through our website, via hyperlink to a third party service that
maintains filings made with the Securities and Exchange Commission, our annual
report on Form 10-K, our quarterly reports on Form 10-Q and our current reports
on Form 8-K, and all amendments to such reports, as soon as reasonably
practicable after they are electronically filed with, or furnished to, the SEC.

Additional Factors that may Affect our Business or Future Results

Our revenues are concentrated with a limited number of retailers under
nonexclusive arrangements that may be terminated at will.If one or more of
these retailers were to materially reduce or terminate its business with us,
our revenues may suffer. For fiscal 2003, Wal*Mart, Home Depot, and Lowes
represented approximately 36%, 18% and 11% of our net revenues, respectively.
None of our significant retail accounts are contractually bound to offer our
cylinder exchange service or products. Therefore, retailers can discontinue
our cylinder exchange service or sales of our products at any time and offer a
competitors cylinder exchange service or products or none at all. Continued
relations with a retailer depend upon various factors, including price,
customer service, consumer demand, and competition. In addition, certain of
our retailers have multiple vendor policies and may seek to offer a
competitors cylinder exchange program or products competitive with our
products at new or existing locations. If any significant retailer materially
reduces, terminates or is unwilling to expand its relationship with us, or
requires price reductions or other adverse modifications in our selling terms,
our revenues may suffer.

If our distributors do not perform to our retailers expectations, if we
encounter difficulties in managing our distributor operations, or if we or our
distributors are not able to manage growth effectively, our retail
relationships may be adversely impacted and our cylinder exchange business may
suffer.We rely exclusively on our distributors to deliver our cylinder
exchange service to retailers. Accordingly, our success depends on our ability
to maintain and manage distributor relationships and operations and on the
distributors ability to set up and adequately service retail accounts. Many
of our distributors are independent as of the date hereof, and we exercise only
limited influence over the resources that they devote to cylinder exchange.
Our retailers impose demanding

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service requirements on us, and we could suffer a loss of consumer or
retailer goodwill if our distributors do not adhere to our quality control and
service guidelines or fail to ensure an adequate and timely supply of cylinders
at retail locations. The poor performance of a single distributor to a
national retailer could jeopardize our entire relationship with that retailer
and cause our cylinder exchange business to suffer. In addition, the number of
retail locations offering Blue Rhino cylinder exchange and our corresponding
sales, have grown significantly over the past several years along with the
creation of our distributor network. Accordingly, our distributors must be
able to adequately service an increasing number of retail accounts. Certain
distributors have experienced service problems in the past, particularly during
peak demand periods such as holiday weekends. We must implement and improve
operational and financial systems and train and manage our employee base in
order to manage our expanding retailer and distributor relationships. If we or
our distributors fail to manage our growth effectively, our cylinder exchange
business may suffer.

If we experience problems associated with the R4 Technical Center, our
distributors may not be able to service our retail accounts and our cylinder
exchange business may suffer. R4 Technical Center  North Carolina, LLC (R4
Tech), is a joint venture in which we own a 49% ownership interest, Platinum
Propane, L.L.C., our wholly owned subsidiary, owns a 1% ownership interest, and
Manchester Tank & Equipment Co. (Manchester) owns a 50% interest. R4 Tech
operates an automated propane bottling and cylinder refurbishing plant in North
Carolina. Certain of our company-owned and independent distributors rely on R4
Tech for their required supplies of refilled and refurbished cylinders. We
effectively share management of R4 Tech with Manchester. If R4 Tech
experiences problems, whether operational, caused by management disagreements
or otherwise, it may be unable to meet production goals, achieve targeted
production costs or otherwise satisfy our distributors needs in which event
the ability of our distributors to service our retail accounts may be adversely
impacted and cause our cylinder exchange business to suffer. Furthermore,
based on our ownership interest, we currently recognize up to 100% of R4 Techs
net earnings or losses. For the years ended July 31, 2003, 2002 and 2001, R4
Tech incurred net losses of $597,000, $1,449,000 and $5,250,000, respectively.
If R4 Tech is unable to generate earnings, our business, financial condition
and results of operations may suffer.

If we are unable to manage the impact of recent overfill prevention device
valve guidelines, our cylinder exchange business may suffer.Guidelines
published by the NFPA in the current form of Pamphlet 58 and adopted in many
states require that all cylinders refilled after April 1, 2002 must be fitted
with an overfill prevention device valve. If we or our distributors cannot
satisfy the demand for compliant cylinders such that our retailers maintain an
adequate supply, our retailer relationships and our cylinder exchange business
may suffer. In addition, for certain customers we have fixed in advance the
price per cylinder exchange unit charged to our retailers. When pricing, we
make certain assumptions with regard to the number of cylinders that will
already have an overfill prevention device valve when presented for exchange,
on which our margins will be greater, and the number of cylinders that will
need an overfill prevention device valve. If our actual experience is
inconsistent with our assumptions, our margins on sales to that retailer may be
lower than expected, which may have an adverse effect on our financial
condition and results of operations.

Weather conditions can adversely affect our sales volume.Our cylinder
exchange segment experiences higher revenues and operating income in the spring
and summer, which includes the majority of the grilling season. Sustained
periods of poor weather, particularly in the grilling season, can negatively
affect our revenues. Poor weather may reduce consumers propensity to purchase
and use grills and other propane-fueled appliances thereby reducing demand for
cylinder exchange and our outdoor products.

We face competition from major propane providers and other cylinder
exchange providers.Major propane providers, such as AmeriGas Propane
Partners, L.P., Ferrellgas Propane Partners, L.P., Heritage Propane Partners,
L.P. and Suburban Propane Partners, L.P., could establish new cylinder exchange
businesses or expand their existing cylinder exchange businesses nationally.
These major propane providers have greater resources than we do and may be able
to undertake more extensive marketing campaigns and adopt more aggressive
pricing policies than we can. We also compete with numerous regional cylinder
exchange providers, which typically have operations in a few states, and with
local cylinder exchange providers. If these competitors expand their cylinder
exchange programs or new competitors enter the market or grow to compete with
us on a national scale, our market share and gross margins could decrease.

We are exposed to the inherent market risks associated
with new product introductions, including uncertainties about trade and
consumer acceptance.We plan to introduce a number of new products in fiscal
2004, including new models of our mosquito elimination devices. If these or
other new or recently introduced products have shortcomings related to
performance, reliability, quality or other factors, such products could fail to
achieve adequate market acceptance. The failure of our new or existing
products to achieve or enjoy market acceptance, whether for these or other
reasons, could cause us to experience reduced orders and/or high product
returns, which could have an adverse effect on our financial condition and
results of operations.

Our business and our ability to provide our products and services may be
impaired by claims that we infringe intellectual property of others.Vigorous
protection and pursuit of intellectual property rights characterize the
consumer products industry. These

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traits can result in significant, protracted and expensive litigation.
For example, on August 8, 2003, American Biophysics Corporation (ABC) filed a
patent infringement suit against the Company in federal court in Rhode Island
alleging that the SkeeterVac® product infringes certain patents of ABC. ABC
also filed a complaint with the International Trade Commission seeking to bar
further import of the SkeeterVac® product on the basis of the alleged
infringement. Litigation to determine the validity of patents or claims by
third parties of infringement of patents or other intellectual property rights
could result in significant expense and divert the efforts of our research and
development personnel and management, even if the litigation results in a
determination favorable to us. In the event of an adverse result in such
litigation, we could be required to: (i) pay substantial damages; (ii)
indemnify our customers, business partners or others; (iii) stop the
manufacture, use, import, distribution or sale of products or services found to
be infringing; (iv) discontinue the use of processes found to be infringing;
(v) expend significant resources to develop non-infringing products, services
and processes; and/or (vi) obtain a license to use third party intellectual
property rights.

If we are unable to protect our intellectual property, we may lose assets
or require costly litigation to protect our rights.We consider our patents,
copyrights and trademarks, particularly the Blue Rhino logo and name, and the
design of our product packaging, to be valuable to our business and the
establishment of our national branded cylinder exchange program. We rely on a
combination of patent, copyright and trademark laws and other arrangements to
protect our proprietary rights and could incur substantial expense to enforce
our rights under such laws. The requirement to change any of our trademarks,
service marks or trade names could entail significant expense and result in the
loss of any goodwill associated with that trademark, service mark or trade
name, and adversely impact our ability to apply for copyrights and additional
trademarks in the future. While we intend to file patent applications, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, we cannot be sure that patents will be issued on such applications
or that our existing or future patents will not be successfully contested by
third parties. Also, since issuance of a valid patent does not prevent other
companies from using alternative, non-infringing technology, we cannot be sure
that any of our patents (or patents issued to others and licensed to us) will
provide significant commercial protection, especially as new competitors enter
the market. In addition to patent protection, we also rely on trade secrets
and other non-patented proprietary information relating to our product
development and operating activities. We try to protect this information
through appropriate efforts to maintain its secrecy, including confidentiality
agreements. We cannot be sure that these efforts will be successful or that
confidentiality agreements will not be breached. We also cannot be sure that
we would have adequate remedies for any breach of such agreements or other
misappropriation of our trade secrets, or that our trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by others. Where necessary, we may initiate litigation to enforce
our patent or other intellectual property rights. Any such litigation may
require us to spend a substantial amount of time and money and could distract
management from our day-to-day operations. Moreover, there is no assurance that
we will be successful in any such litigation or that such litigation will not
result in successful counterclaims or challenges to the validity of our
intellectual property rights.

Propane supplies and costs are unpredictable and propane price increases
could adversely impact our profit margins.Our independent and company-owned
distributors purchase propane from natural gas providers and oil refineries
that produce propane as a by-product of the refining process. R4 Tech also
purchases propane. The supply and price of propane fluctuates depending upon
underlying natural gas and oil prices and the ability of suppliers to deliver
propane. A substantial increase in propane prices could lead to decreased
profit margins for us or our distributors and could impact our distributors
ability or, in the case of our independent distributors, desire, to service our
retail accounts which could negatively affect our business.

Propane is a volatile product and we face potential product liability.
Propane is a gas which, if exposed to flame or high pressure, may ignite or
explode, potentially causing significant property damage and bodily harm. In
the past, fires and other incidents have occurred at refurbishing and refilling
facilities operated by our distributors that resulted in bodily injuries and
substantial property damage. Because of the volatility of propane, accidents
may occur during the refurbishing, refilling, transport, storage, exchange, use
or disposal of cylinders. Because we own certain distributors that perform
these activities and, even with respect to our independent distributors,
because the Blue Rhino name and logo are prominently displayed on all cylinders
and cylinder displays, we could be subjected to damage claims. In addition, we
offer propane-fueled appliances like grills, patio heaters and mosquito
exterminators that use propane cylinders as their fuel source. Accidents may
occur while using the appliances due to misuse or malfunction, resulting in
property damage and bodily harm. We also sell an overfill protection device
(OPD) valve for use in propane cylinders. Accidents may occur while using
propane cylinders fitted with this valve due to misuse or failure, resulting in
property damage or bodily harm. Because we have offered these propane
appliances and OPD valves to consumers, we could be subject to damage claims.
We could also be subject to claims related to manufacturing defects or
workplace accidents that may occur at R4 Tech and at the production facilities
of our company-owned distributors. If an accident happens, we could incur
substantial expense, receive adverse publicity and suffer a loss of sales. We
cannot be sure that insurance will provide sufficient coverage in any
particular case or that we or our distributors will be able to continue to
obtain desired insurance coverage at an acceptable cost.

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In addition to damage claims, any cylinder-related accident (or
intentional wrongdoing) involving personal injury could adversely affect our
reputation and the perceived benefits of cylinder exchange and, particularly if
the accident were to trigger adverse publicity, could affect the willingness of
retailers to continue to offer, or consumers to continue to use, cylinder
exchange, any of which may cause our business, financial condition and results
of operations to suffer.

Adverse changes in the prevailing political or economic climates in China
or negative ramifications resulting from a spread of the outbreak of Severe
Acute Respiratory Syndrome (SARS) could reduce the supply of products available
to us to import for sale or require us to incur substantial additional expense
to import products for sale. We rely on the products segment of our business
for a significant percentage of our net sales. We currently import a
substantial percentage of our products from companies based in China. As a
result, we may be adversely affected by changes in the prevailing political or
economic climates in China. In addition, if China were to lose its most
favored nation trade status with the United States, there would likely be an
increase in duty for our products, which may cause our business, financial
condition and results of operations to suffer. There have recently been
proposals in the United States to impose significant duties on Chinese imports
as a result of an undervaluation of the Chinese currency.

Litigation matters could adversely affect our operating results and
financial condition.On May 19, 2003, a securities class action was filed
against the Company in federal court in Los Angeles, California. The
plaintiff alleges violations of Section 10(b) of the Securities Exchange Act of
1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder, and Section
20(a) of the Exchange Act. In particular, the plaintiff has alleged that we
and certain individual officers and directors violated the federal securities
laws by, among other things, making materially false and misleading statements
and/or failing to disclose material facts related to our financial performance,
the impact of overfill prevention device regulations on our business, the
financial position of distributors Ark and Platinum, and our acquisition of Ark
and Platinum. The complaint seeks unspecified damages, plus reasonable costs
and expenses, including attorneys fees and experts fees. Two shareholder
derivative actions, as well as several tag-along class actions that were
subsequently consolidated with the original class action complaint, followed,
all arising out of substantially the same alleged facts and circumstances.
Defending against securities class actions and other litigation matters will
likely require significant attention and resources and, regardless of the
outcome, result in significant legal expenses, which will adversely affect our
results unless covered by insurance proceeds. If our defenses are ultimately
unsuccessful, or if we are unable to achieve a favorable resolution, we could
be liable for damage awards that could materially adversely affect our results
of operations and financial condition.

We depend on our management information systems to manage all aspects of
our business effectively. We depend on our management information systems
(MIS) to process orders, manage inventory and accounts receivable collections,
maintain distributor and customer information, maintain cost-efficient
operations and assist distributors in delivering products on a timely basis.
In addition, our staff of MIS professionals relies heavily on the support of
several key consultants. Any disruption in the operation of our MIS, loss of
employees knowledgeable about such systems, termination of our relationship
with one or more of these key consultants or failure to continue to modify such
systems effectively as our business expands could negatively affect our
business.

Changes in accounting requirements could impact the reporting of our
financial results or financial position.From time to time, the Financial
Accounting Standards Board (FASB) issues statements and interpretations that
may impact the reporting of the Companys consolidated results of operations or
its financial position. It is possible that any one or more of these
pronouncements could cause the Company to report lower net income (or a greater
net loss) than it would have under existing accounting requirements or could
cause the Company to have to record reductions in the value of goodwill or
other balance sheet items. For example, the FASB has issued Interpretation No.
46 (FIN 46), Consolidation of Variable Interest Entities, which addresses the
consolidation of business enterprises (variable interest entities), to which
the usual condition of consolidation, a controlling financial interest, does
not apply. We have goodwill associated with previous acquisitions that may be
affected by FIN 46.

Failure to comply with the regulations applicable to propane may subject
us to fines, penalties or injunctions that may negatively affect our cylinder
exchange business. Federal, state and local authorities regulate the
transportation, handling, storage and sale of propane in order to protect
consumers, employees, property and the environment. The handling of propane in
many regions of the United States is subject to guidelines published by the
NFPA in the current form of Pamphlet 58. These guidelines require that all
cylinders produced or recertified after September 30, 1998 and all cylinders
refilled after April 1, 2002 must be fitted with an OPD valve. Failure of our
company-owned or independent distributors to comply with any of these
regulations could subject us to potential remedial action for violation of such
regulations, which could result in fines, penalties and/or injunctions.

Potential retail partners may not be able to obtain necessary permits or
may be substantially delayed in obtaining necessary permits, which may
adversely impact our ability to grow our cylinder exchange retail locations.
Local ordinances, which vary from jurisdiction to jurisdiction, generally
require retailers to obtain permits to store and sell propane cylinders. These
ordinances influence

8



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retailers acceptance of cylinder exchange, distribution methods, cylinder
packaging and storage. The ability and time required to obtain permits varies
by jurisdiction. Delays in obtaining permits have from time to time
significantly delayed the installation of new retail locations. Some
jurisdictions have refused to issue the necessary permits, which has prevented
some installations. Certain jurisdictions may also impose additional
restrictions on our ability to market and our distributors ability to
transport cylinders or otherwise maintain our cylinder exchange program.
Violations of current or future regulations by us or our distributors, may
cause our cylinder exchange business to suffer.

Item 2.Properties

We lease our Winston-Salem, North Carolina headquarters and warehouse
space from Rhino Real Estate, LLC, a company affiliated with Billy D. Prim, our
Chairman and Chief Executive Officer, and Andrew J. Filipowski, our Vice
Chairman. Pursuant to the lease terms, we pay aggregate annual rent of
$505,000, plus our allocable share of all taxes, utilities and maintenance.
The lease for the majority of the space terminates on December 31, 2003, and
the leases for the balance of the space terminate on May 1, 2004 and October
31, 2007. We currently anticipate renewing the leases or entering into similar
leases for our headquarters at least through the end of calendar year 2005.

Uniflame Corporation, our wholly owned subsidiary, leases an
office/warehouse facility located in Zion, Illinois from H & M Enterprises,
LLC, a company affiliated with the president of Uniflame. Pursuant to the
terms of the lease, Uniflame pays annual rent of $324,000, plus its allocable
share of all taxes, utilities and maintenance. The lease terminates on March
31, 2005. This facility is used by Uniflame in the conduct of our products
business segment.

We own the land, buildings and equipment used by R4 Tech in Hamptonville,
North Carolina. The land consists of approximately 17 acres and the buildings
consist of: (i) the office building containing approximately 4,930 square feet,
(ii) the production building containing approximately 23,900 square feet, (iii)
the warehouse building containing approximately 17,955 square feet, and (iv)
the service building containing approximately 4,800 square feet.

Platinum and Ark lease real estate and buildings in North Carolina,
Virginia, South Carolina, Georgia, Florida, Tennessee, New Jersey, Illinois,
Minnesota, Colorado, Nevada, Kansas, Utah, California and Washington under
non-cancelable operating leases with initial terms expiring between 2004 and
2008. Substantially all of these real estate leases contain renewal options
upon expiration of the initial lease terms.

In the opinion of our management, our properties have been well
maintained, are in sound operating condition and contain all equipment and
facilities necessary for us to operate at present levels.

Item 3.Legal Proceedings

Patent Lawsuit and Related Proceedings

On August 8, 2003, American Biophysics Corporation (ABC) filed a patent
infringement suit against us in the U.S. District Court for the District of
Rhode Island. ABC alleges that the SkeeterVac® mosquito elimination product
infringes certain patents of ABC. The complaint seeks treble damages and
attorneys fees. Also on August 8, 2003, ABC filed a complaint against us with
the United States International Trade Commission (ITC) pursuant to Section
337 of the Tariff Act of 1930, as amended (Section 337). That complaint
requests that the ITC institute an investigation regarding alleged violations
of Section 337 based upon the importation into the United States by us and/or
the offer for sale and sale within the United States after importation of
SkeeterVac® products that allegedly infringe certain ABC patents. ABC also
requested that the ITC issue a permanent exclusion order pursuant to Section
337, which would exclude further entry into the United States of the allegedly
infringing products, and a permanent cease and desist order under Section 337,
which would prohibit the importation into the United States, the sale for
importation, and/or sale within the United States after importation, of
allegedly infringing products. On August 13, 2003, our subsidiary, Blue Rhino
Consumer Products, LLC (BRCP), filed suit against ABC in the U.S. District
Court for the Middle District of North Carolina seeking a declaration that
BRCPs SkeeterVac® product does not infringe ABCs patents. On August 14,
2003, BRCP and another one of our subsidiaries, CPD Associates, Inc. (CPD),
filed a lawsuit in the Superior Court of North Carolina, Forsyth County,
against ABC asserting unfair and deceptive trade practices, unfair competition
under North Carolina common law, tortious interference with business relations
and prospective economic advantage, violations of Section 43(a) of the Lanham
Act, and violation of the Anticybersquatting Consumer Protection Act. The
complaint seeks, among other relief against ABC, a permanent injunction, treble
damages, punitive damages, attorneys fees and other costs and expenses. This
case has been removed to the U.S. District Court for the Middle District of
North Carolina. We believe that ABCs claims against us are without merit and
intend to vigorously defend ourselves.

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Securities Class Actions and Shareholder Derivative Actions

On May 19, 2003, George Schober filed a shareholder securities class
action lawsuit in the United States District Court for the Central District of
California, naming us, along with four of our officers and directors, as
defendants. The plaintiff seeks to represent a class of investors who
purchased our publicly-traded securities between August 2002 and February 2003.
The plaintiff alleges violations of Section 10(b) of the Securities Exchange
Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder, and
Section 20(a) of the Exchange Act. In particular, the plaintiff has alleged
that we and the individual defendants violated the federal securities laws by,
among other things, making materially false and misleading statements and/or
failing to disclose material facts related to our financial performance, the
impact of overfill prevention device regulations on our business, the financial
position of distributors Ark and Platinum, and our acquisition of Ark and
Platinum. The complaint seeks unspecified damages, plus reasonable costs and
expenses, including attorneys fees and experts fees. Six tag-along
securities class actions arising out of the same alleged facts and
circumstances as the original action were subsequently filed in the same court.
The cases have been consolidated into a single action and Andy Lee, Charles
Anderberg and Steven Lendeman have been designated as lead plaintiffs. On May
22, 2003, Richard Marcoux filed a shareholder derivative action in the Superior
Court of California, Los Angeles County, naming all of our directors and
certain of our officers as individual defendants and us as a nominal defendant.
On June 19, 2003, Randy Gish filed a substantially similar derivative action
in the same court. Both the Marcoux and Gish actions were removed to the U.S.
District Court for the Central District of California. The
Marcoux case was
subsequently remanded to Los Angeles Superior Court, but motions are pending to
dismiss or stay that matter. The derivative actions arise out of substantially
similar facts and circumstances as the securities class actions, and allege
violations of the California Corporations Code, breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets and unjust
enrichment. We believe that all of the foregoing securities class actions and
derivative actions are without merit and intend to vigorously defend ourselves
against these actions.

Settlement of Lawsuit with Former Independent Auditor

On March 7, 2003, pursuant to a negotiated settlement agreement, we
dismissed our lawsuit against PricewaterhouseCoopers (PwC) by filing a
Voluntary Dismissal with Prejudice in the Superior Court of Forsyth County,
North Carolina. This lawsuit had alleged violations of professional standards
by PwC and failure to comply with contractual obligations during PwCs
engagement as our auditor. The net proceeds to us in the settlement were
recognized in our fiscal third quarter and, after attorneys fees and other
third quarter litigation expenses, were approximately $2.5 million. The
specific terms of the settlement are confidential.

Other Litigation

We are also a party to other litigation which we consider routine and
incidental to our business. We do not expect the results of any of these
other actions to have a material adverse effect on our business, results of operation
or financial condition.

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

Not applicable.

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PART II

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

Our common stock is traded on The Nasdaq Stock Market under the symbol
RINO. The table below shows the high and low per share sales prices of our
common stock for the periods indicated, as reported by The Nasdaq Stock Market.
As of September 30, 2003, there were 140 record holders of our common stock.

|                                |  |                       |       |     |  |   |       | 
|------------------------------- |  | --------------------- | ----- | --- |  | - | ----- | 
|                                |  | Price Range of Common
|                                |  | Stock                
|                                |  |                      
|Fiscal Year Ended July 31, 2003 |  | High                  |       | Low
|                                |  |                       |       |    
|First Quarter                   |  | $                     | 17.71 |     |  | $ | 10.26 | 
|Second Quarter                  |  |                       | 19.40 |     |  |   | 14.69 | 
|Third Quarter                   |  |                       | 14.29 |     |  |   | 9.32  | 
|Fourth Quarter                  |  |                       | 15.89 |     |  |   | 10.91 | 

|                                |  |                       |       |     |  |   |      | 
|------------------------------- |  | --------------------- | ----- | --- |  | - | ---- | 
|                                |  | Price Range of Common
|                                |  | Stock                
|                                |  |                      
|Fiscal Year Ended July 31, 2002 |  | High                  |       | Low
|                                |  |                       |       |    
|First Quarter                   |  | $                     | 4.88  |     |  | $ | 3.00 | 
|Second Quarter                  |  |                       | 7.54  |     |  |   | 4.50 | 
|Third Quarter                   |  |                       | 9.57  |     |  |   | 6.90 | 
|Fourth Quarter                  |  |                       | 14.57 |     |  |   | 8.60 | 

We have never declared nor paid any cash dividends on shares of our common
stock. We currently intend to retain all earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Payments of cash dividends are prohibited by certain of our existing
financing agreements and may be prohibited in the future under then existing
financing agreements. Even if not prohibited by our financing agreements, the
payment of cash dividends in the future will be at the discretion of the Board
of Directors and subject to applicable law, and there can be no assurance that
we will pay any dividends in the future.

Effective May 29, 2003, we issued 4,541 shares of our common stock upon
the conversion of a warrant to purchase 11,864 shares of our common stock at an
exercise price of $8.48 per share by a single warrant holder that we believe to
be an accredited investor. We issued the shares in reliance on Section 3(a)(9)
of the Securities Act as securities exchanged with an existing security holder
exclusively where no commission or other remuneration is paid or given,
directly or indirectly, for soliciting such exchange.

Effective June 2, 2003, we issued 8,080 shares of our common stock upon
the conversion of a warrant to purchase 23,728 shares of our common stock at an
exercise price of $8.48 per share by a single warrant holder that we believe to
be an accredited investor. We issued the shares in reliance on Section 3(a)(9)
of the Securities Act as securities exchanged with an existing security holder
exclusively where no commission or other remuneration is paid or given,
directly or indirectly, for soliciting such exchange.

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Item 6.Selected Consolidated Financial Data

The following selected consolidated statements of operations and balance
sheet data of the Company as of and for the periods ended July 31, 2003, 2002,
2001, 2000 and 1999 have been derived from our audited consolidated financial
statements. The financial data set forth below should be read in conjunction
with Item 7  Managements Discussion and Analysis of Financial Condition and
Results of Operations and Item 8  Financial Statements and Supplementary
Data  Consolidated Financial Statements of the Company and Related Notes
Thereto included elsewhere herein.

|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |        |        | 
|---------------------------------------------- | ----------------------------------- | -------------------------------------------------- | ------- | ----------------------------------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                               |                                     |                                                    |         | Fiscal Year Ended                  
|                                               |                                     |                                                    |         |                                    
|                                               |                                     |                                                    |         | July 31,                            |         | July 31, |         | July 31, |         | July 31, |         | July 31,
|                                               |                                     |                                                    |         | 2003                                |         | 2002     |         | 2001     |         | 2000     |         | 1999    
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |         
|                                               |                                     |                                                    |         | (In thousands, except per share and
|                                               |                                     |                                                    |         | retail locations data)             
|Consolidated Statements of Operations Data:    |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Net revenues                                   |                                     | $                                                  | 258,222 |                                     |         | $        | 205,585 |          |         | $        | 137,957 |          |         | $ | 78,230  |        |        | $ | 53,820 |       
|Operating costs and expenses:                  |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Cost of sales                       |                                                    |         | 196,084                             |         |          |         | 159,440  |         |          |         | 106,783  |         |   |         | 57,994 |        |   |        | 38,661 |       
|                                               | Selling, general and administrative |                                                    |         | 28,404                              |         |          |         | 21,886   |         |          |         | 18,688   |         |   |         | 12,966 |        |   |        | 8,539  |       
|                                               | Depreciation and amortization       |                                                    |         | 9,261                               |         |          |         | 7,888    |         |          |         | 8,461    |         |   |         | 4,717  |        |   |        | 2,872  |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               |                                     | Total operating costs and expenses                 |         |                                     | 233,749 |          |         |          | 189,214 |          |         |          | 133,932 |   |         |        | 75,677 |   |        |        | 50,072 | 
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               |                                     | Income from operations                             |         |                                     | 24,473  |          |         |          | 16,371  |          |         |          | 4,025   |   |         |        | 2,553  |   |        |        | 3,748  | 
|Other expenses (income):                       |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Interest expense (1)                |                                                    |         | 7,784                               |         |          |         | 6,217    |         |          |         | 5,134    |         |   |         | 3,107  |        |   |        | 837    |       
|                                               | Loss on investees (2)               |                                                    |         | 455                                 |         |          |         | 714      |         |          |         | 2,572    |         |   |         | 403    |        |   |        | 311    |       
|                                               | Nonrecurring items (3)              |                                                    |         |                                    |         |          |         |         |         |          |         | 449      |         |   |         |       |        |   |        | 551    |       
|                                               | Other, net (4)                      |                                                    |         | (2,513                              | )       |          |         | (422     | )       |          |         | (301     | )       |   |         | 16     |        |   |        | (48    | )     
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               |                                     | Income (loss) before income taxes                  |         |                                     | 18,747  |          |         |          | 9,862   |          |         |          | (3,829  | ) |         |        | (973   | ) |        |        | 2,097  | 
|Income taxes                                   |                                     |                                                    | 2,217   |                                     |         |          | 47      |          |         |          | 123     |          |         |   | 32      |        |        |   | 30     |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               |                                     | Net income (loss)                                  |         | $                                   | 16,530  |          |         | $        | 9,815   |          |         | $        | (3,952  | ) |         | $      | (1,005 | ) |        | $      | 2,067  | 
|Preferred dividends                            |                                     |                                                    | 71      |                                     |         |          | 1,789   |          |         |          | 770     |          |         |   |        |        |        |   |       |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               |                                     | Income (loss) available to common
Stockholders (5) |         | $                                   | 16,459  |          |         | $        | 8,026   |          |         | $        | (4,722  | ) |         | $      | (1,005 | ) |        | $      | 2,067  | 
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Per Share Data:                                |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Earnings (loss) per common share:              |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Basic                               |                                                    | $       | 1.00                                |         |          | $       | 0.63     |         |          | $       | (0.41    | )       |   | $       | (0.12  | )      |   | $      | 0.27   |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Diluted                             |                                                    | $       | 0.86                                |         |          | $       | 0.55     |         |          | $       | (0.41    | )       |   | $       | (0.12  | )      |   | $      | 0.27   |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Shares used in per share calculations:         |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Basic                               |                                                    |         | 16,430                              |         |          |         | 12,658   |         |          |         | 11,641   |         |   |         | 8,736  |        |   |        | 7,645  |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|                                               | Diluted (6)                         |                                                    |         | 19,239                              |         |          |         | 14,701   |         |          |         | 11,641   |         |   |         | 8,736  |        |   |        | 7,787  |       
|                                               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Selected Operating Data:                       |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Retail locations (at period end)(7)            |                                     |                                                    | 28,000  |                                     |         |          | 26,000  |          |         |          | 27,000  |          |         |   | 25,000  |        |        |   | 18,500 |       
|Cylinder transactions                          |                                     |                                                    | 10,551  |                                     |         |          | 8,267   |          |         |          | 6,243   |          |         |   | 4,995   |        |        |   | 3,710  |       
|Consolidated Balance Sheet Data:               |                                     |                                                    |         |                                     |         |          |         |          |         |          |         |          |         |   |         |        |        |   |        |       
|Cash and cash equivalents                      |                                     | $                                                  | 2,495   |                                     |         | $        | 1,563   |          |         | $        | 1,044   |          |         | $ | 1,079   |        |        | $ | 913    |       
|Working capital                                |                                     |                                                    | 26,692  |                                     |         |          | 15,256  |          |         |          | 18,761  |          |         |   | 5,667   |        |        |   | 7,442  |       
|Total assets                                   |                                     |                                                    | 210,805 |                                     |         |          | 143,373 |          |         |          | 127,344 |          |         |   | 108,175 |        |        |   | 59,899 |       
|Long-term obligations, less current maturities |                                     |                                                    | 42,800  |                                     |         |          | 39,259  |          |         |          | 50,931  |          |         |   | 42,396  |        |        |   | 24,111 |       
|Total stockholders equity                     |                                     |                                                    | 132,468 |                                     |         |          | 78,362  |          |         |          | 57,149  |          |         |   | 41,952  |        |        |   | 27,338 |       



---

|(1) |  | See Note 8 of Notes to Consolidated Financial Statements for an
explanation of these items for fiscal years 2003, 2002 and 2001. For
fiscal 2000, $158 was reclassified from extraordinary loss as a result of
the implementation of a new accounting standard.                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | See Note 11 of Notes to Consolidated Financial Statements for an
explanation of these items for fiscal years 2003, 2002 and 2001. During
fiscal 2000, the Company had a loss on investee related to the operations
of R4 Tech. During fiscal 1999, the Company had a loss on investee
related to its convertible loan to Bison Valve, LLC.
|   
|(3) |  | See Note 12 of Notes to Consolidated Financial Statements for an
explanation of this item in fiscal 2001. During fiscal 1999, the Company
incurred costs in connection with an offering of common stock that was
terminated before completion due to unfavorable market conditions.                                                       
|   
|(4) |  | See Note 9 of Notes to Consolidated Financial Statements for an
explanation of these items for fiscal years 2003, 2002 and 2001.                                                                                                                                                                                                          
|   
|(5) |  | See Note 15 of Notes to Consolidated Financial Statements for fiscal
years 2003, 2002 and 2001.                                                                                                                                                                                                                                           
|   
|(6) |  | For fiscal years 2001 and 2000, common stock options and common stock
warrants have been excluded from the computation of diluted loss per share
because they were anti-dilutive.                                                                                                                                                         
|   
|(7) |  | The number of retail locations we report in any period is net of any
retail locations at which we have discontinued our cylinder exchange
service, whether due to closings, relocations, performance, competitive,
regulatory or other factors.                                                                                           

12



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

The following discussion and analysis should be read in conjunction with
Item 1  Business  Additional Factors that may Affect our Business or Future
Results, Item 6  Selected Consolidated Financial Data and our Consolidated
Financial Statements and Notes thereto included in Item 8 of this Annual Report
on Form 10-K.

Overview

Blue Rhino was founded in March 1994. We believe we have become the
leading national provider of propane cylinder exchange and a leading provider
of complementary propane and non-propane products to consumers through many of
the worlds greatest retailers. Our branded propane cylinder exchange service
is offered at more than 28,000 retail locations in 48 states and Puerto Rico,
including leading home improvement centers, mass merchants, hardware, grocery
and convenience stores. Our retail partners include Home Depot, Lowes,
Wal*Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica, Circle K
and ExxonMobil. Propane cylinder exchange provides consumers with a safe and
convenient alternative to traditional propane tank refilling.

Our cylinder exchange segment partners with retailers and distributors to
provide consumers with a nationally branded alternative to traditional cylinder
refill. We dedicate our efforts and capital to brand development, value-added
marketing, customer service, cylinders, displays, account growth, distributor
network management and management information systems. Our distributor network
is comprised of independent and company-owned distributorships that invest in
the vehicles and other operational infrastructure necessary to operate cylinder
exchange businesses. In November 2002, we acquired ten distributors whose
territories have historically represented approximately 45% of our cylinder
exchange revenues. We believe that our distributor network affords us the
opportunity to service approximately 90% of the consumer cylinder exchange
markets in the United States.

We currently offer three types of cylinder transactions: (i) like-for-like
cylinder exchanges; (ii) cylinder exchanges with valve upgrades offering
additional safety features; and (iii) filled cylinder sales. Cylinder
transactions accounted for 66.2%, 62.2% and 62.1% of our net revenues in fiscal
2003, 2002 and 2001, respectively.

Our products and other segment revenue grew in fiscal 2003 to $87.3
million from $77.6 million in fiscal 2002 primarily due to the successful
launch of the SkeeterVac® product. Our products and other segment includes the
design and import of consumer products sold through mass retailers. The
segments revenues are derived from products that use propane cylinders as
their fuel source, principally grills, patio heaters and mosquito elimination
devices and non-propane products such as charcoal grills, fireplace accessories
and garden products. This segments revenues have historically been strongest
in the fall and winter months, which is counterseasonal to the strongest months
for our cylinder exchange segment. QuickShip, Inc., a retail shipping services
company that we acquired in October 2000, is included within the products
segment as it is not currently significant on a stand-alone basis. See Note 17
of Notes to Consolidated Financial Statements.

Our revenues are influenced by a number of factors, including seasonality,
consumer awareness, weather conditions, new propane appliance sales, price,
promotional activities, advertising and those factors described above under
Business  Additional Factors that may Affect our Business or Future Results.
We believe we have strategically expanded our business to better diversify our
revenue stream, balance our seasonality and offer and promote more products
that use our core cylinder exchange service like barbecue grills, patio heaters
and mosquito elimination devices.

Our cost of sales for cylinder exchange is comprised of two components.
For independent distributors, cost of sales is a contractually determined fixed
base amount, along with a variable component based on the price of propane,
which we pay for each cylinder transaction. For company-owned distributors,
cost of sales is the cost of materials, labor and overhead associated with
refurbishing, refilling and distributing cylinders. Our cost of sales for
products is comprised of the wholesale cost of products sold.

Critical Accounting Policies

Our consolidated financial statements and related public financial
information are based on the application of generally accepted accounting
principles of the United States of America (US GAAP). US GAAP requires the
use of estimates, assumptions, judgments and subjective interpretations of
accounting principles that have an impact on the assets, liabilities, revenue
and expense amounts reported. We believe our uses of estimates and underlying
accounting assumptions adhere to US GAAP and are consistently applied.
Valuations based on estimates are reviewed for reasonableness on a consistent
basis. Actual results may differ materially from these estimates.

13



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We have identified the following critical accounting policies that, among
others, affect the more significant judgments and estimates used in the
preparation of our consolidated financial statements (for further detail, see
Summary of Significant Accounting Policies in Note 2 of the Notes to
Consolidated Financial Statements):

Revenue recognition.We recognize: (i) cylinder transaction revenues upon
delivery of the cylinders to retailers by our distributors; (ii) products
revenues upon shipment to retailers; and (iii) shipping services revenues at
the time consumers ship packages at the in-store retail depot. We estimate
returns and allowances against the revenues and record the estimated returns
and allowances in the same period in which the revenue is recorded. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business. If the
allowances we calculate do not accurately reflect actual returns associated
with current revenue, actual revenues could be higher or lower than the level
recognized.

Allowance for doubtful accounts.Allowances for doubtful accounts are
estimated at the segment level based on estimates of losses related to customer
receivable balances. Quantitative estimates are developed from accounts
receivable agings based on expected losses. Qualitative estimates are based on
evaluations of specific customer accounts in light of current economic
conditions. Balances due from customers in bankruptcy are considered
uncollectible. The establishment of reserves requires the use of judgments and
assumptions regarding the potential for losses on receivable balances. If the
allowances we calculate do not accurately reflect losses associated with
current receivables, actual losses could be higher or lower than the level
recognized.

Depreciation of propane cylinders, cylinder displays and proprietary
valves.We own cylinders and cylinder displays, a significant portion of which
are leased to our independent distributors under operating lease agreements
(Notes 4 and 6 of the Notes to Consolidated Financial Statements). Cylinders
are depreciated over their estimated useful lives of 25 years. Our independent
distributors are contractually obligated to refurbish cylinders into like-new
condition and reimburse us for any inventory shortages related to cylinders in
the form of cash or like-new cylinders. Our displays are depreciated over
their estimated useful lives of 10 years and our proprietary valves are
depreciated over their estimated useful lives of 12 years. We believe these
estimates are reflective of the future usefulness of these assets to our
operations. In the event that future facts and circumstances indicate that the
carrying value of cylinders, cylinder displays or proprietary valves may not be
recoverable, estimated future undiscounted cash flows will be compared to the
carrying value of the particular asset and, if less, an impairment loss will be
recognized in an amount by which the carrying amount exceeds fair value.

Intangible assets and goodwill impairment.As discussed in Note 7 of the
Notes to Consolidated Financial Statements and in the Impact of New Accounting
Pronouncements section of this report, we have significant intangible assets
on our Consolidated Balance Sheets that include goodwill and other intangibles
related to acquisitions. The valuation and classification of these assets and
the assignment of useful amortization lives involves judgments and the use of
estimates. In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. We applied
the new rules on accounting for goodwill and other intangible assets beginning
in the first quarter of fiscal year 2002. Under the new rules, goodwill (and
intangible assets deemed to have indefinite lives) is no longer amortized but
is subject to annual impairment tests and, in certain circumstances, more
frequent impairment tests in accordance with the Statements. Impairment tests
are designed to review the recoverability of the carrying values of the
intangible assets and require the use of judgments and assumptions. The fair
value of the intangible assets would be different using different estimates and
assumptions in these valuation techniques. We cannot be sure that future
goodwill impairment tests will not result in a change in asset valuations and a
charge to earnings.

Derivative instruments.As discussed in Note 14 of the Notes to
Consolidated Financial Statements and in Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, we use derivative instruments to manage
exposure to interest rate fluctuations and wholesale propane price volatility.
In connection with these activities, we have adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, which requires
that all financial derivative instruments be recorded on the balance sheet at
fair value. Fair values are based on listed market prices, when such prices
are available. To the extent that listed market prices are not available, fair
value is determined based on other relevant factors, including dealer price
quotations, price quotations for similar instruments traded in different
markets, and pricing models that consider current market conditions and
contractual prices for the underlying financial instruments or commodities.
Changes in the interest rate and commodity markets will impact our estimates of
fair value in the future, potentially affecting our results of operations.

Income Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
In assessing the realizability of deferred tax assets, we consider whether it
is more likely than not that some portion or all of the deferred tax assets
will not be realized. We

14



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##### 



consider the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment
and record a valuation allowance to reduce our deferred tax assets to the
amount that is expected to be realized in future periods.

Results of Operations

The following table sets forth for the periods indicated the percentage
relationship of certain items from our statements of operations to net
revenues. Due to many factors, including the National Fire Protection
Association (NFPA) guidelines that require that all propane cylinders
refilled after April 1, 2002 be fitted with an overfill prevention device, the
diversification of our product offerings and our rapid sales growth, any trends
reflected by the following table may not be indicative of future results.

|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |      |      |   
|------------------------------------- | ----------------------------------- | -------------------------------------------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | --
|                                      |                                     |                                                    |       | 2003 |      | 2002 |       | 2001
|                                      |                                     |                                                    |       |      |      |      |       |     
|Net revenues                          |                                     |                                                    | 100.0 | %    |      |      | 100.0 | %    |      |   | 100.0 | %   
|Operating costs and expenses:         |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      | Cost of sales                       |                                                    |       | 75.9 |      |      |       | 77.6 |      |   |       | 77.4 |     
|                                      | Selling, general and administrative |                                                    |       | 11.0 |      |      |       | 10.6 |      |   |       | 13.6 |     
|                                      | Depreciation and amortization       |                                                    |       | 3.6  |      |      |       | 3.8  |      |   |       | 6.1  |     
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      |                                     | Total operating costs and expenses                 |       |      | 90.5 |      |       |      | 92.0 |   |       |      | 97.1 |   
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      |                                     | Income from operations                             |       |      | 9.5  |      |       |      | 8.0  |   |       |      | 2.9  |   
|Interest and other expenses (income): |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      | Interest expense                    |                                                    |       | 3.0  |      |      |       | 3.0  |      |   |       | 3.7  |     
|                                      | Loss on investee                    |                                                    |       | 0.2  |      |      |       | 0.4  |      |   |       | 1.8  |     
|                                      | Nonrecurring items                  |                                                    |       |     |      |      |       |     |      |   |       | 0.3  |     
|                                      | Other, net                          |                                                    |       | (1.0 | )    |      |       | (0.2 | )    |   |       | (0.2 | )   
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      |                                     | Income (loss) before income taxes                  |       |      | 7.3  |      |       |      | 4.8  |   |       |      | (2.7 | ) 
|Income taxes                          |                                     |                                                    | 0.9   |      |      |      |      |      |      |   | (0.1  | )   
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      |                                     | Net income (loss)                                  |       |      | 6.4  |      |       |      | 4.8  |   |       |      | (2.8 | ) 
|Preferred dividends                   |                                     |                                                    | 0.0   |      |      |      | 0.9   |      |      |   | 0.6   |     
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     
|                                      |                                     | Net income (loss) available to common stockholders |       |      | 6.4  | %    |       |      | 3.9  | % |       |      | (3.4 | )%
|                                      |                                     |                                                    |       |      |      |      |       |      |      |   |       |     

Comparison of Fiscal Years Ended July 31, 2003 and 2002

Net revenues.Net revenues increased 25.6% to $258.2 million for fiscal
2003 from $205.6 million for fiscal 2002. Net revenues for fiscal 2003
consisted of $170.9 million from cylinder transactions and $87.3 million from
product sales. Cylinder exchange revenues increased 33.6% primarily due to an
approximately 28% increase in the number of total cylinder transactions to 10.6
million units for fiscal 2003 from 8.3 million units for fiscal 2002. This
increase reflects the positive trend toward consumer acceptance of cylinder
exchange versus refill and the impact of National Fire Protection Association
(NFPA) guidelines adopted by many states that mandate that all propane
cylinders refilled after April 1, 2002 be fitted with an overfill prevention
device (OPD). Product revenues increased 12.4% due principally to the launch
of the SkeeterVac® mosquito elimination product in March 2003. We currently
anticipate revenue growth between 10% and 15% for both our cylinder exchange
and products and other segments in fiscal 2004 and we currently expect the new
NFPA guidelines to continue to contribute to our cylinder exchange revenue
growth at a decreasing rate through at least the end of fiscal 2005.

Gross margin.Our overall gross margin increased to 24.1% for fiscal 2003
from 22.4% for fiscal 2002. Gross margin percentage increased 150 basis points
in cylinder exchange to 28.9% from 27.4% in fiscal 2002 due primarily to the
reduced cost of valves and cylinders and lower costs at company-owned
distributors. We have a propane hedging program that we currently believe
limits the exposure of our cylinder exchange gross margin to volatility in
propane prices. The products and other segment gross margin increased to 14.6%
in fiscal 2003 from 14.3% in fiscal 2002 due primarily to sales of our mosquito
elimination device partially offset by lower margins on patio heaters. For
fiscal 2004, we currently expect cylinder exchange margins to be between 25%
and 28% and product sales gross margins to continue to be between 13% and 17%.

Selling, general and administrative expenses.Selling, general and
administrative (SG&A) expenses increased 29.8% to $28.4 million for fiscal
2003 from $21.9 million for fiscal 2002 and, as a percentage of net revenues,
increased to 11.0% for fiscal 2003 from 10.6% for fiscal 2002. SG&A expenses
in the cylinder exchange segment increased 26.2% to $18.1 million for fiscal
2003 from $14.4 million for fiscal 2002 due primarily to increased personnel
costs associated with managing distributor operations and increased
professional fees. SG&A expenses in the products and other segment increased
36.6% to $10.3 million from $7.5 million in the same period in the prior year
due primarily to special charges, consisting primarily of relocation expenses
associated with consolidating many products segment employees based in Zion,
Illinois with the cylinder exchange employee base in Winston-Salem, North
Carolina and start-up and development costs related to the introduction of the
SkeeterVac® mosquito elimination product. We currently expect SG&A expenses to
decrease as a percentage of net revenues in fiscal 2004.

15



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Depreciation and amortization.Depreciation and amortization increased
17.4% to $9.3 million for fiscal 2003 from $7.9 million for fiscal 2002.
Depreciation and amortization in the cylinder exchange segment increased 17.8%
to $8.4 million for fiscal 2003 from $7.1 million in fiscal 2002 due primarily
to the increase in depreciation expense resulting from an increase in the
number of cylinders and displays. Depreciation and amortization in the
products and other segment increased 13.7% to $860,000 for fiscal 2003 from
$756,000 in fiscal 2002 due primarily to the increase in depreciation expense
related to software development costs for QuickShip. We currently expect
depreciation and amortization to increase approximately 15% in fiscal 2004.

Interest expense.Interest expense increased 25.2% to $7.8 million for
fiscal 2003 from $6.2 million for fiscal 2002 due primarily to a $2.6 million
non-cash charge resulting from the prepayment of $15 million of our 13%
subordinated debt that was partially offset by lower interest rates on our
credit facility. We currently expect interest expense to decrease to less than
$3.0 million in fiscal 2004 due primarily to the absence of subordinated debt,
decreased average borrowings on our credit facility and a more favorable
interest rate swap agreement.

Loss on investee.Loss on investee decreased to $455,000 for fiscal 2003
from $714,000 for fiscal 2002. We recognized 100% of the loss of R4 Tech in
the first quarter of fiscal 2003 as a result of advances made without a
corresponding advance from the other joint venture partners. This charge
represented the loss related to our 49% ownership interest in R4 Tech, which
has since increased to 50% as a result of our acquisition of Platinum. The
increased ownership interest and financial control resulted in the
consolidation of the financial statements of R4 Tech beginning in the second
quarter of fiscal 2003.

Other, net.Other, net increased to $2.5 million for fiscal 2003 from
$422,000 for fiscal 2002 due primarily to net proceeds of $2.5 million received
in a litigation settlement in March 2003. In addition to the proceeds of the
litigation settlement, other, net consists primarily of interest income from
advances made to independent distributors and losses from the disposal of
assets. We currently expect other, net to be near breakeven for fiscal 2004.

Income taxes.The provision for income taxes increased to $2.2 million in
fiscal 2003 from $47,000 for fiscal 2002. The provision reflects the
transition to reporting deferred tax expense during the fourth quarter that
resulted in a 12% effective tax rate for fiscal 2003. The effective tax rate
reflects a net change in the valuation allowance for deferred tax assets of
$5.5 million. We currently expect to report income taxes at a fully taxed rate
of approximately 39% for fiscal 2004 and going forward.

Preferred dividends.Preferred dividends accrued on our outstanding
shares of Series A convertible preferred stock decreased to $71,000 for fiscal
2003 from $1.8 million for fiscal 2002 due to the conversion of all of the
Series A convertible preferred stock into common stock in March, April, May and
September 2002.

Comparison of Fiscal Years Ended July 31, 2002 and 2001

Net revenues.Net revenues increased 49.0% to $205.6 million for fiscal
2002 from $138.0 million for fiscal 2001. Net revenues for fiscal 2002
consisted of $128.0 million from cylinder transactions and $77.6 million from
product sales. Cylinder exchange revenues increased 49.4% due primarily to an
approximately 33% increase in the number of cylinder transactions to 8.3
million units in fiscal year 2002 from 6.2 million units during fiscal 2001,
reflecting the positive trend toward consumer acceptance of cylinder exchange
versus refill and the impact of the new NFPA guidelines requiring that all
propane cylinders refilled after April 1, 2002 be fitted with an overfill
prevention device (OPD). Approximately one-third of the increase in cylinder
exchange revenues was due to price increases to retailers, enabled by a higher
mix of upgrade transactions, and approximately two-thirds was due to an
increase in the number of total cylinder transactions. Product revenues
increased 48.5% due principally to an increase in the number of grills sold and
to a lesser degree an increase in the number of patio heaters sold.

Gross margin.Our overall gross margin decreased slightly to 22.4% for
fiscal 2002 from 22.6% for fiscal 2001. Gross margin percentage increased 70
basis points in cylinder exchange to 27.4% from 26.7% in fiscal 2001 due
primarily to price increases to retailers partially offset by a restructured
payment plan to distributors to reflect their cost of installing OPD valves.
The products and other segment gross margin decreased to 14.3% in fiscal 2002
from 15.9% in fiscal 2001 due primarily to a shift in sales mix to products
that carry a lower margin.

Selling, general and administrative expenses.Selling, general and
administrative (SG&A) expenses increased 17.1% to $21.9 million for fiscal
2002 from $18.7 million for fiscal 2001 and, as a percentage of net revenues,
decreased to 10.6% for fiscal 2002 from 13.5% for fiscal 2001. The decrease in
SG&A expenses as a percentage of net revenues was due primarily to the fact
that a significant portion of such expenses are fixed and increased at a slower
rate than did net revenues. SG&A expenses in the cylinder

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exchange segment increased 13.5% to $14.4 million for fiscal 2002 from
$12.7 million for fiscal 2001 primarily due to increased personnel costs to
support growth, additional costs associated with distributor operations and
increased professional fees, partially offset by a decrease in marketing costs.
SG&A expenses in the products and other segment increased 24.6% to $7.5
million from $6.0 million in the same period in the prior year primarily due to
increased personnel costs to support products-related growth and additional
costs related to QuickShip, which had operating costs for the entire fiscal
year 2002 compared to nine months in fiscal 2001.

Depreciation and amortization.Depreciation and amortization decreased to
$7.9 million for fiscal 2002 from $8.5 million for fiscal 2001. This decrease
was primarily due to a reduction in amortization expense to $309,000 for fiscal
2002 from $2.6 million for fiscal 2001 as a result of the elimination of
goodwill amortization due to the implementation of SFAS No. 142, Goodwill and
Other Intangible Assets. The decrease was partially offset by an increase in
depreciation expense resulting from an increase in the number of cylinders held
under operating lease agreements and from our acquisition, effective September
30, 2001, of machinery and equipment from R4 Tech.

Interest expense.Interest expense increased to $6.2 million for fiscal
2002 from $5.1 million for fiscal 2001 primarily due to increased interest
rates from our $15 million of subordinated debt that we obtained on June 15,
2001.

Loss on investee.Loss on investee decreased to $714,000 for fiscal 2002
from $2.6 million for fiscal 2001 due primarily to increased revenue and
improved gross margins. This charge represents our share of the loss related
to our 49% ownership interest in R4 Tech.

Other, net.Other, net increased to approximately $422,000 for fiscal
2002 from approximately $301,000 for fiscal 2001. Other income consists
primarily of interest income from advances made to R4 Tech and distributors.

Income taxes.The provision for income taxes, which reflects current
state income tax expense, decreased to $47,000 in fiscal 2002 from $123,000 for
fiscal 2001.

Preferred dividends.Preferred dividends accrued on outstanding Series A
Preferred Stock increased to $1.8 million for fiscal 2002 from $770,000 for
fiscal 2001. The Series A Preferred Stock accrued a cumulative dividend based
on an annual rate of: 5% through September 7, 2003; 12% from September 8, 2003
through September 7, 2004; and 15% thereafter. The annual dividend rate
increased to 15% from September 7, 2001 through April 7, 2002 because a
registration statement covering the shares of common stock into which the
Series A Preferred Stock is convertible was not yet effective. The Series A
convertible preferred stock converted into common stock in March, April, May
and September 2002.

Liquidity and Capital Resources

Our primary sources of funds have been the incurrence of debt, the
issuance of stock and cash flow from operations. The primary sources of cash
for fiscal 2003 were cash provided by the issuance of stock and, to a lesser
extent, cash provided by operations. Working capital increased by $11.4
million from July 31, 2002 to July 31, 2003, primarily due to a significant
increase in inventories during fiscal 2003. The inventory increase in the
cylinder exchange segment was primarily as a result of efforts to build
inventory to a more acceptable level than maintained during fiscal 2002 and as
a result of the acquisition of Platinum and Ark. The increase in inventory in
the products and other segment was primarily associated with the launch of new
products. On July 31, 2003, we had $14.6 million in inventory related to the
cylinder exchange segment and $5.8 million in inventory related to the products
and other segment. The primary sources of cash for fiscal 2002 were cash
provided by operations and, to a lesser extent, cash provided by the issuance
of stock. The primary sources of cash for fiscal 2001 were cash provided by
the issuance of stock and the proceeds from debt and, to a lesser extent, cash
provided by operations.

Net cash generated by operating activities was $11.6 million, $16.7
million, and $1.3 million for fiscal 2003, 2002, and 2001, respectively. The
decrease in cash provided by operations for fiscal 2003 from fiscal 2002 was
primarily due to increased inventory purchases that offset higher net income
and increased non-cash charges. Net cash from operations was significantly
lower in 2001 than in fiscal 2003 and fiscal 2002 due primarily to
significantly lower net income.

Net cash used in investing activities was $29.3 million for fiscal 2003,
$13.1 million for fiscal 2002, and $16.3 million for fiscal 2001. The primary
components of cash used in investing activities in all periods included
purchases of cylinders, investments in property, plant and equipment and
advances to R4 Tech. For fiscal 2003, an additional primary component of cash
used in investing activities related to acquisitions. As a result of the
acquisitions of Platinum and Ark and the consolidation of R4 Tech resulting
from

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the acquisition of Platinum (Note 17 of Notes to Consolidated Financial
Statements), advances to R4 Tech, Platinum and Ark beginning with the second
quarter of fiscal 2003 were not reflected in net cash used in investing
activities.

Net cash provided by financing activities was $18.7 million for fiscal
2003, compared to net cash used in financing activities of $3.1 million for
fiscal 2002 and net cash provided by financing activities of $14.9 million for
fiscal 2001. Cash provided by financing activities for fiscal 2003 included
net borrowings under our credit facility of $20.3 million, net proceeds of
$14.3 million from the sale of common stock in a private placement and net
proceeds from exercises of warrants and stock options partially offset by
payments on long-term debt including the prepayment in full of our $15.0
million of subordinated debt. Cash used in financing activities for fiscal
2002 included net payments on our credit facility and payments on long-term
debt and capital lease obligations partially offset by net proceeds of $9.9
million from the sale of common stock in a private placement. Cash provided by
financing activities for fiscal 2001 included $15.0 million in subordinated
debt and net proceeds of $9.7 million from a preferred stock private placement
partially offset by net payments on our credit facility.

In March 2003, pursuant to a negotiated settlement agreement, we dismissed
our lawsuit against PricewaterhouseCoopers alleging violations of professional
standards and failure to comply with contractual obligations during its
engagement as our auditor. The net proceeds to us in the settlement, after
attorneys fees and other third quarter litigation expenses, were approximately
$2.5 million and were reflected in other, net in the Consolidated Statements of
Operations. In accordance with the terms of our credit facility, $1.1 million
of the net proceeds were applied against the term loan as a reduction. The
specific terms of the settlement are confidential.

On December 20, 2002, we completed a private placement of 1.0 million
shares of our common stock at a purchase price of $15.79 per share to two
institutional investors for gross proceeds of $15.8 million. We initially
utilized the proceeds to pay down the revolving line of credit under our credit
facility and subsequently used the increased availability under the revolving
line to repay in full the $15 million in subordinated debt in our third and
fourth fiscal quarters of 2003. In conjunction with the private placement, we
issued Additional Investment Rights to the investors exercisable for,
collectively, up to an additional 330,000 shares of our common stock at an
exercise price of $15.79 per share. The Additional Investment Rights were
never exercised and expired on October 1, 2003.

In November 2002, we completed the syndication of a new and expanded bank
credit facility (the Credit Facility). The Credit Facility consists of a $45
million revolving line of credit and a $15 million term loan, both for general
corporate purposes, inclusive of payments made under letters of credit. The
Credit Facility has a maturity date of November 30, 2005 and, as amended,
required us to utilize the approximately $14.9 million in net proceeds from a
private placement of common stock completed December 20, 2002 to repay the term
loan or our subordinated debt, in such proportion as we elect, by July 31,
2003. In the third and fourth quarters of fiscal 2003, we prepaid the entire
balance of $15 million of our subordinated debt. Advances under the Credit
Facility are collateralized by a lien on substantially all of our assets.

Advances under the Credit Facility may be made as either base rate (prime
rate) loans or London Interbank Offered Rate (LIBOR) loans at our election.
Applicable interest rates are based upon either the LIBOR or prime rate plus an
applicable margin dependent upon a total leverage ratio. The applicable LIBOR
margins range from 200 to 300 basis points, and the applicable prime rate
margins range from 50 to 150 basis points. We incurred fees of approximately
$1.3 million in connection with the Credit Facility. The fees will be
amortized over the life of the agreement through November 30, 2005. We
incurred a charge of $96,000 in November 2002 resulting from unamortized fees
related to our prior credit facility. On July 31, 2003 we had $46.4 million
(including a $10.9 million balance on the term loan) in LIBOR loans outstanding
at a weighted-average interest rate of 3.85% and $500,000 in prime rate loans
outstanding at a weighted-average interest rate of 5.25%.

Principal payments on the outstanding term loan began on December 31, 2002
and continue quarterly until September 30, 2005. The initial principal
payments are $1 million per calendar quarter beginning December 31, 2002, will
increase to $1.25 million per calendar quarter beginning December 31, 2003 and
will further increase to $1.5 million per calendar quarter beginning December
31, 2004. The Credit Facility includes a .50% commitment fee on the average
daily unused amount for each fiscal quarter. The Credit Facility requires us
to meet certain covenants, including minimum net worth and cash flow
requirements and restricts the payment of cash dividends. At July 31, 2003, we
were in compliance with all covenants.

We were party to an interest rate swap agreement with a notional amount of
$10 million that expired in July 2003. Under that agreement, we paid a fixed
rate of 7.36% and received a rate equivalent to the thirty-day LIBOR, adjusted
quarterly. In May 2003, we entered into a new swap agreement with an effective
date of August 1, 2003 and an expiration date of October 3, 2005. The initial
notional amount is $20 million beginning August 1, 2003, will decrease to $15
million on June 1, 2004, will decrease to $10 million

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on March 1, 2005 and will further decrease to $5 million on September 1,
2005. Under the new swap agreement, we pay a fixed rate of 1.85% and receive a
rate equivalent to the thirty-day LIBOR, adjusted monthly.

In November 2002, we acquired Platinum and Ark and their respective
subsidiaries, representing ten of our distributors. Collectively, the
territories served by the acquired distributors have historically represented
approximately 45% of our cylinder exchange revenues. The aggregate purchase
price for the two acquisitions was approximately $32 million. The
consideration paid by Blue Rhino in the acquisitions consisted of approximately
1.1 million restricted shares of common stock valued, based on the closing
price of our common stock on the Nasdaq National Market on November 22, 2002,
at approximately $19 million, $3.1 million in assumed debt satisfied at
closing, $4.9 million in advances, and $5.0 million in liabilities assumed. On
a preliminary basis, approximately $28.2 million of the purchase price was
allocated to goodwill, $2.8 million was allocated to current assets and $1.2
million was allocated to equipment, vehicles and other assets.

On April 19, 2002, we completed the sale of 1.5 million shares of our
common stock for $10.875 million in a private placement through SunTrust
Robinson Humphrey Capital Markets, as Placement Agent, to selected
institutional and individual investors at a price of $7.25 per share. The net
proceeds from the financing were used to pay down the Credit Facility.

On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. The debenture carried interest
at the annual rate of 13%, payable quarterly. The principal balance was
scheduled to mature on August 31, 2006, but was prepaid in full during the
third and fourth quarters of fiscal 2003. In conjunction with the subordinated
debt, we issued a warrant to the investor to purchase 1,372,071 shares of
common stock, with an exercise price of $3.8685 per share (subject to
adjustment for organic changes in our common stock and for certain future
issuances below the then-existing exercise price). The warrant was converted
by the investor into 1,070,179 shares of common stock effective January 6,
2003.

On October 26, 2000, we completed the acquisition of QuickShip, Inc., a
retail shipping service company and our wholly owned subsidiary. QuickShip,
which currently offers its service at over 250 retail locations in 26 states,
provides consumers with a convenient, full-service, in-store postal and parcel
shipping depot and provides retailers with an additional revenue source. The
aggregate purchase price, including certain acquisition costs, was
approximately $9.8 million, comprised of approximately $1.0 million in cash and
deferred payments, $86,000 in a five-year warrant to purchase 100,000 shares of
common stock with an exercise price of $6.00 per share, $2.0 million in
liabilities assumed and $6.8 million paid in the form of 1,133,333 shares of
Series A Convertible Preferred Stock valued at $6.00 per share. We currently
project QuickShip to be dilutive by approximately $600,000 on an operating
income basis in fiscal 2004 primarily due to depreciation and amortization
expenses of approximately $500,000.

On September 7, 2000, we completed a private placement of 1,716,667 shares
of our Series A Convertible Preferred Stock to two institutional investors
under common management and three individuals, including Billy Prim and Andrew
Filipowski, for an aggregate purchase price of approximately $10.3 million.
Messrs. Prim and Filipowski invested $50,000 and $250,000 for 8,333 and 41,667
shares of Series A Convertible Preferred Stock, respectively. In connection
with this issuance of the Series A Convertible Preferred Stock we paid William
Blair & Co. a placement fee of $500,000 in cash and issued a five-year warrant
to purchase 16,667 shares of common stock at $6.00 per share. The warrant was
converted by the investor into 10,100 shares of common stock effective
September 27, 2002.

The Series A Convertible Preferred Stock accrued a cumulative dividend on
the 20th day of December, March, June, and September of each year based on an
annual rate of 5% through September 7, 2003; 12% from September 8, 2003 through
September 7, 2004; and 15% thereafter. Effective September 7, 2001, the annual
dividend rate increased to 15% because a registration statement covering the
shares of common stock into which the Series A Convertible Preferred Stock was
convertible was not yet effective. The 15% rate continued until the
registration statement became effective on April 8, 2002. As of July 31, 2003,
2002 and 2001, we had accrued dividends on the outstanding shares of Series A
Convertible Preferred Stock of $0, $1.7 million and $770,000, respectively.
During March, April and May 2002, the holder of 1,000,000 shares of Series A
Convertible Preferred Stock voluntarily converted such shares into 1,000,000
shares of common stock. Effective September 24, 2002, as permitted by our
Second Amended and Restated Certificate of Incorporation, as amended, we
converted the remaining 1,850,000 outstanding shares of Series A Convertible
Preferred Stock into 1,850,000 shares of common stock. Prior to the respective
conversions, the shares of Series A Convertible Preferred Stock accrued a
cumulative dividend that we satisfied, as permitted by the terms of the Series
A Convertible Preferred Stock, by issuing an aggregate of 233,611 shares of our
common stock to the holders of the Series A Convertible Preferred Stock upon
conversion.

On April 28, 2000, we entered into a joint venture agreement to operate
and manage the automated propane bottling and cylinder refurbishing plant in
North Carolina then owned by R4 Tech, which began operations in May 2000. We
received a 49% ownership

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interest in the joint venture in exchange for our net contribution of
approximately $3.4 million. Effective September 30, 2001, we entered into a
sale and leaseback transaction with R4 Tech, purchasing all of the land,
buildings and equipment associated with the propane bottling and cylinder
refurbishing operation for $7.6 million. The purchase price was used by R4
Tech to repay our outstanding advances. Contemporaneously with the sale, R4
Tech leased back the land, buildings and equipment from us under the terms of a
three-year operating lease agreement. The joint venture was accounted for
using the equity method of accounting through the first quarter of fiscal 2003.
As a result of the acquisition of Platinum, we increased our ownership
interest in R4 Tech on a consolidated basis by 1% to 50%. We consolidated the
results of R4 Tech beginning in the second quarter of fiscal 2003 as a result
of our increased ownership and financial control. During the first quarter of
fiscal 2003 we provided net advances of $1.1 million to R4 Tech. During the
fiscal years 2002 and 2001, we provided net advances of $1.0 million and $4.2
million, respectively, to R4 Tech.

We currently have capital commitments outstanding of approximately $2.5
million relating to machinery and equipment associated with three new cylinder
refilling and refurbishing facilities that are being constructed in Los
Angeles, Chicago and Denver and two mobile filling
and refurbishing facilities. We expect that these commitments will be
satisfied by the spring of 2004. We currently anticipate that our total
capital expenditures for fiscal 2004, excluding acquisitions, will be
approximately $14.0 million, and will relate primarily to cylinders, cylinder
displays, computer technology and distribution infrastructure. Our capital
expenditure and working capital requirements in the foreseeable future will
change depending on many factors including, but not limited to, the rate of our
expansion, our operating results and any other adjustments in our operating
plan made in response to competition, acquisition opportunities or unexpected
events.

We believe that our existing borrowing capacity under the Credit Facility,
together with cash provided by operations, will be sufficient to meet our
expected capital expenditure and working capital requirements for fiscal 2004
and enable us to pay down a portion of our credit facility. However, if we
experience an unexpected change in demand for our cylinder exchange service or
our products, we may need additional funds to meet our capital requirements
and, in that event, we may seek additional debt or equity financing. We cannot
be sure that any additional equity or debt financing will be available on
favorable terms or on terms that are not dilutive to our stockholders.

The following table summarizes our contractual payment obligations and other
commercial commitments (in thousands):

|                                                  |  |      |       |      |  |      |       |      |  |      |     |            |  |       |     |  |  |   |    |  |  |   |     |  |  |   |       | 
|------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | --- | ---------- |  | ----- | --- |  |  | - | -- |  |  | - | --- |  |  | - | ----- | 
|Payment obligations by fiscal year ended July 31,
|                                                 
|Contractual obligations                           |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |     | Thereafter |  | Total
|                                                  |  |      |       |      |  |      |       |      |  |      |     |            |  |      
|Long-term debt                                    |  | $    | 1,464 |      |  | $    | 42    |      |  | $    | 29  |            |  | $     | 24  |  |  | $ | 9  |  |  | $ | 110 |  |  | $ | 1,678 | 
|Capital lease obligations                         |  |      | 219   |      |  |      | 267   |      |  |      | 129 |            |  |       | 17  |  |  |   | 14 |  |  |   | 9   |  |  |   | 655   | 
|Operating leases                                  |  |      | 1,422 |      |  |      | 715   |      |  |      | 344 |            |  |       | 223 |  |  |   | 53 |  |  |   |    |  |  |   | 2,757 | 
|                                                  |  |      |       |      |  |      |       |      |  |      |     |            |  |       |     |  |  |   |    |  |  |   |     |  |  |   |       | 
|Total contractual cash obligations                |  | $    | 3,105 |      |  | $    | 1,024 |      |  | $    | 502 |            |  | $     | 264 |  |  | $ | 76 |  |  | $ | 119 |  |  | $ | 5,090 | 
|                                                  |  |      |       |      |  |      |       |      |  |      |     |            |  |       |     |  |  |   |    |  |  |   |     |  |  |   |       | 

|                             |  |      |       |      |  |      |       |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |        | 
|---------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ---------- |  | ----- | - |  |  | - | - |  |  | - | - |  |  | - | ------ | 
|Other commercial commitments |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |        | Thereafter |  | Total
|                             |  |      |       |      |  |      |       |      |  |      |        |            |  |      
|Line of
credit               |  | $    | 4,750 |      |  | $    | 5,750 |      |  | $    | 36,400 |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 46,900 | 
|Standby letters of credit    |  |      | 605   |      |  |      |      |      |  |      |       |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 605    | 
|                             |  |      |       |      |  |      |       |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |        | 
|Total commercial commitments |  | $    | 5,355 |      |  | $    | 5,750 |      |  | $    | 36,400 |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 47,505 | 
|                             |  |      |       |      |  |      |       |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |        | 

We lease some of our facilities from Billy D. Prim, our Chairman and Chief
Executive Officer, and from Rhino Real Estate, LLC, a company affiliated with
Billy D. Prim and Andrew J. Filipowski, our Vice Chairman. The leases expire
on December 31, 2003, April 30, 2004 and October 31, 2007, respectively. Our
rent expense for these related-party leases for the years ended July 31, 2003,
2002 and 2001 was $433,000, $272,000 and $259,000, respectively. Management
has received an independent third-party determination from Lincoln Harris, LLC
to the effect that these leases are fair and within typical market conditions
for comparable properties and that the terms of all of these leases are within
the range of terms that could have been obtained from unrelated third parties
for comparable properties.

Uniflame Corporation leases its facility from H & M Enterprises, LLC, a
company affiliated with Mac McQuilkin, the president of Uniflame. The lease
terminates on March 31, 2005. Uniflames rent expense for the years ended July
31, 2003, 2002 and 2001 was $317,000, $316,000 and $308,000, respectively.
Management believes that the terms of this lease are comparable to those that
could have been obtained from unrelated third parties.

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Seasonality

We have experienced and currently expect to continue to experience
seasonal fluctuations in our revenues and operating income. Our revenues and
operating income have been highest in the spring and summer, which includes the
majority of the grilling season, and lowest in the fall and winter. Our
cylinder exchange segment, which generally enjoys higher margins than our
products and other segment, experiences higher revenues and operating income in
the spring and summer. Conversely, our products and other segment experiences
higher revenues and operating income in the fall and winter. Sustained periods
of poor weather, particularly in the spring and summer, can negatively impact
our revenues. Accordingly, our results of operations in any quarter will not
necessarily be indicative of the results that we may achieve for a full fiscal
year or any future quarter.

Inflation

We do not believe that inflation has had a material adverse effect on our
revenues, cost of sales or our results of operations. We cannot be sure that
our business will not be materially affected by inflation in the future.

Price of Propane

Beginning with the third quarter of fiscal 2000 and continuing through the
third quarter of fiscal 2001, there were dramatic increases in fuel costs and
propane reached unusually high levels. During the fourth quarter of fiscal
2001 and continuing through the first quarter of fiscal 2003, propane prices
returned to a range more consistent with historical levels, but during the
balance of fiscal 2003, again reached unusually high levels. On March 1, 2001,
we initiated a propane price hedging strategy that reduced, and we currently
believe will continue to reduce, our gross margin risk resulting from
fluctuations in the price of propane. Our strategy is designed to reduce
exposure to the fuel cost component of a significant portion of our expected
total cylinder exchange volume. If propane costs rise, our gross margins and
results of operations would be negatively affected due to additional costs on
unhedged volumes (both within and, if applicable, in excess of our expected
volumes) that we may not be able to recover fully through an increase in our
price to retailers.

Off-Balance Sheet Arrangements

The Company does not have any transactions, obligations or relationships
that could be considered off-balance sheet arrangements.

Impact of New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for
Asset Retirement Obligations.The Statement requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. As required by SFAS No. 143, we have adopted this new
accounting standard for fiscal year 2003. The adoption of SFAS No. 143 did not
have a material impact on our consolidated results of operations or financial
position.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets.
As required by SFAS No. 144, we have adopted this new accounting standard for
fiscal year 2003. The adoption of SFAS No. 144 did not have a material impact
on our consolidated results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and establishes that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria for treatment as extraordinary. We have adopted this
standard for fiscal year 2003. The adoption of SFAS No. 145 did not have a
material impact on our consolidated results of operations or financial
position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 also establishes that fair value
is the objective for initial measurement of the liability. We have adopted
this standard for fiscal

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year 2003. The adoption of SFAS No. 146 did not have a material impact on
our consolidated results of operations or financial position.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions-An Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 is an industry specific standard and is not
applicable to us; therefore, it will not have an impact on our consolidated
results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions in
SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. We adopted the interim financial

reporting for interim periods beginning after December 15, 2002. The adoption
of SFAS No. 148 did not have a material impact on our consolidated results of
operations or financial position.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its business relationships
to determine if they are variable
interest entities. As defined in FIN 46, variable interests are contractual,
ownership or other interests in an entity that change with changes in the
entitys net asset value. Variable interests in an entity may arise from
financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entitys expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entitys assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 is immediately effective for all
variable interest entities created after January 31, 2003. For variable
interest entities created prior to this date, the provisions of FIN 46 were
originally required to be applied no later than our first quarter of Fiscal
2004. On October 8, 2003, the FASB issued FASB Staff Position (FSP)
FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. The FSP provides a limited deferral (until the end
of our second quarter of 2004) of the effective date of FIN 46 for certain
interests of a public entity in a variable interest entity or a potential
variable interest entity. We will continue to evaluate FIN 46, but due to the
complex nature of the analysis required by FIN 46, we have not determined the
impact on our consolidated results of operations or financial position. We
have goodwill associated with previous acquisitions that may be affected by FIN
46.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. We adopted this standard for
contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material impact on our consolidated results of
operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement requires certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity to be
classified as liabilities. We adopted this standard for financial instruments
entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did
not have a material impact on our consolidated results of operations or
financial position.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates on
borrowings under our Credit Facility. The Credit Facility bears interest based
on LIBOR and the prime rate, plus an applicable margin dependent upon a total
leverage ratio. To quantify our

22



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##### 



exposure to interest rate risk, a 100 basis point increase in interest
rates would have increased interest expense for the years ended July 31, 2003,
2002 and 2001 by approximately $284,000, $243,000 and $341,000, respectively.
Actual changes in interest rates may differ materially from the hypothetical
assumptions used in computing this exposure.

We use derivative financial instruments to manage exposure to fluctuations
in interest rates on our Credit Facility (Note 14 of Notes to Consolidated
Financial Statements). These derivative financial instruments, which are all
swap agreements, are not entered into for trading purposes. A swap agreement
is a contract to exchange a floating rate for a fixed rate without the exchange
of the underlying notional amount. In fiscal 2000, we entered into an interest
rate swap agreement with a notional amount of $10 million as a hedge of our
variable interest rate debt represented by the Credit Facility. Under the swap
agreement, which expired in July 2003, we paid a fixed rate of 7.36% and
received a rate equivalent to the thirty-day LIBOR, adjusted quarterly. At
July 31, 2003, we had $46.4 million in LIBOR-based loans outstanding at a
weighted-average interest rate of 3.85% and the interest rate swap was an
effective cash flow hedge. In May 2003, we entered into a new swap agreement
with an effective date of August 1, 2003 and an expiration date of October 3,
2005. The initial notional amount is $20 million beginning August 1, 2003,
will decrease to $15 million on June 1, 2004, will decrease to $10 million on
March 1, 2005 and will further decrease to $5 million on September 1, 2005.
Under the new swap agreement, we will pay a fixed rate of 1.85% and receive a
rate equivalent to the thirty-day LIBOR, adjusted monthly.

We are exposed to commodity price risk related to changes in the price of
propane. If propane prices rise, our gross margins and results of operations
would be negatively affected due to additional costs that may not be fully
recovered through an increase in our price to retailers. Assuming that propane
prices are not hedged and any increase cannot be recovered through an increase
in our price, a $.01 increase in the price per gallon of propane would reduce
the gross margin in our cylinder exchange segment by approximately .3% or 30
basis points. Actual changes in cylinder exchange margins may differ
materially from that based on the hypothetical assumptions used in computing
this exposure. We have entered into a series of monthly option contracts that
are designed to reduce exposure to the propane cost component of a significant
portion of our total projected cylinder exchange volume (Note 14 of Notes to
Consolidated Financial Statements). These monthly option contracts are not
entered into for trading purposes.

We invest our cash and cash equivalents in investment grade, highly liquid
investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper. Substantially all of
our transactions are conducted and accounts are denominated in U.S. dollars,
and, as such, we do not currently have material exposure to foreign currency
risk.

23



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##### 



Item 8.Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

BLUE RHINO CORPORATION

|                                                                                                 |  |      |    | 
|------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                 |  | Page
|                                                                                                 |  |     
|Report of Independent Accountants                                                                |  |      | 25 | 
|Consolidated Balance Sheets as of July 31, 2003 and 2002                                         |  |      | 26 | 
|Consolidated Statements of Operations for the years ended
July 31, 2003, 2002 and 2001           |  |      | 27 | 
|Consolidated Statements of Stockholders Equity for the
years ended July 31, 2003, 2002 and 2001 |  |      | 28 | 
|Consolidated Statements of Cash Flows for the years ended
July 31, 2003, 2002 and 2001           |  |      | 29 | 
|Notes to Consolidated Financial Statements                                                       |  |      | 30 | 

24



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##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Blue Rhino Corporation:

We have audited the accompanying consolidated balance sheets of Blue Rhino
Corporation and subsidiaries as of July 31, 2003, and 2002 and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the three years then ended. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Blue Rhino Corporation at July 31, 2003, and 2002, and the consolidated
results of their operations and cash flows for each of the three years then
ended, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

As discussed in Note 7 to the financial statements the Company adopted
Statement of Financial Accounting Standard No. 142, requiring the Company to
cease the amortization of goodwill and instead review goodwill for impairment
on adoption and annually thereafter.

| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Greensboro, North Carolina
September 16, 2003,
except for the last paragraph of Note 2
as to which the date is October 8, 2003

25



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##### 



BLUE RHINO CORPORATION

CONSOLIDATED BALANCE SHEETS
As of July 31, 2003 and 2002
(In thousands, except share and per share data)

|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |         |         | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | ---- | ------ | ------- | ------- | 
|                                                                      |                                                                                                                                                                |                                            |        | 2003    |         | 2002
|                                                                      |                                                                                                                                                                |                                            |        |         |         |     
|ASSETS                                                                |                                                                                                                                                                |                                            |        |         |         |      |        |        
|Current assets:                                                       |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      | Cash and cash equivalents                                                                                                                                      |                                            | $      | 2,495   |         |      | $      | 1,563   |        
|                                                                      | Accounts receivable, net                                                                                                                                       |                                            |        | 25,809  |         |      |        | 25,329  |        
|                                                                      | Inventories                                                                                                                                                    |                                            |        | 20,372  |         |      |        | 11,035  |        
|                                                                      | Prepaid expenses and other current assets                                                                                                                      |                                            |        | 7,055   |         |      |        | 3,081   |        
|                                                                      | Deferred income taxes                                                                                                                                          |                                            |        | 2,266   |         |      |        |        |        
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total current assets                       |        |         | 57,997  |      |        |         | 41,008  | 
|Cylinders, net                                                        |                                                                                                                                                                |                                            | 50,917 |         |         |      | 37,004 |        
|Property, plant and equipment, net                                    |                                                                                                                                                                |                                            | 37,765 |         |         |      | 30,477 |        
|Goodwill and other intangibles, net                                   |                                                                                                                                                                |                                            | 62,862 |         |         |      | 31,988 |        
|Other assets                                                          |                                                                                                                                                                |                                            | 1,264  |         |         |      | 2,896  |        
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total assets                               |        | $       | 210,805 |      |        | $       | 143,373 | 
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                  |                                                                                                                                                                |                                            |        |         |         |      |        |        
|Current liabilities:                                                  |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      | Accounts payable                                                                                                                                               |                                            | $      | 19,193  |         |      | $      | 19,969  |        
|                                                                      | Current portion of long-term debt and capital lease obligations                                                                                                |                                            |        | 6,433   |         |      |        | 2,013   |        
|                                                                      | Accrued liabilities                                                                                                                                            |                                            |        | 5,679   |         |      |        | 3,770   |        
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total current liabilities                  |        |         | 31,305  |      |        |         | 25,752  | 
|Long-term debt and capital lease obligations, less current maturities |                                                                                                                                                                |                                            | 42,800 |         |         |      | 39,259 |        
|Deferred income taxes                                                 |                                                                                                                                                                |                                            | 4,232  |         |         |      |       |        
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total liabilities                          |        |         | 78,337  |      |        |         | 65,011  | 
|Stockholders equity:                                                 |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      | Preferred stock, $0.001 par value, 20,000,000 shares authorized,
1,850,000 shares issued and outstanding at July 31, 2002                                      |                                            |        |        |         |      |        | 2       |        
|                                                                      | Common stock, $0.001 par value, 100,000,000 shares authorized,
17,838,027 and 12,058,542 shares issued and outstanding at
July 31, 2003 and 2002, respectively |                                            |        | 18      |         |      |        | 12      |        
|                                                                      | Capital in excess of par                                                                                                                                       |                                            |        | 132,704 |         |      |        | 95,901  |        
|                                                                      | Accumulated deficit                                                                                                                                            |                                            |        | (1,068  | )       |      |        | (17,527 | )      
|                                                                      | Accumulated other comprehensive income (loss)                                                                                                                  |                                            |        | 814     |         |      |        | (26     | )      
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total stockholders equity                 |        |         | 132,468 |      |        |         | 78,362  | 
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |        
|                                                                      |                                                                                                                                                                | Total liabilities and stockholders equity |        | $       | 210,805 |      |        | $       | 143,373 | 
|                                                                      |                                                                                                                                                                |                                            |        |         |         |      |        |         |        

The accompanying notes are an integral part of the consolidated financial
statements.

26



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##### 



BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands, except per share data)

|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |         |   |         |  
|-------------------------------------- | ----------------------------------- | - | ---------------------------------------------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | -
|                                       |                                     |   |                                                |         | 2003 |         | 2002    |         | 2001
|                                       |                                     |   |                                                |         |      |         |         |         |     
|Net revenues                           |                                     | $ | 258,222                                        |         |      | $       | 205,585 |         |      | $       | 137,957 |        
|Operating costs and expenses:          |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Cost of sales                       |   |                                                | 196,084 |      |         |         | 159,440 |      |         |         | 106,783 |  
|                                       | Selling, general and administrative |   |                                                | 28,404  |      |         |         | 21,886  |      |         |         | 18,688  |  
|                                       | Depreciation and amortization       |   |                                                | 9,261   |      |         |         | 7,888   |      |         |         | 8,461   |  
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       |                                     |   | Total operating costs and expenses             |         |      | 233,749 |         |         |      | 189,214 |         |         |   | 133,932 |  
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       |                                     |   | Income from operations                         |         |      | 24,473  |         |         |      | 16,371  |         |         |   | 4,025   |  
|Interest and other expenses (income):  |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Interest expense                    |   |                                                | 7,784   |      |         |         | 6,217   |      |         |         | 5,134   |  
|                                       | Loss on investee                    |   |                                                | 455     |      |         |         | 714     |      |         |         | 2,572   |  
|                                       | Nonrecurring item                   |   |                                                |        |      |         |         |        |      |         |         | 449     |  
|                                       | Other, net                          |   |                                                | (2,513  | )    |         |         | (422    | )    |         |         | (301    | )
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       |                                     |   | Income (loss) before income taxes              |         |      | 18,747  |         |         |      | 9,862   |         |         |   | (3,829  | )
|Income taxes                           |                                     |   | 2,217                                          |         |      |         | 47      |         |      |         | 123     |        
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       |                                     |   | Net income (loss)                              |         |      | 16,530  |         |         |      | 9,815   |         |         |   | (3,952  | )
|Preferred dividends                    |                                     |   | 71                                             |         |      |         | 1,789   |         |      |         | 770     |        
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       |                                     |   | Income (loss) available to common
stockholders |         | $    | 16,459  |         |         | $    | 8,026   |         |         | $ | (4,722  | )
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|Earnings per common share:             |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Basic                               |   | $                                              | 1.00    |      |         | $       | 0.63    |      |         | $       | (0.41   | )
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Diluted                             |   | $                                              | 0.86    |      |         | $       | 0.55    |      |         | $       | (0.41   | )
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|Shares used in per share calculations: |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Basic                               |   |                                                | 16,430  |      |         |         | 12,658  |      |         |         | 11,641  |  
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        
|                                       | Diluted                             |   |                                                | 19,239  |      |         |         | 14,701  |      |         |         | 11,641  |  
|                                       |                                     |   |                                                |         |      |         |         |         |      |         |         |        

The accompanying notes are an integral part of the consolidated financial
statements.

27



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##### 



BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands, except share data)



|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |   |  | 
|----------------------- | ----------------------------------------------------------------------- |  | ---------- | --------- | ------------ | - | --------------- | - | ---------- |  | --------- | ---------- | ------------- | - | - | -- | - | - | ------- | ------ | - |  | 
|                        |                                                                         |  |            |           | Common Stock |   | Preferred Stock |   |           
|                        |                                                                         |  |            |           |              |   |                 |   | Capital in
|                        |                                                                         |  |            |           | Shares       |   | Amount          |   | Shares     |  | Amount    |            | Excess of Par
|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |              
|Balances, July 31, 2000 |                                                                         |  | 9,221,703  |           |              | $ | 9               |   |            |  |           |            |               |   |   |    |   | $ | 59,897  |       
|                        | Issuance of Series A Convertible Preferred
stock                        |  |            |           |              |   |                 |   |            |  |           | 1,716,667  |               |   | $ | 2  |   |   |         | 9,659  |  
|                        | Issuance of common stock warrants                                       |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Issuance of preferred stock in connection
with
acquisitions             |  |            |           |              |   |                 |   |            |  |           | 1,133,333  |               |   |   | 1  |   |   |         | 6,799  |  
|                        | Issuance of common stock under employee
stock purchase and option plans |  |            | 57,449    |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 84     |  
|                        | Accretion of preferred dividend                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 770    |  
|                        | Expense related to distributor stock option
plan                        |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 180    |  
|                        | Loss on derivative instruments                                          |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Net loss                                                                |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Total comprehensive loss                                                |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |       
|Balances, July 31, 2001 |                                                                         |  | 9,279,152  |           |              |   | 9               |   |            |  | 2,850,000 |            |               |   | 3 |    |   |   | 77,389  |       
|                        | Issuance of Series A Convertible Preferred
stock                        |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | (168   | )
|                        | Issuance of common stock in private
placement                           |  |            | 1,500,000 |              |   |                 | 2 |            |  |           |            |               |   |   |    |   |   |         | 9,861  |  
|                        | Conversion of preferred stock to
common
stock                           |  |            | 1,000,000 |              |   |                 | 1 |            |  |           | (1,000,000 | )             |   |   | (1 | ) |   |         |        |  
|                        | Common stock issued for preferred dividend                              |  |            | 96,532    |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Accretion of preferred dividend                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 1,789  |  
|                        | Proceeds from exercise of stock options
and
warrants                    |  |            | 105,277   |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 481    |  
|                        | Issuance of common stock under employee
stock purchase
plan             |  |            | 77,581    |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 237    |  
|                        | Expense related to distributor stock option
plan                        |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 111    |  
|                        | Income on derivative instruments                                        |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Net
income                                                              |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Total comprehensive income                                              |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |       
|Balances, July 31, 2002 |                                                                         |  | 12,058,542 |           |              |   | 12              |   |            |  | 1,850,000 |            |               |   | 2 |    |   |   | 89,700  |       
|                        | Issuance of common stock in private
placement                           |  |            | 1,000,000 |              |   |                 | 1 |            |  |           |            |               |   |   |    |   |   |         | 13,497 |  
|                        | Conversion of preferred stock to
common stock                           |  |            | 1,850,000 |              |   |                 | 2 |            |  |           | (1,850,000 | )             |   |   | (2 | ) |   |         |        |  
|                        | Common stock issued for preferred dividend                              |  |            | 137,079   |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Accretion of preferred dividend                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 71     |  
|                        | Issuance of common stock in connection with
acquisitions                |  |            | 1,104,196 |              |   |                 | 1 |            |  |           |            |               |   |   |    |   |   |         | 18,549 |  
|                        | Proceeds from exercise of stock options
and warrants                    |  |            | 1,635,436 |              |   |                 | 2 |            |  |           |            |               |   |   |    |   |   |         | 7,353  |  
|                        | Issuance of common stock under employee
stock purchase plan             |  |            | 52,774    |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 356    |  
|                        | Expense related to distributor stock option
Plan                        |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 125    |  
|                        | Tax effect of non-qualified stock options
exercised                     |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         | 494    |  
|                        | Income on derivative instruments, net of
income taxes of $533           |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Net
income                                                              |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        | Total comprehensive income                                              |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |        |  
|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |       
|Balances, July 31, 2003 |                                                                         |  | 17,838,027 |           |              | $ | 18              |   |            |  |          |            |               | $ |  |    |   | $ | 130,145 |       
|                        |                                                                         |  |            |           |              |   |                 |   |            |  |           |            |               |   |   |    |   |   |         |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |        |   |  | 
|------------------------------------------------------------- | ----------------------------------------------------------------------- | - | ------ | ----- | -------- | - | ----------- | ------ | ------------- | - | ------------- | ------ | ------------- | - | ------- | ------ | - | - | --- | ------ | - |  | 
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        | Accumulated   |   |         |        |   |   |     |        |  
|                                                              |                                                                         |   |        |       | Common   |   |             |        |               |   | Other         |        | Total         |   | Total  
|                                                              |                                                                         |   |        |       | Stock    |   | Accumulated |        | Comprehensive |   | Stockholders |        | Comprehensive
|                                                              |                                                                         |   |        |       | Warrants |   | Deficit     |        | Income (Loss) |   | Equity        |        | Income (Loss)
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |              
|Balances, July 31, 2000                                       |                                                                         | $ | 2,877  |       |          | $ | (20,831     | )      |               |   |               |        |               | $ | 41,952  |        |   |   |     |       
|                                                              | Issuance of Series A Convertible Preferred
stock                        |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 9,661  |   |   |     |        |  
|                                                              | Issuance of common stock warrants                                       |   |        | 3,526 |          |   |             |        |               |   |               |        |               |   |         | 3,526  |   |   |     |        |  
|                                                              | Issuance of preferred stock in connection
with
acquisitions             |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 6,800  |   |   |     |        |  
|                                                              | Issuance of common stock under employee
stock purchase and option plans |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 84     |   |   |     |        |  
|                                                              | Accretion of preferred dividend                                         |   |        |       |          |   |             | (770   | )             |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Expense related to distributor stock option
plan                        |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 180    |   |   |     |        |  
|                                                              | Loss on derivative instruments                                          |   |        |       |          |   |             |        |               |   | $             | (1,102 | )             |   |         | (1,102 | ) |   | $   | (1,102 | )
|                                                              | Net loss                                                                |   |        |       |          |   |             | (3,952 | )             |   |               |        |               |   |         | (3,952 | ) |   |     | (3,952 | )
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|                                                              | Total comprehensive loss                                                |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   | $   | (5,054 | )
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|Balances, July 31, 2001                                       |                                                                         |   | 6,403  |       |          |   | (25,553     | )      |               |   | (1,102        | )      |               |   | 57,149  |        |   |   |     |       
|                                                              | Issuance of Series A Convertible Preferred
stock                        |   |        |       |          |   |             |        |               |   |               |        |               |   |         | (168   | ) |   |     |        |  
|                                                              | Issuance of common stock in private
placement                           |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 9,863  |   |   |     |        |  
|                                                              | Conversion of preferred stock to
common
stock                           |   |        |       |          |   |             |        |               |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Common stock issued for preferred dividend                              |   |        |       |          |   |             |        |               |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Accretion of preferred dividend                                         |   |        |       |          |   |             | (1,789 | )             |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Proceeds from exercise of stock options
and
warrants                    |   |        | (202  | )        |   |             |        |               |   |               |        |               |   |         | 279    |   |   |     |        |  
|                                                              | Issuance of common stock under employee
stock purchase
plan             |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 237    |   |   |     |        |  
|                                                              | Expense related to distributor stock option
plan                        |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 111    |   |   |     |        |  
|                                                              | Income on derivative instruments                                        |   |        |       |          |   |             |        |               |   |               | 1,076  |               |   |         | 1,076  |   |   | $   | 1,076  |  
|                                                              | Net
income                                                              |   |        |       |          |   |             | 9,815  |               |   |               |        |               |   |         | 9,815  |   |   |     | 9,815  |  
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|                                                              | Total comprehensive income                                              |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   | $   | 10,891 |  
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|Balances, July 31, 2002                                       |                                                                         |   | 6,201  |       |          |   | (17,527     | )      |               |   | (26           | )      |               |   | 78,362  |        |   |   |     |       
|                                                              | Issuance of common stock in private
placement                           |   |        | 843   |          |   |             |        |               |   |               |        |               |   |         | 14,341 |   |   |     |        |  
|                                                              | Conversion of preferred stock to
common stock                           |   |        |       |          |   |             |        |               |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Common stock issued for preferred dividend                              |   |        |       |          |   |             |        |               |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Accretion of preferred dividend                                         |   |        |       |          |   |             | (71    | )             |   |               |        |               |   |         |       |   |   |     |        |  
|                                                              | Issuance of common stock in connection with
acquisitions                |   |        |       |          |   |             |        |               |   |               |        |               |   |         | 18,550 |   |   |     |        |  
|Proceeds from exercise of stock options
and warrants          |                                                                         |   | (4,485 | )     |          |   |             |        |               |   |               |        |               |   | 2,870   |        |   |   |     |       
|Issuance of common stock under employee
stock purchase plan   |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   | 356     |        |   |   |     |       
|Expense related to distributor stock option
Plan              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   | 125     |        |   |   |     |       
|Tax effect of non-qualified stock options
exercised           |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   | 494     |        |   |   |     |       
|Income on derivative instruments, net of
income taxes of $533 |                                                                         |   |        |       |          |   |             |        |               |   | 840           |        |               |   | 840     |        |   | $ | 840 |       
|                                                              | Net
income                                                              |   |        |       |          |   |             | 16,530 |               |   |               |        |               |   |         | 16,530 |   |   |     | 16,530 |  
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|                                                              | Total comprehensive income                                              |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   | $   | 17,370 |  
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       
|Balances, July 31, 2003                                       |                                                                         | $ | 2,559  |       |          | $ | (1,068      | )      |               | $ | 814           |        |               | $ | 132,468 |        |   |   |     |       
|                                                              |                                                                         |   |        |       |          |   |             |        |               |   |               |        |               |   |         |        |   |   |     |       

The accompanying notes are an integral part of the consolidated financial statements.

28



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##### 



BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands)

|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |        |       |        |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ----- | ------- | ------- | ------- | ----- | ------ | ------- | ------ | ----- | ------ | ------- | -
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       | 2003    |         | 2002    |       | 2001  
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |       
|Cash flows from operating activities:                |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     | Net income (loss)                                                                        |                                                                            | $                                        | 16,530                                              |       |         | $       | 9,815   |       |        | $       | (3,952 | )    
|                                                     | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |        |      
|                                                     |                                                                                          | Depreciation and amortization                                              |                                          |                                                     | 9,261 |         |         |         | 7,888 |        |         |        | 8,461 |       
|                                                     |                                                                                          | Loss on investee                                                           |                                          |                                                     | 455   |         |         |         | 714   |        |         |        | 2,572 |       
|                                                     |                                                                                          | Expense related to distributor stock option plan                           |                                          |                                                     | 125   |         |         |         | 111   |        |         |        | 180   |       
|                                                     |                                                                                          | Non-cash interest expenses                                                 |                                          |                                                     | 3,446 |         |         |         | 1,048 |        |         |        | 210   |       
|                                                     |                                                                                          | Deferred income taxes                                                      |                                          |                                                     | 2,157 |         |         |         |      |        |         |        |      |       
|                                                     |                                                                                          | Nonrecurring item                                                          |                                          |                                                     |      |         |         |         |      |        |         |        | 449   |       
|                                                     |                                                                                          | Other                                                                      |                                          |                                                     | 363   |         |         |         | 105   |        |         |        | 38    |       
|                                                     |                                                                                          | Changes in operating assets and liabilities, net of
business acquisitions: |                                          |                                                     |       |         |         |         |       |        |         |        |       |       
|                                                     |                                                                                          |                                                                            | Accounts receivable                      |                                                     |       | 250     |         |         |       | (5,710 | )       |        |       | (485   | )      
|                                                     |                                                                                          |                                                                            | Inventories                              |                                                     |       | (15,035 | )       |         |       | (3,126 | )       |        |       | (2,477 | )      
|                                                     |                                                                                          |                                                                            | Other current assets                     |                                                     |       | (295    | )       |         |       | 140    |         |        |       | (1,540 | )      
|                                                     |                                                                                          |                                                                            | Accounts payable and accrued liabilities |                                                     |       | (5,693  | )       |         |       | 5,764  |         |        |       | (2,159 | )      
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     |                                                                                          |                                                                            |                                          | Net cash provided by operating activities           |       |         | 11,564  |         |       |        | 16,749  |        |       |        | 1,297   |  
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|Cash flows from investing activities:                |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     | Business acquisitions                                                                    |                                                                            |                                          | (6,746                                              | )     |         |         | (218    | )     |        |         | (1,334 | )    
|                                                     | Purchases of property, plant and equipment                                               |                                                                            |                                          | (11,400                                             | )     |         |         | (4,683  | )     |        |         | (5,582 | )    
|                                                     | Purchase of cylinders, net                                                               |                                                                            |                                          | (7,720                                              | )     |         |         | (7,381  | )     |        |         | (5,414 | )    
|                                                     | Net investment in and advances to joint venture                                          |                                                                            |                                          | (1,086                                              | )     |         |         | (1,049  | )     |        |         | (4,152 | )    
|                                                     | (Issuance of) collections on notes receivable and advances to
distributors,
net          |                                                                            |                                          | (2,372                                              | )     |         |         | 205     |       |        |         | 217    |      
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     |                                                                                          |                                                                            |                                          | Net cash used in investing activities               |       |         | (29,324 | )       |       |        | (13,126 | )      |       |        | (16,265 | )
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|Cash flows from financing activities:                |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     | Proceeds from (payments on) revolving line of credit, net                                |                                                                            |                                          | 9,357                                               |       |         |         | (10,977 | )     |        |         | (6,654 | )    
|                                                     | Proceeds from term
loan                                                                  |                                                                            |                                          | 10,900                                              |       |         |         |        |       |        |         |       |      
|                                                     | Proceeds from issuance of common stock, net                                              |                                                                            |                                          | 18,066                                              |       |         |         | 10,210  |       |        |         | 84     |      
|                                                     | Payment of debt issuance and common stock registration costs                             |                                                                            |                                          | (1,320                                              | )     |         |         |        |       |        |         | (932   | )    
|                                                     | Payments of long-term debt and capital lease obligations                                 |                                                                            |                                          | (18,311                                             | )     |         |         | (2,337  | )     |        |         | (2,226 | )    
|                                                     | Proceeds from issuance of preferred stock, net                                           |                                                                            |                                          |                                                    |       |         |         |        |       |        |         | 9,661  |      
|                                                     | Proceeds from debt issuance                                                              |                                                                            |                                          |                                                    |       |         |         |        |       |        |         | 15,000 |      
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     |                                                                                          |                                                                            |                                          | Net cash provided by (used in) financing activities |       |         | 18,692  |         |       |        | (3,104  | )      |       |        | 14,933  |  
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                                                            | 932                                      |                                                     |       |         | 519     |         |       |        | (35     | )     
|Cash and cash equivalents at beginning of period     |                                                                                          |                                                                            | 1,563                                    |                                                     |       |         | 1,044   |         |       |        | 1,079   |       
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |       
|                                                     |                                                                                          |                                                                            |                                          | Cash and cash equivalents at end of period          |       | $       | 2,495   |         |       | $      | 1,563   |        |       | $      | 1,044   |  
|                                                     |                                                                                          |                                                                            |                                          |                                                     |       |         |         |         |       |        |         |        |      

The accompanying notes are an integral part of the consolidated financial statements.

29



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##### 



BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

1. Description of Business and Basis of Presentation

Blue Rhino Corporation (Blue Rhino or the Company) believes it is the
leading provider of propane cylinder exchange as well as a leading provider of
complementary propane and non-propane products to consumers. Blue Rhino
cylinder exchange provides consumers with a convenient means to exchange empty
cylinders for clean, safe, precision-filled cylinders. The Company has branded
cylinder displays at over 28,000 retail locations in 48 states plus Puerto
Rico. Blue Rhino cylinder exchange is offered at leading home improvement
centers, mass merchants, hardware, grocery and convenience stores. Cylinders
are delivered to retailers through a national network of 51 independent and
company-owned distributors. The Blue Rhino products group designs and imports
patio heaters, barbecue grills, mosquito elimination devices and various garden
and fireplace products primarily from Asia. These products are marketed
primarily to home improvement centers, mass merchants, and hearth stores. A
subsidiary, QuickShip, Inc., provides consumers with a convenient,
full-service, in-store postal and parcel shipping depot and provides retailers
with another revenue source.

The consolidated financial statements of Blue Rhino Corporation (the
Company) include the accounts of its wholly owned subsidiaries: Uniflame
Corporation (Uniflame); QuickShip, Inc. (QuickShip); Rhino Services,
L.L.C., CPD Associates, Inc.; USA Leasing, L.L.C.; Blue Rhino Global Sourcing,
LLC; Platinum Propane, L.L.C. (Platinum); Ark Holding Company LLC (Ark);
and Blue Rhino Consumer Products, LLC. As a result of the Companys
acquisition of Platinum in November 2002, the Company increased its ownership
interest in R4 Technical Center North Carolina, LLC (R4 Tech) on a
consolidated basis by 1% to 50%. The Company consolidated the results of R4
Tech beginning in the second quarter of fiscal 2003 as a result of its
increased ownership and financial control (Note 11). All material intercompany
transactions and balances have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Revenue Recognition Blue Rhino recognizes: (i) cylinder transaction
revenues upon delivery of the cylinders to retailers by our distributors; (ii)
products revenues upon shipment to retailers; and (iii) shipping services
revenues at the time consumers ship packages at the in-store retail depot. The
Company estimates returns and allowances against the revenues and records the
estimated returns and allowances in the same period in which the revenue is
recorded. These estimates are based upon historical analysis, customer
agreements and/or currently known factors that arise in the normal course of
business.

Accounts Receivable, Net Accounts receivable, net include allowances for
doubtful accounts of $917 and $841 at July 31, 2003 and 2002, respectively.
Allowances for doubtful accounts are estimated at the segment level based on
estimates of losses related to customer receivable balances. Quantitative
estimates are developed from accounts receivable agings based on expected
losses. Qualitative estimates are based on evaluations of specific customer
accounts in light of current economic conditions. Balances due from customers
in bankruptcy are considered uncollectible.

Inventories Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis and consist primarily of finished goods
including cylinders, cylinder valves, grills, patio heaters, mosquito
eliminators, fireplace accessories, and garden products. The Company
maintains reserves for obsolete inventories. Specific reserves are established
based on an evaluation of the inventory to determine if cost exceeds market
value. General reserves are established based on markdowns applied to excess
or aged inventories.

Cylinders, Net Cylinders are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of twenty-five years.
Cylinders include the cost of proprietary valves. The proprietary valves are
depreciated on a straight-line basis over their estimated useful lives of
twelve years. Depreciation expense for the years ended July 31, 2003, 2002,
and 2001 was $2,618, $2,126 and $1,434, respectively.

Capitalized Software Development Costs Certain development costs for
internal use software are capitalized when incurred. Capitalization of
software development costs begins upon the establishment of technological
feasibility and ceases when the product is ready for release. Software
development costs are amortized on a straight-line basis over the expected life
of the product estimated at three years. Capitalized software development
costs were $1,785, $560 and $583 for the years ended July 31, 2003, 2002 and
2001,

30



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##### 



respectively. At July 31, 2003 and 2002, total capitalized costs were
$4,144 and $2,359 and accumulated amortization was $2,308 and $1,419,
respectively.

Property, Plant and Equipment, Net Property, plant and equipment are
stated at cost. Depreciation and amortization are provided for using the
straight-line method over estimated useful lives ranging from 3 to 10 years for
cylinder displays, 3 to 5 years for computer hardware and software, and 5 to 30
years for building and equipment.

Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. For
assets held and used, an impairment charge is recognized if projected
undiscounted cash flows are not adequate to cover the carrying value of the
assets. For assets held for disposal, an impairment charge is recognized if
the carrying value of the assets exceeds the fair value less costs to sell.

Goodwill and other Intangibles, Net In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Our annual measurement date is February 1.
The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. There
was no impairment of goodwill upon adoption of SFAS 142. The Company is
required to perform goodwill impairment tests on an annual basis and between
annual tests in certain circumstances. The Company cannot be sure that future
goodwill impairment tests will not result in a charge to earnings. Patents and
other intellectual property are amortized over their estimated useful lives.
Non-compete agreements are amortized using the straight-line method over the
life of the agreements, which is generally three years.

Financial Instruments Financial instruments consist of cash and cash
equivalents, accounts receivable, advances, notes receivable, short-term and
long-term debt and derivatives. The Company considers all highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. At July 31, 2003 and 2002 the carrying
amounts of the Companys financial instruments approximated their fair values.

The Company uses derivative financial instruments to manage exposure to
fluctuations in interest rates on its variable rate debt (Note 14). An
interest rate swap agreement is a contract to exchange floating rate for fixed
interest payments periodically over the life of the agreement without the
exchange of the underlying notional amount. The notional amount of the swap
agreement is used to measure interest to be paid or received and does not
represent the amount of exposure to credit loss. The differential paid or
received under the interest rate swap agreement is recognized as an adjustment
to interest expense.

The Company uses derivative financial instruments in the form of swaps and
collars to hedge against fluctuations in the propane price component of its
distributor payments and in the price of propane purchases at company-owned
distributors (Note 14). The differential paid or received under the agreements
is recognized as an adjustment to cost of sales.

Comprehensive income Comprehensive income includes net income and
certain financial statement components, such as net unrealized holding gains or
losses, cumulative translation adjustments, and income or loss on derivative
instruments. The Company reports accumulated other comprehensive income in the
Consolidated Statement of Stockholders Equity.

Advertising and Promotion The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising and promotion costs for the years ended
July 31, 2003, 2002 and 2001 were $145, $262 and $392, respectively.
Cooperative advertising expenses are classified as a reduction of revenue.

Self-Insurance The Company is self-insured for a portion of losses
relating to workers compensation, automobile, and product liability claims.
Claims filed and claims incurred but not reported are accrued based upon
managements estimates of the aggregate liability for claims using insurance
data and historical experience.

Income Taxes Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that some portion or all of the deferred tax asset will
not be realized.

Stock-Based Compensation The Company accounts for the 1994 Stock
Incentive Plan, the 1998 Stock Incentive Plan and the Director Option Plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued

31



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##### 



to Employees(APB 25) (Note 15). Under APB 25, no compensation expense
is recognized for stock options issued with an exercise price equivalent to the
fair value of the Companys common stock on the date of grant. In general,
stock options and other equity instruments granted or issued under the
Distributor Stock Option Plan are accounted for in accordance with Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). For companies that continue to account for stock-based
compensation arrangements under APB 25, SFAS 123 requires disclosure of the pro
forma effect on net income (loss) as if the fair value based method prescribed
by SFAS 123 had been applied. The Company has adopted the pro forma disclosure
requirements of SFAS 123.

Had compensation expense for the 1994 Stock Incentive Plan, the 1998 Stock
Incentive Plan or the Director Option Plan been determined for options granted
since August 1, 1995 in accordance with SFAS No. 123, the Companys pro forma
net income/(loss) and earnings/(loss) per share for the years ended July 31,
2003, 2002 and 2001 would have been as follows:

|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|---------------------------------------------------- | ----------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                                     |             |  | 2003 |        | 2002 |  | 2001
|                                                     |             |  |      |        |      |  |     
|Net income (loss) available for common stockholders: |             |  |      |        |      |  |      |       |  |  |   |       
|                                                     | As reported |  | $    | 16,459 |      |  | $    | 8,026 |  |  | $ | (4,722 | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|                                                     | Pro forma   |  | $    | 13,212 |      |  | $    | 6,636 |  |  | $ | (5,952 | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|Earnings (loss) per common share:                    |             |  |      |        |      |  |      |       |  |  |   |       
|Basic:                                               |             |  |      |        |      |  |      |       |  |  |   |       
|                                                     | As reported |  | $    | 1.00   |      |  | $    | 0.63  |  |  | $ | (0.41  | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|                                                     | Pro forma   |  | $    | 0.80   |      |  | $    | 0.52  |  |  | $ | (0.51  | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|Diluted:                                             |             |  |      |        |      |  |      |       |  |  |   |       
|                                                     | As reported |  | $    | 0.86   |      |  | $    | 0.55  |  |  | $ | (0.41  | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  
|                                                     | Pro forma   |  | $    | 0.69   |      |  | $    | 0.45  |  |  | $ | (0.51  | )
|                                                     |             |  |      |        |      |  |      |       |  |  |   |        |  

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for all grants: expected lives ranging from five to
six years; expected volatility ranging from 30% to 91%; expected dividends of
zero and a risk-free interest rate ranging from 1.1% to 5.8%.

Use of Estimates The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ materially from these estimates.

Reclassification Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 2003.

Recent Accounting Pronouncements In August 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 143, Accounting for Asset Retirement Obligations.The
Statement requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. As required
by SFAS No. 143, the Company adopted this new accounting standard for fiscal
year 2003. The adoption of SFAS No. 143 did not have a material impact on the
Companys consolidated results of operations or financial position.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets.
As required by SFAS No. 144, the Company adopted this new accounting standard
for fiscal year 2003. The adoption of SFAS No. 144 did not have a material
impact on the Companys consolidated results of operations or financial
position.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and establishes that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria for treatment as extraordinary. The Company adopted this
standard for fiscal year 2003. The adoption of SFAS No. 145 did not have a
material impact on the Companys consolidated results of operations or
financial position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 also establishes that fair value
is the objective for initial measurement of the liability. The Company adopted
this standard for fiscal year 2003. The adoption of SFAS No. 146 did not have
a material impact on the Companys consolidated results of operations or
financial position.

32



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##### 



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions in
SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The Company adopted the interim
financial reporting for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a significant impact on the Companys
consolidated results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. The Company adopted this
standard for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a significant impact on the Companys
consolidated results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement requires certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity to be
classified as liabilities. The Company adopted this standard for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 did not have a significant impact on the Companys consolidated results
of operations or financial position.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its business relationships to determine if
they are variable interest entities. As defined in FIN 46, variable interests
are contractual, ownership or other interests in an entity that change with
changes in the entitys net asset value. Variable interests in an entity may
arise from financial instruments, service contracts, guarantees, leases or
other arrangements with the variable interest entity. An entity that will
absorb a majority of the variable interest entitys expected losses or expected
residual returns, as defined in FIN 46, is considered the primary beneficiary
of the variable interest entity. The primary beneficiary must include the
variable interest entitys assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 is immediately effective for all
variable interest entities created after January 31, 2003. For variable
interest entities created prior to this date, the provisions of FIN 46 were
originally required to be applied no later than the Companys first quarter of
Fiscal 2004. On October 8, 2003, the FASB issued FASB Staff Position (FSP) FIN
46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities. The FSP provides a limited deferral (until the end of the
Companys second quarter of 2004) of the effective date of FIN 46 for certain
interests of a public entity in a variable interest entity or a potential
variable interest entity. The Company will continue to evaluate FIN 46, but
due to the complex nature of the analysis required by FIN 46 has not determined
the impact on its consolidated results of operations or financial position.

3. Concentration of Credit Risk

The Companys cash and cash equivalents are held by high-quality financial
institutions, thereby reducing credit risk concentrations. Due to the
geographic dispersion and the high credit quality of the Companys significant
customers, credit risk relating to accounts receivable is limited. The Company
performs ongoing credit evaluations of its customers financial condition and,
generally, does not require collateral on accounts receivable. The Companys
three largest customers accounted for a total of approximately 65%, 59%, and
54% of net revenues in the years ended July 31, 2003, 2002 and 2001,
respectively, as follows:

|                 |  |      |    |      |  |      |    |   |  |  |    |  
|---------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                 |  | 2003 |    | 2002 |  | 2001
|                 |  |      |    |      |  |     
|Wal*Mart         |  |      | 36 | %    |  |      | 32 | % |  |  | 26 | %
|Home Depot       |  |      | 18 |      |  |      | 18 |   |  |  | 19 |  
|Lowes Companies |  |      | 11 |      |  |      | 9  |   |  |  | 9  |  
|                 |  |      |    |      |  |      |    |   |  |  |    |  
|Total            |  |      | 65 | %    |  |      | 59 | % |  |  | 54 | %
|                 |  |      |    |      |  |      |    |   |  |  |    |  

The Companys revenues with Home Depot and Lowes are predominantly in the
cylinder exchange segment while revenues with Wal Mart occur in both the
cylinder exchange and products segments. Approximately 58% and 47% of the
Companys

33



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##### 



aggregate accounts receivable at July 31, 2003 and 2002, respectively,
were from these customers. If the financial condition or operations of these
customers deteriorate, the Companys operating results could be adversely
affected.

4. Cylinders, net

The Company owns propane cylinders and cylinder displays. The Company is
responsible for the cost of refurbishing cylinders obtained from consumers in
exchange transactions. The Company currently offers three types of cylinder
transactions: (i) like-for-like cylinder exchanges; (ii) cylinder exchanges
with valve upgrades offering additional safety features; and (iii) filled
cylinder sales. The refurbishment cost of all three types of cylinder
transactions, the valve cost associated with upgrade transactions, and the
cylinder cost associated with sale transactions are expensed as part
of cost of goods sold. As cylinder inventories are depleted by sale transactions,
they are generally replaced by purchasing new cylinders.

Cylinder cost as of July 31, 2003 and 2002 was $47,318 and $30,781,
respectively, with accumulated depreciation of $5,175 and $3,474, respectively.
As of July 31, 2003 and 2002, cylinder cost included the cost of proprietary
valves of $11,008 and $11,008, respectively, with accumulated depreciation of
$2,234 and $1,317, respectively.

Significant portions of cylinders and displays are leased to independent
distributors under operating lease agreements for use within each distributors
territory (Note 6). Under these lease agreements, independent distributors are
obligated to refurbish cylinders into like-new condition and, in the event of
loss or damage, to repair or replace the cylinders. In addition, the
distributor (lessee) is obligated to pay for all maintenance, installation,
deinstallation, taxes and insurance related to the cylinders. The leases
continue until either party terminates upon 60 days written notice the other
party.

As of July 31, 2003 and 2002, the costs of cylinders under lease were
$22,236 and $30,781, respectively, with accumulated depreciation of $2,400 and
$3,474, respectively. Lease income for cylinders for the years ended July 31,
2003, 2002 and 2001 was $1,785, $2,865 and $2,957, respectively. As of July
31, 2003, estimated future minimum rental payments to be received are
approximately $1,205 per year through the year 2008.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consists of the following at
July 31:

|                                       |  |      |       |      |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                       |  | 2003 |       | 2002
|                                       |  |      |       |     
|Advances                               |  | $    | 1     |      |  | $ | 991   | 
|Prepaid expenses and other
receivables |  |      | 5,561 |      |  |   | 1,782 | 
|Propane derivative                     |  |      | 1,365 |      |  |   | 307   | 
|Notes receivable                       |  |      | 128   |      |  |   | 1     | 
|                                       |  |      |       |      |  |   |       | 
|                                       |  | $    | 7,055 |      |  | $ | 3,081 | 
|                                       |  |      |       |      |  |   |       | 

6. Property, Plant and Equipment, Net

Property, plant and equipment consists of the following at July 31:

|                                            |                                                                                                                                                         |   |        |         |      |   |        |         |  
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------ | ------- | ---- | - | ------ | ------- | -
|                                            |                                                                                                                                                         |   | 2003   |         | 2002
|                                            |                                                                                                                                                         |   |        |         |     
|Land                                        |                                                                                                                                                         | $ | 178    |         |      | $ | 178    |        
|Building and leasehold improvements         |                                                                                                                                                         |   | 4,442  |         |      |   | 3,526  |        
|Cylinder displays, including panel graphics |                                                                                                                                                         |   | 31,429 |         |      |   | 26,894 |        
|Vehicles                                    |                                                                                                                                                         |   | 1,843  |         |      |   | 589    |        
|Machinery and equipment                     |                                                                                                                                                         |   | 8,083  |         |      |   | 6,578  |        
|Furniture
&
fixtures                        |                                                                                                                                                         |   | 432    |         |      |   | 283    |        
|Computer hardware and software              |                                                                                                                                                         |   | 11,063 |         |      |   | 8,337  |        
|Equipment leased under capital leases       |                                                                                                                                                         |   | 750    |         |      |   | 411    |        
|Construction in
progress                    |                                                                                                                                                         |   | 1,945  |         |      |   |       |        
|                                            |                                                                                                                                                         |   |        |         |      |   |        |        
|                                            |                                                                                                                                                         |   | 60,165 |         |      |   | 46,796 |        
|                                            | Less accumulated depreciation and amortization (including
$174 and $135 as of July 31, 2003 and 2002,
respectively, for equipment under capital leases) |   |        | (22,400 | )    |   |        | (16,319 | )
|                                            |                                                                                                                                                         |   |        |         |      |   |        |        
|                                            |                                                                                                                                                         | $ | 37,765 |         |      | $ | 30,477 |        
|                                            |                                                                                                                                                         |   |        |         |      |   |        |        

34



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Depreciation and amortization expense for the years ended July 31, 2003,
2002 and 2001 was $6,495, $5,453 and $4,384, respectively.

The Company enters into operating lease agreements with its independent
distributors for cylinder displays for use within each distributors territory.
Under these leases, the distributor (lessee) is obligated to pay for all
maintenance, installation, deinstallation, taxes and insurance related to the
cylinder displays. The lessee bears all risk of loss and damage to the
displays and, in the event of loss or damage, is required to repair or replace
the displays. The leases continue until either party terminates upon 60 days
written notice to the other party. As of July 31, 2003 and 2002, the costs of
cylinder displays under lease were $15,957 and $24,573, respectively, with
accumulated depreciation of $5,578 and $7,538, respectively. Lease income for
cylinder displays for the years ended July 31, 2003, 2002 and 2001 was $1,050,
$1,646 and $1,685, respectively. As of July 31, 2003, estimated future minimum
rental payments to be received are approximately $882 per year through the year
2008.

Effective September 30, 2001, the Company entered into a sale and
leaseback transaction with R4 Tech. The Company purchased all of the land,
buildings and equipment associated with the propane bottling and cylinder
refurbishing operation. The assets were purchased for $7,599. The purchase
price was used to repay outstanding advances to R4 Tech. Simultaneously, R4
Tech leased the land, buildings, and equipment from the Company under the terms
of a three-year operating lease agreement. Under this agreement, R4 Tech pays
Blue Rhino a ten percent annual rate based on the value of all leased
equipment. Lease income for the years ended July 31, 2003 and 2002 was $196
and $640, respectively. As a result of the acquisition of Platinum, the
Company increased its ownership interest in R4 Tech (Note 11) on a consolidated
basis by 1% to 50%. The Company consolidated the results of R4 Tech beginning
in the second quarter of fiscal 2003 as a result of its increased ownership and
financial control, therefore the lease payments are eliminated in
consolidation.

Land, buildings and equipment leased to R4 Tech consisted of the following
at July 31, 2003 and 2002:

|                         |  |      |       |      |  |   |       |  
|------------------------ |  | ---- | ----- | ---- |  | - | ----- | -
|                         |  | 2003 |       | 2002
|                         |  |      |       |     
|Land                     |  | $    | 158   |      |  | $ | 158   |  
|Buildings                |  |      | 2,921 |      |  |   | 2,775 |  
|Equipment                |  |      | 5,173 |      |  |   | 4,837 |  
|                         |  |      |       |      |  |   |       |  
|                         |  |      | 8,252 |      |  |   | 7,770 |  
|Accumulated depreciation |  |      | (939  | )    |  |   | (418  | )
|                         |  |      |       |      |  |   |       |  
|                         |  | $    | 7,313 |      |  | $ | 7,352 |  
|                         |  |      |       |      |  |   |       |  

7. Goodwill and other intangibles, Net

Intangibles consist of the following at July 31:

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2003 |        | 2002
|                         |  |      |        |     
|Goodwill                 |  | $    | 64,852 |      |  | $ | 33,867 |  
|Patents and trademarks   |  |      | 1,421  |      |  |   | 1,409  |  
|Non-compete agreements   |  |      | 1,029  |      |  |   | 1,002  |  
|                         |  |      |        |      |  |   |        |  
|                         |  |      | 67,302 |      |  |   | 36,278 |  
|Accumulated amortization |  |      | (4,440 | )    |  |   | (4,290 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 62,862 |      |  | $ | 31,988 |  
|                         |  |      |        |      |  |   |        |  

Amortization expense for the years ended July 31, 2003, 2002 and 2001 was
$148, $309, and $2,644, respectively. As of July 31, 2003, the estimated
aggregate amortization expense for each of the five succeeding fiscal years is
$114 in 2004, $81 in 2005, $71 in 2006, $71 in 2007 and $67 in 2008.

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be
subject to impairment tests on at least an annual basis (and more often in
certain circumstances) in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

The Company applied the new rules for accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. In accordance
with the requirements of SFAS 142, the Company has identified three reporting
units: the cylinder exchange segment, the products group and QuickShip. The
forecasts, valuations and impairment analyses under the Statement were made at
these reporting unit levels. The fair values of the cylinder exchange segment
and the products group were based on discounted cash flow projections over ten
fiscal years. The Company projected positive cash flows for cylinder exchange
and the

35



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##### 



products group in all periods. The valuations indicated that the fair
value of the reporting units exceeded the carrying value of the reporting units
by a substantial margin.

Negative indicators have existed for QuickShip, including operating losses
and negative cash flows. As a result, management deemed it appropriate to
obtain an independent valuation of QuickShip to determine if goodwill
impairment existed as of August 1, 2001. The valuation was based on projected
cash flows over ten fiscal years with significant growth in the number of
locations and revenue assumed in years three through seven. Capital
expenditures range from $100 to $750 each year. The valuation uses a discount
rate of 25%. The independent valuation concluded that the fair value of
QuickShip exceeded its carrying value at August 1, 2001. Since that date, the
Company has updated the valuation on a quarterly basis using revised
assumptions of cash flow in the future years based upon the Companys most
recent business plan, which shows near breakeven cash flows in year three with
steadily increasing cash flows in years four through ten. Each of the revised
valuations also concluded that there was no impairment of the $6.3 million in
goodwill for QuickShip.

Based on the foregoing, the Company determined there to be no impairment
of goodwill. Future goodwill impairment tests may, however, result in a charge
to earnings.

The following table presents the impact of SFAS 142 on net income (loss)
and net income (loss) per share for the years ended July 31, 2003 and 2002 and,
assuming SFAS 142 had then been in effect, for the year ended July 31, 2001 (in
thousands, except per share amounts):

|                                                        |                          |   |        |   |      |   |       |   |  |   |        |       | 
|------------------------------------------------------- | ------------------------ | - | ------ | - | ---- | - | ----- | - |  | - | ------ | ----- | 
|                                                        |                          |   | 2003   |   | 2002 |   | 2001 
|                                                        |                          |   |        |   |      |   |      
|Reported income (loss) available to
common stockholders |                          | $ | 16,459 |   |      | $ | 8,026 |   |  | $ | (4,722 | )    
|Adjustments:                                            |                          |   |        |   |      |   |       |   |  |   |        |      
|                                                        | Amortization of goodwill |   |        |  |      |   |       |  |  |   |        | 2,268 | 
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      
|Adjusted income (loss) available to
common stockholders |                          | $ | 16,459 |   |      | $ | 8,026 |   |  | $ | (2,454 | )    
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      
|Reported basic income (loss) per
common share           |                          | $ | 1.00   |   |      | $ | 0.63  |   |  | $ | (0.41  | )    
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      
|Reported diluted income (loss) per
common share         |                          | $ | 0.86   |   |      | $ | 0.55  |   |  | $ | (0.41  | )    
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      
|Adjusted basic income (loss) per
common
share           |                          | $ | 1.00   |   |      | $ | 0.63  |   |  | $ | (0.21  | )    
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      
|Adjusted diluted income (loss) per
common
share         |                          | $ | 0.86   |   |      | $ | 0.55  |   |  | $ | (0.21  | )    
|                                                        |                          |   |        |   |      |   |       |   |  |   |        |      

8. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital leases consist of the following at July 31:

|                                                                               |                          |   |        |        |      |   |        |        | 
|------------------------------------------------------------------------------ | ------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                               |                          |   | 2003   |        | 2002
|                                                                               |                          |   |        |        |     
|Bank credit facility                                                          
|                                                                               | Revolving line of
credit |   | $      | 36,000 |      |   | $      | 26,643 | 
|                                                                               | Term
loan                |   |        | 10,900 |      |   |        |       | 
|Subordinated
debt                                                              |                          |   |       |        |      |   | 15,000 |       
|Discount on subordinated
debt                                                  |                          |   |       |        |      |   | (2,666 | )     
|Acquisition notes
payable                                                      |                          |   | 158    |        |      |   | 655    |       
|Capital lease obligations bearing interest at various rates from 3.2%
to
12.6% |                          |   | 655    |        |      |   | 113    |       
|Other                                                                          |                          |   | 1,520  |        |      |   | 1,527  |       
|                                                                               |                          |   |        |        |      |   |        |       
|                                                                               |                          |   | 49,233 |        |      |   | 41,272 |       
|Less amounts due within one
year                                               |                          |   | 6,433  |        |      |   | 2,013  |       
|                                                                               |                          |   |        |        |      |   |        |       
|                                                                               |                          | $ | 42,800 |        |      | $ | 39,259 |       
|                                                                               |                          |   |        |        |      |   |        |       

36



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The aggregate maturities of long-term debt and capital lease obligations
at July 31, 2003 are as follows:

|                      |  |           |        |               |  |       |     |   |  |   |        |  
|--------------------- |  | --------- | ------ | ------------- |  | ----- | --- | - |  | - | ------ | -
|                      |  | Long-Term |        | Capital Lease |  |       |     |  
|                      |  | Debt      |        | Obligations   |  | Total
|                      |  |           |        |               |  |      
|2004                  |  | $         | 6,214  |               |  | $     | 263 |   |  | $ | 6,477  |  
|2005                  |  |           | 5,792  |               |  |       | 277 |   |  |   | 6,069  |  
|2006                  |  |           | 36,429 |               |  |       | 132 |   |  |   | 36,561 |  
|2007                  |  |           | 24     |               |  |       | 19  |   |  |   | 43     |  
|2008                  |  |           | 9      |               |  |       | 15  |   |  |   | 24     |  
|Thereafter            |  |           | 110    |               |  |       | 9   |   |  |   | 119    |  
|                      |  |           |        |               |  |       |     |   |  |   |        |  
|                      |  |           | 48,578 |               |  |       | 715 |   |  |   | 49,293 |  
|Less imputed interest |  |           |       |               |  |       | (60 | ) |  |   | (60    | )
|                      |  |           |        |               |  |       |     |   |  |   |        |  
|                      |  | $         | 48,578 |               |  | $     | 655 |   |  | $ | 49,233 |  
|                      |  |           |        |               |  |       |     |   |  |   |        |  

On November 20, 2002, the Company completed the syndication of a new and
expanded bank credit facility (the Credit Facility). The Credit Facility
consists of a $45,000 revolving line of credit and a $15,000 term loan, both
for general corporate purposes, inclusive of payments made under letters of
credit. The Company has outstanding letters of credit of $605 and $1,093 as of
July 31, 2003 and 2002, respectively. The Credit Facility has a maturity date
of November 30, 2005 and, as amended, requires the Company to utilize the
approximately $14,900 in net proceeds from a private placement of common stock
completed December 20, 2002 to repay the term loan or its subordinated debt, in
such proportion as the Company elects, by July 31, 2003. In the third and
fourth quarters of fiscal 2003, the Company repaid the entire $15,000 of the
subordinated debt and incurred a $2,589 non-cash charge that was reflected in
interest expense. Advances under the Credit Facility are collateralized by a
lien on substantially all of the Companys assets.

Advances under the Credit Facility may be made as either base rate (prime
rate) loans or London Interbank Offered Rate (LIBOR) loans at the Companys
election. Interest rates are based upon either the LIBOR or prime rate plus an
applicable margin dependent upon a total leverage ratio. The applicable LIBOR
margins range from 200 to 300 basis points, and the applicable prime rate
margins range from 50 to 150 basis points. The Company incurred fees of $1,320
in connection with the Credit Facility. The fees will be amortized over the
life of the Credit Facility, through November 30, 2005. The Company incurred a
charge of $96 in November 2002 resulting from unamortized fees related to its
prior credit facility. On July 31, 2003 the Company had $46,400 (including a
$10,900 balance on the term loan) in LIBOR loans outstanding at a
weighted-average interest rate of 3.85% and $500 in prime rate loans
outstanding at a weighted-average interest rate of 5.25%.

Principal payments on the outstanding term loan began on December 31, 2002
and continue quarterly until September 30, 2005. The initial principal
payments are $1,000 per calendar quarter beginning December 31, 2002, will
increase to $1,250 per calendar quarter beginning December 31, 2003 and will
further increase to $1,500 per calendar quarter beginning December 31, 2004.
In accordance with the terms of the Credit Facility, $1,100 of the net proceeds
of the March 2003 litigation settlement (Note 20) were applied against the term
loan as a reduction. The Credit Facility includes a .50% commitment fee on the
average daily unused amount for each fiscal quarter. The Credit Facility
requires the Company to meet certain covenants, including minimum net worth and
cash flow requirements, restricts the payment of cash dividends and permits
early extinguishment of up to $15,000 of the Companys subordinated debt.

The Company was party to an interest rate swap agreement with a notional
amount of $10,000 that expired in July 2003. Under that agreement, the Company
paid a fixed rate of 7.36% and received a rate equivalent to the thirty-day
LIBOR, adjusted quarterly. In May 2003, the Company entered into a new swap
agreement with an effective date of August 1, 2003 and an expiration date of
October 3, 2005. The initial notional amount is $20,000 beginning August 1,
2003, will decrease to $15,000 on June 1, 2004, will decrease to $10,000 on
March 1, 2005 and will further decrease to $5,000 on September 1, 2005. Under
the new swap agreement, the Company will pay a fixed rate of 1.85% and receive
a rate equivalent to the thirty-day LIBOR, adjusted monthly.

On June 15, 2001, the Company completed a $15,000 private placement of
subordinated debt to an institutional investor. The debenture carried interest
at the annual rate of 13%, payable quarterly. The principal balance was
scheduled to mature on August 31, 2006, but was prepaid in full during the
third and fourth quarters of fiscal 2003. In addition, the Company issued a
warrant to the investor to purchase 1,372,071 shares of common stock, with an
exercise price of $3.8685 per share (subject to adjustment for organic changes
in its common stock and for certain future issuances below the then-existing
exercise price) valued at $3,440. The warrant was converted by the investor
into 1,070 shares of common stock effective January 6, 2003.

Interest expense included the non-cash amortization of debt issuance costs
for the years ended July 31, 2003, 2002 and 2001 of $780, $304 and $192,
respectively.

37



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##### 



Other includes obligations bearing interest at various rates between 3.50%
and 11.50%.

9. Other, net

The Company had certain non-operating income and expenses classified as
other, net during the years ended July 31, 2003, 2002 and 2001 as follows:

|                              |  |      |        |      |  |      |      |   |  |   |      |  
|----------------------------- |  | ---- | ------ | ---- |  | ---- | ---- | - |  | - | ---- | -
|                              |  | 2003 |        | 2002 |  | 2001
|                              |  |      |        |      |  |     
|Interest income               |  | $    | (141   | )    |  | $    | (512 | ) |  | $ | (553 | )
|Miscellaneous (income)expense |  |      | (165   | )    |  |      | (15  | ) |  |   | 201  |  
|Loss on disposal of assets    |  |      | 258    |      |  |      | 105  |   |  |   | 51   |  
|Litigation proceeds,
net      |  |      | (2,465 | )    |  |      |     |   |  |   |     |  
|                              |  |      |        |      |  |      |      |   |  |   |      |  
|                              |  | $    | (2,513 | )    |  | $    | (422 | ) |  | $ | (301 | )
|                              |  |      |        |      |  |      |      |   |  |   |      |  

10. Income Taxes

The components of the provision for income taxes for the years ended July
31, 2003, 2002 and 2001 are as follows:

|                           |         |   |       |       |      |   |      |    |  |   |     |     | 
|-------------------------- | ------- | - | ----- | ----- | ---- | - | ---- | -- |  | - | --- | --- | 
|                           |         |   | 2003  |       | 2002 |   | 2001
|                           |         |   |       |       |      |   |     
|Current:                   |         |   |       |       |      |   |      |    |  |   |     |    
|                           | State   |   | $     | 60    |      |   | $    | 47 |  |   | $   | 123 | 
|                           |         |   |       |       |      |   |      |    |  |   |     |     | 
|Total current              |         |   | 60    |       |      |   | 47   |    |  |   | 123 |    
|Deferred:                  |         |   |       |       |      |   |      |    |  |   |     |    
|                           | Federal |   | $     | 1,801 |      |   |      |   |  |   |     |    | 
|                           | State   |   |       | 356   |      |   |      |   |  |   |     |    | 
|                           |         |   |       |       |      |   |      |    |  |   |     |     | 
|Total deferred             |         |   | 2,157 |       |      |   |     |    |  |   |    |    
|                           |         |   |       |       |      |   |      |    |  |   |     |     | 
|Total income tax provision |         | $ | 2,217 |       |      | $ | 47   |    |  | $ | 123 |    
|                           |         |   |       |       |      |   |      |    |  |   |     |     | 

A reconciliation of the differences between the statutory federal income
tax rate and the effective tax rate for the years ended July 31, 2003, 2002 and
2001 is as follows:

|                           |                                    |  |      |       |      |  |      |       |   |  |       |      | 
|-------------------------- | ---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | ----- | ---- | 
|                           |                                    |  | 2003 |       | 2002 |  | 2001
|                           |                                    |  |      |       |      |  |     
|Federal statutory tax rate |                                    |  | 35.0 | %     |      |  | 34.0 | %     |   |  | (34.0 | )%  
|                           | Change in valuation allowance      |  |      | (27.7 | )    |  |      | (34.4 | ) |  |       | 32.5 | 
|                           | Permanent differences and other    |  |      | .2    |      |  |      | .4    |   |  |       | 2.5  | 
|                           | State taxes net of federal benefit |  |      | 4.3   |      |  |      | .5    |   |  |       | 2.2  | 
|                           |                                    |  |      |       |      |  |      |       |   |  |       |     
|Effective tax rate         |                                    |  | 11.8 | %     |      |  | .5   | %     |   |  | 3.2   | %   
|                           |                                    |  |      |       |      |  |      |       |   |  |       |     

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

|                                     |                                 |   |        |        |      |   |       |        |   |   |       |        |  
|------------------------------------ | ------------------------------- | - | ------ | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                                     |                                 |   | 2003   |        | 2002 |   | 2001 
|                                     |                                 |   |        |        |      |   |      
|Assets:                              |                                 |   |        |        |      |   |       |        |   |   |       |       
|                                     | Net operating loss carryforward |   | $      | 16,489 |      |   | $     | 11,583 |   |   | $     | 13,884 |  
|                                     | Allowance for doubtful accounts |   |        | 370    |      |   |       | 1,540  |   |   |       | 1,042  |  
|                                     | Distributor option plan         |   |        | 346    |      |   |       | 289    |   |   |       | 205    |  
|                                     | Deferred loss on joint venture  |   |        | 30     |      |   |       | (430   | ) |   |       | 529    |  
|                                     | Accrued expenses                |   |        | 765    |      |   |       | 327    |   |   |       | 531    |  
|                                     | Reserves and other              |   |        | 1,255  |      |   |       | 661    |   |   |       | 591    |  
|                                     |                                 |   |        |        |      |   |       |        |   |   |       |       
|                                     | Total gross deferred tax assets |   |        | 19,255 |      |   |       | 13,970 |   |   |       | 16,782 |  
|                                     | Valuation allowance             |   |        | (149   | )    |   |       | (5,606 | ) |   |       | (8,616 | )
|                                     |                                 |   |        |        |      |   |       |        |   |   |       |       
|Net deferred tax assets              |                                 | $ | 19,106 |        |      | $ | 8,364 |        |   | $ | 8,166 |       
|                                     |                                 |   |        |        |      |   |       |        |   |   |       |        |  
|Liability:                           |                                 |   |        |        |      |   |       |        |   |   |       |       
|                                     | Depreciation and amortization   |   |        | 21,072 |      |   |       | 8,364  |   |   |       | 8,166  |  
|                                     |                                 |   |        |        |      |   |       |        |   |   |       |       
|Total gross deferred tax
liabilities |                                 | $ | 21,072 |        |      | $ | 8,364 |        |   | $ | 8,166 |       
|                                     |                                 |   |        |        |      |   |       |        |   |   |       |       

As of July 31, 2003, the Company has recorded a valuation reserve for
deferred tax assets of $149 related to state operating losses. This reserve
was established in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, as it is managements opinion that it is
more likely than not that some portion of these benefits may not be realized.
The net change in the valuation allowance for the year ended July 31, 2003 was
a decrease of $5,457. At July 31, 2003, federal net operating losses of
approximately $42,000 may expire beginning in year 2010 and state net operating
losses of approximately $33,000 may expire beginning in year 2010 if unused.
The utilization of the net operating losses will be subject to certain
limitations as prescribed by Section 382 of the Internal Revenue Code.

38



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##### 



11. Investment in Joint Venture

As a result of the acquisition of Platinum, the Company increased its
ownership interest in R4 Technical Center  North Carolina, LLC (R4 Tech) on
a consolidated basis by 1% to 50%. The Company consolidated the results of R4
Tech beginning in the second quarter of fiscal 2003 as a result of its
increased ownership and financial control. R4 Tech began operations in May
2000 and was accounted for under the equity method of accounting through the
first quarter of fiscal 2003. During the first quarter of fiscal 2003, the
Company recognized 100% of the loss of R4 Tech as a result of advances made
without a corresponding advance from the other joint venture partners. The
Company recognized its portion of the loss in the joint venture for the period
ended July 31, 2003, 2002 and 2001 of $455, $714 and $2,572, respectively. At
July 31, 2002, the Company had advances outstanding to R4 Tech of $141 and
payables to R4 Tech of $1,755.

Summary financial information for R4 Tech as of and for the periods ended
July 31, 2002 and 2001 is as follows:

|                                                |  |      |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                |  | 2002 |        | 2001
|                                                |  |      |        |     
|Current assets                                  |  | $    | 2,323  |      |  | $ | 1,496  |  
|Property, plant, and equipment and other assets |  |      | 1      |      |  |   | 7,617  |  
|Current liabilities                             |  |      | 2,895  |      |  |   | 8,162  |  
|Long-term debt                                  |  |      |       |      |  |   | 22     |  
|Net sales                                       |  |      | 12,697 |      |  |   | 9,910  |  
|Gross loss                                      |  |      | (260   | )    |  |   | (3,802 | )
|Net loss                                        |  |      | (1,449 | )    |  |   | (5,250 | )

12. Nonrecurring Item

During the year ended July 31, 2001, the Company incurred a charge of $449
related to costs incurred in connection with refinancing its bank credit
facility.

13. Earnings (Loss) Per Share:

The following table sets forth a reconciliation of the numerators and
denominators in computing earnings (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128.

|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |   | 
|---------------------------------------------------------------------- | --------------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | - | 
|                                                                       |                       |   | 2003   |       | 2002 |   | 2001  
|                                                                       |                       |   |        |       |      |   |       
|Net income (loss)                                                      |                       | $ | 16,530 |       |      | $ | 9,815  |       |  | $ | (3,952 | )
|Less: Preferred stock dividends                                        |                       |   | 71     |       |      |   | 1,789  |       |  |   | 770    |  
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Income (loss) available to common stockholders                         |                       | $ | 16,459 |       |      | $ | 8,026  |       |  | $ | (4,722 | )
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Income (loss) available to common stockholders                         |                       | $ | 16,459 |       |      | $ | 8,026  |       |  | $ | (4,722 | )
|Weighted average number of common shares
outstanding (in
thousands)    |                       |   | 16,430 |       |      |   | 12,658 |       |  |   | 11,641 |  
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Basic earnings (loss) per common share                                 |                       | $ | 1.00   |       |      | $ | 0.63   |       |  | $ | (0.41  | )
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Income (loss) available to common stockholders                         |                       | $ | 16,459 |       |      | $ | 8,026  |       |  | $ | (4,722 | )
|Weighted average number of common shares
outstanding (in
thousands)    |                       |   | 16,430 |       |      |   | 12,658 |       |  |   | 11,641 |  
|Effect of potentially dilutive securities (in thousands):              |                       |   |        |       |      |   |        |       |  |   |        |  
|                                                                       | Common stock options  |   |        | 1,671 |      |   |        | 890   |  |   |        |  | 
|                                                                       | Common stock warrants |   |        | 1,138 |      |   |        | 1,153 |  |   |        |  | 
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Weighted average number of common shares
outstanding assuming
dilution |                       |   | 19,239 |       |      |   | 14,701 |       |  |   | 11,641 |  
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  
|Diluted earnings (loss) per common share                               |                       | $ | 0.86   |       |      | $ | 0.55   |       |  | $ | (0.41  | )
|                                                                       |                       |   |        |       |      |   |        |       |  |   |        |  

39



---



##### 



Common stock options and common stock warrants listed below for the years
ended July 31, 2003 and 2002 were not included in the computation of diluted
earnings per share because the exercise prices are greater than the average
market price of the Companys common stock and the effect would be
anti-dilutive. Common stock options and common stock warrants listed below for
the year ended July 31, 2001 have been excluded from the computation of diluted
loss per share because they were anti-dilutive.

|                      |  |      |         |      |  |      |           |  |  |  |           | 
|--------------------- |  | ---- | ------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                      |  | 2003 |         | 2002 |  | 2001
|                      |  |      |         |      |  |     
|Common stock options  |  |      | 990,750 |      |  |      | 1,023,047 |  |  |  | 2,467,893 | 
|                      |  |      |         |      |  |      |           |  |  |  |           | 
|Common stock warrants |  |      | 330,000 |      |  |      | 284,063   |  |  |  | 2,935,704 | 
|                      |  |      |         |      |  |      |           |  |  |  |           | 

14. Derivative Instruments

Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities(SFAS 133) which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative
is designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive income (OCI)
and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow
hedges are recognized in earnings. The cumulative effect of the adoption of
SFAS 133 resulted in a reduction to OCI of $131 for fiscal 2001.

The Company uses derivative instruments, which are designated as cash flow
hedges, to manage exposure to interest rate fluctuations and wholesale propane
price volatility. The Companys objective for holding derivatives is to
minimize risks by using the most effective methods to eliminate or reduce the
impacts of these exposures.

In July 2000, the Company entered into an interest rate swap agreement
(2000 Swap), as required under its former bank credit facility, with a
notional amount of $10,000 as a cash flow hedge of the variable interest rate
debt outstanding under its credit facility. Under the 2000 Swap agreement,
which expired in July 2003, the Company paid a fixed rate of 7.36% and received
a rate equivalent to the thirty-day London Interbank Offered Rate (LIBOR),
adjusted quarterly. The 2000 Swap was designated as a hedge of the benchmark
interest rate. In November 2002, the Company completed the syndication of a
new and expanded bank credit facility (the Credit Facility). Advances under
the Credit Facility may be made as either base rate (prime rate) loans or
LIBOR loans at the Companys election. Applicable interest rates are based
upon either the LIBOR or prime rate plus an applicable margin dependent upon a
total leverage ratio. As a result of the 2000 Swap, there was a $588, $498 and
a $154 charge to interest expense for the effective portion of the hedge during
the years ended July 31, 2003, 2002 and 2001, respectively. Hedge
ineffectiveness, determined in accordance with SFAS 133, resulted in a ($27)
and a ($1) credit to other income during the years ended July 31, 2003 and
2002, respectively, and a $12 charge to other expense during the year ended
July 31, 2001. The fair value of the 2000 Swap at July 31, 2002 was ($551).

In May 2003, the Company entered into a new swap agreement (2003 Swap),
as required under the Credit Facility, with an effective date of August 1, 2003
and an expiration date of October 3, 2005. The initial notional amount is
$20,000 beginning August 1, 2003, will decrease to $15,000 on June 1, 2004,
will decrease to $10,000 on March 1, 2005 and will further decrease to $5,000
on September 1, 2005. Under the 2003 Swap agreement, the Company will pay a
fixed rate of 1.85% and receive a rate equivalent to the thirty-day LIBOR,
adjusted monthly. On July 31, 2003 the Company had $46,400 in thirty-day LIBOR
loans outstanding.

Effective March 1, 2001, the Company restructured its payment obligations
to independent distributors such that each payment includes a fixed component
and a variable component based on the price of propane. Beginning in March
2001, the Company entered into various derivative instruments as cash flow
hedges against fluctuations in the propane price component of the distributor
payments. The Company acquired the Platinum and Ark distributor entities in
November 2002 (Note 17). As a result of the acquisition, approximately 45% of
the payments made each month for the variable propane price component were
eliminated. However, Platinum and Ark purchase a significant amount of propane
based on the Mt. Belvieu underlying (the same basis used for the Companys
propane swaps). Therefore, the propane swaps effectively hedge the variable
propane price component to independent distributors and the purchases made
based on Mt. Belvieu prices by company-owned distributors. The Company
currently expects that the derivative instruments will hedge, in the aggregate,
approximately 65% to 75% of the Companys anticipated monthly cylinder exchange
volume during fiscal year 2004. At this level, substantially all of the
Companys fixed prices with its major retailers will be hedged. As a result of
the propane derivative instruments, there was a ($3,996) credit to cost of
sales for the effective

40



---



##### 



portion of the hedge during the year ended July 31, 2003 and a $2,064 and
a $235 charge to cost of sales for the effective portion of the hedge during
the years ended July 31, 2002 and 2001, respectively. Hedge ineffectiveness,
determined in accordance with SFAS 133, had no impact on earnings for the
twelve-month periods ended July 31, 2003, 2002 and 2001, respectively. The
fair value of the derivative at July 31, 2003 and 2002 was $1,365 and $515,
respectively, and it is reflected on the balance sheet at July 31, 2003 as a
$1,365 current asset in prepaid expenses and other current assets.

The net derivative loss recorded in OCI will be reclassified into earnings
over the term of the underlying cash flow hedges. The amount that will be
reclassified into earnings will vary depending upon the movement of the
underlying interest rates and propane prices. As interest rates and propane
prices decrease, the charge to earnings will increase. Conversely, as interest
rates and propane prices increase, the charge to earnings will decrease.

The following is a rollforward of the components of OCI for the years
ended July 31, 2003, 2002 and 2001:

|                                                                                                                                          |  |      |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                          |  | 2003 |        | 2002 |  | 2001
|                                                                                                                                          |  |      |        |      |  |     
|Beginning balance deferred in
OCI                                                                                                         |  | $    | (26    | )    |  | $    | (1,102 | ) |  | $ |       |  
|Transition adjustment from adoption of SFAS 133                                                                                           |  |      |       |      |  |      |       |   |  |   | (131   | )
|Net change associated with current period hedge
transactions, net of tax of ($533), $0 and $0 in
fiscal 2003, 2002 and 2001, respectively |  |      | 4,275  |      |  |      | (1,485 | ) |  |   | (1,372 | )
|Net amount reclassified into earnings during the year                                                                                     |  |      | (3,435 | )    |  |      | 2,561  |   |  |   | 401    |  
|                                                                                                                                          |  |      |        |      |  |      |        |   |  |   |        |  
|Ending balance deferred in
OCI                                                                                                            |  | $    | 814    |      |  | $    | (26    | ) |  | $ | (1,102 | )
|                                                                                                                                          |  |      |        |      |  |      |        |   |  |   |        |  

Total comprehensive income (loss) was $17,370, $10,891 and ($5,054) for
the years ended July 31, 2003, 2002 and 2001, respectively.

15. Stockholders Equity

Common Stock Placements

On December 20, 2002, the Company completed a private placement of 1.0
million shares of its common stock at a purchase price of $15.79 per share to
two institutional investors for gross proceeds of $15,800. In conjunction with
the private placement, the Company issued Additional Investment Rights to the
investors exercisable for, collectively, up to an additional 330,000 shares of
its common stock at an exercise price of $15.79 per share. The Additional
Investment Rights were never exercised and expired on October 1, 2003. The net
proceeds from the financing were used to pay down long-term debt.

On April 19, 2002, the Company completed the sale of 1.5 million shares of
common stock for $10.875 million in a private placement through SunTrust
Robinson Humphrey Capital Markets, as Placement Agent, to selected
institutional and individual investors at a price of $7.25 per share. The net
proceeds from the financing were used to pay down the Credit Facility.

Preferred Stock

On September 7, 2000 (the Closing Date) the Company completed a private
placement of 1,716,667 shares of its Series A Convertible Preferred Stock to
two institutional investors under common management and three individuals,
including Billy D. Prim, its Chairman, Chief Executive Officer and President,
and Andrew J. Filipowski, its Vice Chairman, for an aggregate purchase price of
approximately $10,300. Messrs. Prim and Filipowski invested $50 and $250 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively.
In addition, on October 26, 2000, the Company issued 1,133,333 shares of Series
A Convertible Preferred Stock for an aggregate purchase price of $6,800 in
connection with its acquisition of QuickShip (Note 17).

In connection with the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock, the Company paid William Blair & Co. a placement
fee of $500 in cash and issued a five-year warrant to purchase 16,667 shares of
common stock at an exercise price of $6.00 per share.

The Series A Convertible Preferred Stock accrued a cumulative dividend on
the 20th day of December, March, June, and September of each year based on an
annual rate of 5% through September 7, 2003; 12% from September 8, 2003 through
September 7, 2004; and 15% thereafter. Effective September 7, 2001, the annual
dividend rate increased to 15% because a registration statement covering the
shares of common stock into which the Series A Convertible Preferred Stock is
convertible was not yet effective. The 15% rate continued until the
registration statement became effective on April 8, 2002. As of July 31, 2003
and 2002, the Company

41



---



##### 



had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $0 and $1.7 million, respectively. During March, April, May
and September 2002, the holders of all 2,850,000 shares of Series A Convertible
Preferred Stock converted such shares into 2,850,000 shares of common stock.
Prior to conversion, the shares of Series A Convertible Preferred Stock accrued
a cumulative dividend that the Company satisfied, as permitted by the terms of
the Series A Convertible Preferred Stock, by issuing an aggregate of 233,611
shares of common stock to the holders of the Series A Convertible Preferred
Stock upon conversion.

Stock Compensation Plans

The Company has three active stock-based compensation plans (the Plans)
for outside directors, officers and certain employees to receive stock options
and other equity-based awards. Under the Plans, the Company may, at its
discretion, issue incentive or non-qualified stock options, stock appreciation
rights, restricted stock or deferred stock.

Stock options generally are granted with an exercise price equal to 100%
of the market value per share of the common stock on the date of grant. The
options vest over one to five years and expire ten years from the date of
grant. The terms and conditions of the awards made under the plans vary but,
in general, are at the discretion of the board of directors or its appointed
committee. Under the Plans the Company has reserved 5,017,709 shares of common
stock for use and distribution under the terms of the Plans.

The Company also has a Distributor Stock Option Plan (the Distributor
Option Plan) for Blue Rhino distributors and their stockholders, partners,
members, directors, general partners, managers, officers, employees and
consultants. The Company has reserved 400,000 shares of common stock for
issuance upon the exercise of options granted under the Distributor Option
Plan. Options issued under the Distributor Option Plan vest ratably over four
years and expire ten years from the date of grant. For the years ended July
31, 2003, 2002 and 2001, the Company recognized compensation expense included
in cost of sales of approximately $125, $111 and $180, respectively, related to
stock options outstanding under the Distributor Option Plan.

A consolidated summary of the Companys Plans and Distributor Option Plan
at July 31, 2003, 2002 and 2001 and changes during the periods then ended is
presented in the table below:

|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |       |      | 
|---------------------------------------------- | ------------------------------ | --------- | ------- | --------- | --------- | ----- | - | -------- | ----- | ----- | ------- | --------- | --------- | -------- | - | ---- | ---- | - | ------- | --------- | --------- |  | - | ----- | ---- | 
|                                               |                                |           |         | 2003      |           | 2002  |   | 2001    
|                                               |                                |           |         |           |           |       |   |         
|                                               |                                |           |         |           |           |       |   | Weighted |       |       |         |           |           | Weighted |   |      |      |   |         | Weighted 
|                                               |                                |           |         |           |           |       |   | Average  |       |       |         |           |           | Average  |   |      |      |   |         | Average  
|                                               |                                |           |         |           |           |       |   | Exercise |       |       |         |           |           | Exercise |   |      |      |   |         | Exercise 
|                                               |                                |           |         | Shares    |           | Price |   | Shares   |       | Price |         | Shares    |           | Price   
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |         
|Shares under option:                           |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      
|                                               | Outstanding, beginning of year |           |         | 3,297,304 |           |       | $ | 6.61     |       |       |         | 2,467,893 |           |          | $ | 6.93 |      |   |         | 1,535,307 |           |  | $ | 10.58 |     
|                                               |                                | Granted   |         |           | 1,763,000 |       |   |          | 14.80 |       |         |           | 1,110,000 |          |   |      | 5.94 |   |         |           | 1,148,360 |  |   |       | 2.61 | 
|                                               |                                | Exercised |         |           | 150,060   |       |   |          | 5.96  |       |         |           | 58,433    |          |   |      | 3.09 |   |         |           |          |  |   |       |     | 
|                                               |                                | Cancelled |         |           | 423,425   |       |   |          | 9.60  |       |         |           | 222,156   |          |   |      | 7.75 |   |         |           | 215,774   |  |   |       | 9.63 | 
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      
|                                               | Outstanding, end of year       |           |         | 4,486,819 |           |       |   | 9.56     |       |       |         | 3,297,304 |           |          |   | 6.61 |      |   |         | 2,467,893 |           |  |   | 6.93  |     
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      
|                                               | Exercisable, end of year       |           |         | 1,239,648 |           |       |   | 8.38     |       |       |         | 1,063,216 |           |          |   | 9.48 |      |   |         | 688,173   |           |  |   | 11.23 |     
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      
|Weighted average fair value of
options granted |                                | $         | 5.80    |           |           |       |   |          |       | $     | 2.37    |           |           |          |   |      |      | $ | 1.18    |           |           |  |   |      
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      
|Options available for grant, end of
year       |                                |           | 930,890 |           |           |       |   |          |       |       | 770,465 |           |           |          |   |      |      |   | 671,982 |           |           |  |   |      
|                                               |                                |           |         |           |           |       |   |          |       |       |         |           |           |          |   |      |      |   |         |           |           |  |   |      

For various price ranges, weighted average characteristics of outstanding
stock options at July 31, 2003 were as follows:

|                         |  |                     |           |                     |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | --------- | ---- | -------- |  | ----- | ----- |  |  | -------- | --------- |  |  | - | ----- | 
|                         |  | Outstanding Options |           | Exercisable Options
|                         |  |                     |           |                    
|                         |  |                     |           |                     |  | Weighted  |      |          |  |       |       |  |  |          |           |  |  |  
|                         |  |                     |           |                     |  | Average   |      | Weighted |  |       |       |  |  | Weighted
|                         |  |                     |           |                     |  | Remaining |      | Average  |  |       |       |  |  | Average 
|Range of Exercise Prices |  | Shares              |           | Life (Years)        |  | Price     |      | Shares   |  | Price
|                         |  |                     |           |                     |  |           |      |          |  |      
|$2.13  $4.60            |  |                     | 888,777   |                     |  |           | 7.35 |          |  | $     | 2.50  |  |  |          | 354,208   |  |  | $ | 2.54  | 
|$5.06  $7.50            |  |                     | 1,118,834 |                     |  |           | 7.72 |          |  |       | 5.98  |  |  |          | 240,275   |  |  |   | 6.53  | 
|$7.90  $12.75           |  |                     | 813,559   |                     |  |           | 8.37 |          |  |       | 10.08 |  |  |          | 200,582   |  |  |   | 8.62  | 
|$12.86  $14.99          |  |                     | 736,399   |                     |  |           | 6.98 |          |  |       | 13.22 |  |  |          | 397,783   |  |  |   | 13.04 | 
|$15.09  $18.57          |  |                     | 878,250   |                     |  |           | 9.38 |          |  |       | 17.00 |  |  |          |          |  |  |   |      | 
|$19.13  $24.25          |  |                     | 51,000    |                     |  |           | 5.72 |          |  |       | 21.45 |  |  |          | 46,800    |  |  |   | 21.63 | 
|                         |  |                     |           |                     |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 
|                         |  |                     | 4,486,819 |                     |  |           | 7.95 |          |  | $     | 9.56  |  |  |          | 1,239,648 |  |  | $ | 8.38  | 
|                         |  |                     |           |                     |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 

Employee Stock Purchase Plan

The Company established an Employee Stock Purchase Plan (the ESPP)
effective January 1, 2000, for all eligible employees. Under the ESPP, shares
of the Companys common stock are purchased during annual offerings commencing
on January 1 of each

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year. Shares are purchased at three-month intervals at 85% of the lower
of the fair market value on the first day of the offering or the last day of
each three-month purchase period. Employees may purchase shares having a value
not exceeding 15% of their annual compensation, or $25,000, whichever is less.
During the years ended July 31, 2003, 2002 and 2001, employees purchased
52,774, 77,581 and 57,449 shares, respectively, at an average price of $6.75
per share, $3.06 per share and $2.13 per share, respectively. At July 31, 2003,
107,316 shares were reserved for future issuance under the ESPP.

Common Stock Warrants

Warrants to purchase 414,116 shares of the Companys common stock at an
exercise price of $8.48 per share contained anti-dilution provisions that were
triggered as a result of the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock at $6.00 per share and the issuance of warrants to
purchase 1,372,071 shares of common stock at $3.8685 per share in connection
with the private placement of subordinated debt. As a result, the exercise
price of such warrants were reset at $3.8685 and the number of shares of common
stock for which those warrants are exercisable was increased by 589,467 shares
to 1,003,583 shares, which, if the warrants are exercised, will result in
additional dilution for existing stockholders.

The Company has issued common stock warrants in connection with various
debt, equity and acquisition transactions. At July 31, 2003, warrants to
purchase a total of 1,299,093 shares of common stock were outstanding, fully
vested and exercisable for various periods extending as long as through
December 31, 2008, with exercise prices ranging from $3.87 to $15.79 per share.
Interest expense related to the outstanding warrants was $2,666, $744 and $30
respectively, for the years ended July 31, 2003, 2002 and 2001. The fair value
of each warrant is estimated on the date of grant using an option pricing model
with the following weighted average assumptions used for all grants: expected
lives of five to ten years; expected volatility ranging from 30% to 91%;
expected dividends of zero and a risk-free interest rate ranging from 3.5% to
5.8%.

For all applicable warrant prices, weighted average characteristics of
outstanding stock warrants at July 31, 2003 were as follows:

|                |  |                      |           |                      |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 
|--------------- |  | -------------------- | --------- | -------------------- |  | --------- | ---- | -------- |  | ----- | ----- |  |  | -------- | --------- |  |  | - | ----- | 
|                |  | Outstanding Warrants |           | Exercisable Warrants
|                |  |                      |           |                     
|                |  |                      |           |                      |  | Weighted  |      |          |  |       |       |  |  |          |           |  |  |  
|                |  |                      |           |                      |  | Average   |      | Weighted |  |       |       |  |  | Weighted
|                |  |                      |           |                      |  | Remaining |      | Average  |  |       |       |  |  | Average 
|Exercise Prices |  | Shares               |           | Life (Years)         |  | Price     |      | Shares   |  | Price
|                |  |                      |           |                      |  |           |      |          |  |      
|$  3.87         |  |                      | 851,128   |                      |  |           | 1.76 |          |  | $     | 3.87  |  |  |          | 851,128   |  |  | $ | 3.87  | 
|$  8.48         |  |                      | 117,965   |                      |  |           | 1.10 |          |  |       | 8.48  |  |  |          | 117,965   |  |  |   | 8.48  | 
|$15.79          |  |                      | 330,000   |                      |  |           | 0.17 |          |  |       | 15.79 |  |  |          | 330,000   |  |  |   | 15.79 | 
|                |  |                      |           |                      |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 
|                |  |                      | 1,299,093 |                      |  |           | 1.30 |          |  | $     | 7.32  |  |  |          | 1,299,093 |  |  | $ | 7.32  | 
|                |  |                      |           |                      |  |           |      |          |  |       |       |  |  |          |           |  |  |   |       | 

Shares reserved for future issuance

The Company has reserved 6,824,118 authorized shares of common stock for
future issuance as of July 31, 2003.

16. Supplemental Information to Consolidated Statements of Cash Flows

The Company had certain non-cash investing and financing activities during
the years ended July 31, 2003, 2002 and 2001 as follows:

|                                                                                 |  |      |        |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                 |  | 2003 |        | 2002 |  | 2001
|                                                                                 |  |      |        |      |  |     
|Property, plant and equipment acquired under capital
lease obligations           |  | $    | 753    |      |  | $    |      |  |  | $ |      | 
|Stock issued and liabilities assumed in connection
with acquisition transactions |  |      | 29,368 |      |  |      |       |  |  |   | 8,831 | 
|Notes receivable exchanged for the purchase of assets                            |  |      |       |      |  |      | 129   |  |  |   | 157   | 
|Warrants issued in connection with debt, equity and
acquisition transactions     |  |      | 843    |      |  |      |      |  |  |   | 3,526 | 
|Advances to R4 Tech exchanged for the purchase of
property, plant and equipment  |  |      |       |      |  |      | 7,599 |  |  |   |      | 
|Accreted preferred dividends                                                     |  |      | 71     |      |  |      | 1,789 |  |  |   | 770   | 

Interest paid during the years ended July 31, 2003, 2002 and 2001 was
$4,079, $5,382 and $4,339, respectively.

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17. Acquisitions

QuickShip, Inc.

On October 26, 2000, the Company completed the acquisition of QuickShip,
Inc. a retail shipping service company previously based in Lenexa, Kansas.
QuickShip, a wholly owned subsidiary of the Company, offers its service at over
250 retail locations in 26 states. The aggregate purchase price, including
certain acquisition costs, was approximately $9,803, comprised of approximately
$972 in cash and deferred payments, $86 in a five-year warrant to purchase
100,000 shares of common stock, $1,945 in liabilities assumed and $6,800 paid
in the form of shares of Series A Convertible Preferred Stock at $6.00 per
share. This acquisition was accounted for as a purchase. The purchase price
was allocated based on an independent valuation as follows: approximately
$7,433 to intangibles, approximately $2,201 to property, plant, and equipment
consisting primarily of software and the balance to other assets and
liabilities. The goodwill is not deductible for income tax purposes.

Distributors

In November 2002, the Company acquired Platinum Propane, L.L.C.
(Platinum) and Ark Holding Company LLC (Ark) and their respective
subsidiaries (collectively Company-owned distributors), representing ten of
the Companys 51 distributors. Platinums five subsidiary distributors operate
in Southern California, including Los Angeles and San Diego, Chicago, the
Carolinas, Georgia and Florida. Arks five subsidiary distributors operate in
New Jersey, Seattle, Kansas City, Denver and Salt Lake City. Collectively, the
territories served by the acquired distributors have historically represented
approximately 45% of the Companys cylinder exchange revenues. The
consolidated statements of operations include the results of Platinum and Ark
effective November 1, 2002.

The aggregate purchase price for the two acquisitions was approximately
$32,000. The consideration paid by the Company in the two acquisitions
consisted of approximately 1.1 million restricted shares of common stock
valued, based on the closing price of the Companys common stock on the Nasdaq
National Market on November 22, 2002, at approximately $19,000, $3,100 in
assumed debt satisfied at closing, $4,900 in advances, and $5,000 in
liabilities assumed. On a preliminary basis, approximately $28,200 of the
purchase price was allocated to goodwill, $2,800 was allocated to current
assets and $1,200 was allocated to equipment, vehicles and other assets. The
goodwill is not deductible for income tax purposes.

Cylinder Exchange Businesses

During fiscal 2003, 2002 and 2001, the Company completed two, three, and
four, respectively, cylinder exchange acquisitions for an aggregate cash
purchase price of $3,700, $218 and $362, respectively, related to assets
including cylinders, cylinder displays and other equipment and the right, title
and interest in and to sellers retail propane cylinder exchange accounts and
locations.

Summary

During the years ended July 31, 2003, 2002 and 2001, the Company acquired
cylinder exchange, Company-owned distributors and QuickShip assets described
above under various agreements. These acquisitions are summarized as follows:

|                                          |  |      |         |      |  |      |     |  |  |   |        |  
|----------------------------------------- |  | ---- | ------- | ---- |  | ---- | --- |  |  | - | ------ | -
|                                          |  | 2003 |         | 2002 |  | 2001
|                                          |  |      |         |      |  |     
|Net assets acquired including intangibles |  | $    | 35,434  |      |  | $    | 218 |  |  | $ | 10,165 |  
|Assumed
liabilities                       |  |      | (10,138 | )    |  |      |    |  |  |   | (1,945 | )
|Common stock and warrants issued          |  |      | (18,550 | )    |  |      |    |  |  |   | (6,886 | )
|                                          |  |      |         |      |  |      |     |  |  |   |        |  
|Cash paid for acquisitions                |  | $    | 6,746   |      |  | $    | 218 |  |  | $ | 1,334  |  
|                                          |  |      |         |      |  |      |     |  |  |   |        |  

The acquisitions were accounted for under the purchase method and,
accordingly, the operating results from these acquisitions have been included
in the Companys consolidated financial statements since the dates of
acquisition. The following unaudited pro forma summary presents financial
information for the Company for the years ended July 31, 2003 and 2002 as if
the acquisitions had occurred on August 1, 2001. These pro forma results have
been prepared for comparative purposes and do not purport to be indicative of
what would have occurred had the acquisitions been made on August 1, 2001 or of
future results.

|                              |  |             |         |      |  |   |         | 
|----------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                              |  | 2003        |         | 2002
|                              |  |             |         |     
|                              |  | (Unaudited)
|Net revenues                  |  | $           | 257,900 |      |  | $ | 205,313 | 
|Net income                    |  | $           | 13,666  |      |  | $ | 7,267   | 
|Basic income per common share |  | $           | 0.83    |      |  | $ | 0.57    | 

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18. Related Party Transactions

On September 7, 2000 the Company completed a private placement of
1,716,667 shares of its Series A Convertible Preferred Stock to two
institutional investors under common management and three individuals,
including Billy D. Prim, its Chairman, Chief Executive Officer and President,
and Andrew J. Filipowski, its Vice Chairman, for an aggregate purchase price of
approximately $10,300. Messrs. Prim and Filipowski invested $50 and $250 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively
(Note 15).

The
Company leases some of its facilities from Billy D. Prim, the
Companys Chairman and Chief Executive Officer, and from Rhino Real Estate, LLC, a
company affiliated with Billy D. Prim and Andrew J. Filipowski, the Companys Vice Chairman.
The leases expire on December 31, 2003, April 30,
2004 and October 31, 2007, respectively. The Companys rent expense for the
years ended July 31, 2003, 2002 and 2001 was $433, $272 and $259. The Company
has received an independent third-party determination to the effect that its
leases are fair and within typical market conditions and believes that the
terms of all of these leases are comparable to those that could have been
obtained from unrelated third parties.

Uniflame Corporation leases its facility from H & M Enterprises, LLC, a
company affiliated with Mac McQuilkin, the president of Uniflame. The lease
terminates on March 31, 2005. Uniflames rent expense for the years ended July
31, 2003, 2002 and 2001 was $317, $316 and $308, respectively. The Companys
management believes that the terms of this lease are comparable to those that
could have been obtained from unrelated third parties.

Blue Rhino has paid fees for software development and Internet hosting
services provided by divine, inc. Andrew J. Filipowski was the Chairman of
divine, inc. and is the Companys Vice Chairman. During the years ended July
31, 2003 and 2002, the Company paid fees to divine, inc. in the amount of $376
and $31, respectively. The Companys management believes that the terms of
these services were comparable to those that could have been obtained from an
unrelated third party.

Both Messrs. Prim and Filipowski served as directors for Platinum Propane
Holding, LLC (PPH) and Ark Holding Company, LLC (Ark). On November 30,
2001, Messrs. Prim and Filipowski unconditionally guaranteed and secured the
payment of certain PPH obligations to its primary bank in a principal amount of
up to $3,500. In November 2002, the Company acquired Platinum, a subsidiary of
PPH, and Ark (Note 17). The consolidated statements of operations include the
results of Platinum and Ark effective November 1, 2002.

The following represents transactions with PPH as of October 31, 2002, and
July 31, 2002 and 2001, respectively, and for the three-month period ended
October 31, 2002, and years ended July 31, 2002 and 2001, respectively:

|                |  |      |       |      |  |      |        |  |  |   |        | 
|--------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                |  | 2003 |       | 2002 |  | 2001
|                |  |      |       |      |  |     
|Advances        |  | $    | 4,837 |      |  | $    | 2,586  |  |  | $ | 2,637  | 
|Cost of sales   |  |      | 6,949 |      |  |      | 22,947 |  |  |   | 16,439 | 
|Interest income |  |      | 94    |      |  |      | 303    |  |  |   | 162    | 
|Lease income    |  |      | 397   |      |  |      | 1,592  |  |  |   | 1,494  | 

19. Defined Contribution Plan

The Company maintains a defined contribution employee benefit plan
(401(k) plan), which covers all employees over 21 years of age who have
completed a minimum of six months of employment. Employee contributions are
matched by the Company up to a specific amount under the provisions of the
401(k) plan. Company contributions during the years ended July 31, 2003, 2002
and 2001 were approximately $234, $161 and $135, respectively.

20. Commitments and Contingencies

The Company leases certain facilities, vehicles and equipment under
non-cancelable operating leases with original terms ranging from 36 to 60
months (Note 18). Additionally, the Company has certain computer hardware and
software maintenance and support agreements. Rent expense and fees on these
non-cancelable operating leases and service agreements from both affiliates and
non-affiliates for the years ended July 31, 2003, 2002 and 2001 was $2,714,
$1,427 and $1,034, respectively.

45



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Future minimum payments at July 31, 2003 under non-cancelable operating
leases and service agreements with initial or remaining terms of one year or
more to both affiliates and non-affiliates are $1,422 in 2004, $715 in 2005,
$344 in 2006, $223 in 2007, and $53 in 2008.

The Company currently has capital commitments outstanding of approximately
$2.5 million relating to machinery and equipment associated with
three new
cylinder refilling and refurbishing facilities in Los Angeles,
Chicago and Denver and two mobile filling and refurbishing
facilities. The Company expects these commitments will be satisfied by the
spring of 2004.

Patent Lawsuit and Related Proceedings

On August 8, 2003, American Biophysics Corporation (ABC) filed a patent
infringement suit against the Company in the U.S. District Court for the
District of Rhode Island. ABC alleges that the SkeeterVac® mosquito
elimination product infringes certain patents of ABC. The complaint seeks
treble damages and attorneys fees. Also on August 8, 2003, ABC filed a
complaint against the Company with the United States International Trade
Commission (ITC) pursuant to Section 337 of the Tariff Act of 1930, as
amended (Section 337). That complaint requests that the ITC institute an
investigation regarding alleged violations of Section 337 based upon the
importation into the United States by the Company and/or the offer for sale and
sale within the United States after importation of SkeeterVac® products that
allegedly infringe certain ABC patents. ABC also requested that the ITC issue
a permanent exclusion order pursuant to Section 337, which would exclude
further entry into the United States of the allegedly infringing products, and
a permanent cease and desist order under Section 337, which would prohibit the
importation into the United States, the sale for importation, and/or sale
within the United States after importation, of allegedly infringing products.
On August 13, 2003, the Companys subsidiary, Blue Rhino Consumer Products, LLC
(BRCP), filed suit against ABC in the U.S. District Court for the Middle
District of North Carolina seeking a declaration that BRCPs SkeeterVac®
product does not infringe ABCs patents. On August 14, 2003, BRCP and another
Company subsidiary, CPD Associates, Inc. (CPD), filed a lawsuit in the
Superior Court of North Carolina, Forsyth County, against ABC asserting unfair
and deceptive trade practices, unfair competition under North Carolina common
law, tortious interference with business relations and prospective economic
advantage, violations of Section 43(a) of the Lanham Act, and violation of the
Anticybersquatting Consumer Protection Act. The complaint seeks, among other
relief against ABC, a permanent injunction, treble damages, punitive damages,
attorneys fees and other costs and expenses. This case has been removed to
the U.S. District Court for the Middle District of North Carolina. The Company
believes that ABCs claims against it are without merit and intends to
vigorously defend itself.

Securities Class Actions and Shareholder Derivative Actions

On May 19, 2003, George Schober filed a shareholder securities class
action lawsuit in the United States District Court for the Central District of
California, naming the Company, along with four of its officers and directors,
as defendants. The plaintiff seeks to represent a class of investors who
purchased the Companys publicly-traded securities between August 2002 and
February 2003. The plaintiff alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated
thereunder, and Section 20(a) of the Exchange Act. In particular, the
plaintiff has alleged that the Company and the individual defendants violated
the federal securities laws by, among other things, making materially false and
misleading statements and/or failing to disclose material facts related to the
financial performance of the Company, the impact of overfill prevention device
regulations on the Companys business, the financial position of distributors
Ark and Platinum, and the Companys acquisition of Ark and Platinum. The
complaint seeks unspecified damages, plus reasonable costs and expenses,
including attorneys fees and experts fees. Six tag-along securities class
actions arising out of the same alleged facts and circumstances as the original
action were subsequently filed in the same court. The cases have been
consolidated into a single action and Andy Lee, Charles Anderberg and Steven
Lendeman have been designated as lead plaintiffs. On May 22, 2003, Richard
Marcoux filed a shareholder derivative action in the Superior Court of
California, Los Angeles County, naming all directors and certain officers of
the Company as individual defendants and the Company as a nominal defendant.
On June 19, 2003, Randy Gish filed a substantially similar derivative action in
the same court. Both the Marcoux and Gish actions were removed to the U.S.
District Court for the Central District of California. The
Marcoux case was
subsequently remanded to Los Angeles Superior Court, but motions are pending to
dismiss or stay that matter. The derivative actions arise out of substantially
similar facts and circumstances as the securities class actions, and allege
violations of the California Corporations Code, breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets and unjust
enrichment. The Company believes that all of the foregoing securities class
actions and derivative actions are without merit and intends to vigorously
defend against these actions.

46



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Settlement of Lawsuit with Former Independent Auditor

On March 7, 2003, pursuant to a negotiated settlement agreement, the
Company dismissed its lawsuit against PricewaterhouseCoopers (PwC) by filing
a Voluntary Dismissal with Prejudice in the Superior Court of Forsyth County,
North Carolina. This lawsuit had alleged violations of professional standards
by PwC and failure to comply with contractual obligations during PwCs
engagement as the Companys auditor. The net proceeds in the settlement were
recognized in the Companys fiscal third quarter and, after attorneys fees and
other third quarter litigation expenses, were approximately $2.5 million. The
specific terms of the settlement are confidential.

Other Litigation

The Company is also a party to other litigation which it considers routine
and incidental to its business. Management does not expect the results of any
of these other actions to have a material adverse effect on the Companys business,
results of operations or financial condition.

21. Segment Information

The Company has two reportable segments: cylinder exchange and products
and other. The cylinder exchange segment relates to cylinder exchange
transactions and lease income from cylinders and cylinder displays. The
products and other segment includes the activities required to sell patio
heaters, grills, mosquito eliminators, fireplace accessories and garden
products. In addition, the financial information related to QuickShip, a
retail shipping services company acquired in October 2000, is included within
the products and other segment as it is not currently significant on a
stand-alone basis (Note 17). For the years ended July 31, 2003, 2002 and 2001,
QuickShip had a loss from operations of ($1,406), ($2,020) and ($2,126),
respectively.

The Company evaluates performance and allocates resources based on several
factors, of which the primary financial measure is business segment operating
income, defined as earnings before interest, taxes, depreciation and
amortization before other non-operating expenses (EBITDA). Management of the
Company believes that EBITDA is a useful measure of operating performance at a
segment level as it is an important indicator of the ability of each segment to
provide cash flows to service debt and fund working capital requirements and
eliminates the uneven effect between our segments of non-cash depreciation of
tangible assets and amortization of certain intangible assets. In addition,
management currently uses EBITDA performance objectives at a segment level as
the basis for determining incentive compensation. EBITDA as presented may not
be comparable to similarly titled measures used by other entities. EBITDA
should not be considered in isolation from, or as a substitute for, net income
or cash flows from operating activities prepared in accordance with generally
accepted accounting principles as an indicator of operating performance or as a
measure of liquidity. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (Note 2).
There are no significant inter-segment revenues.

The Companys reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and operational strategies. The
Companys selected segment information as of and for the years ended July 31,
2003, 2002, and 2001 is as follows:

|                              |                    |   |         |         |      |   |         |         |  |   |         |        | 
|----------------------------- | ------------------ | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ | 
|                              |                    |   | 2003    |         | 2002 |   | 2001   
|                              |                    |   |         |         |      |   |        
|Net revenues:                 |                    |   |         |         |      |   |         |         |  |   |         |       
|                              | Cylinder exchange  |   | $       | 170,954 |      |   | $       | 127,944 |  |   | $       | 85,666 | 
|                              | Products and other |   |         | 87,268  |      |   |         | 77,641  |  |   |         | 52,291 | 
|                              |                    |   |         |         |      |   |         |         |  |   |         |       
|                              |                    | $ | 258,222 |         |      | $ | 205,585 |         |  | $ | 137,957 |       
|                              |                    |   |         |         |      |   |         |         |  |   |         |        | 
|Segment EBITDA:               |                    |   |         |         |      |   |         |         |  |   |         |       
|                              | Cylinder exchange  |   | $       | 31,252  |      |   | $       | 20,691  |  |   | $       | 10,219 | 
|                              | Products and other |   |         | 2,482   |      |   |         | 3,568   |  |   |         | 2,267  | 
|                              |                    |   |         |         |      |   |         |         |  |   |         |       
|Total segment
EBITDA          |                    |   | 33,734  |         |      |   | 24,259  |         |  |   | 12,486  |       
|Depreciation and
amortization |                    |   | 9,261   |         |      |   | 7,888   |         |  |   | 8,461   |       
|Interest
expense              |                    |   | 7,784   |         |      |   | 6,217   |         |  |   | 5,134   |       
|Loss on
investee              |                    |   | 455     |         |      |   | 714     |         |  |   | 2,572   |       
|Nonrecurring
items            |                    |   |        |         |      |   |        |         |  |   | 449     |       
|Other,
net                    |                    |   | (2,513  | )       |      |   | (422    | )       |  |   | (301    | )     
|Income
taxes                  |                    |   | 2,217   |         |      |   | 47      |         |  |   | 123     |       
|                              |                    |   |         |         |      |   |         |         |  |   |         |       
|Net income                    |                    | $ | 16,530  |         |      | $ | 9,815   |         |  | $ | (3,952  | )     
|                              |                    |   |         |         |      |   |         |         |  |   |         |       
|Total assets:                 |                    |   |         |         |      |   |         |         |  |   |         |       
|                              | Cylinder exchange  |   | $       | 164,280 |      |   | $       | 110,870 |  |   | $       | 93,594 | 
|                              | Products and other |   |         | 46,525  |      |   |         | 32,503  |  |   |         | 33,750 | 
|                              |                    |   |         |         |      |   |         |         |  |   |         |       
|                              |                    | $ | 210,805 |         |      | $ | 143,373 |         |  | $ | 127,344 |       
|                              |                    |   |         |         |      |   |         |         |  |   |         |        | 

47



---



##### 



The following items are included in income (loss) before income taxes:

|                                           |                    |   |       |       |      |   |       |       |  |   |       |       | 
|------------------------------------------ | ------------------ | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                           |                    |   | 2003  |       | 2002 |   | 2001 
|                                           |                    |   |       |       |      |   |      
|Equity in loss of equity method investees: |                    |   |       |       |      |   |       |       |  |   |       |      
|                                           | Cylinder exchange  |   | $     | 455   |      |   | $     | 714   |  |   | $     | 2,572 | 
|                                           | Products and other |   |       |      |      |   |       |      |  |   |       |      | 
|                                           |                    |   |       |       |      |   |       |       |  |   |       |       | 
|                                           |                    | $ | 455   |       |      | $ | 714   |       |  | $ | 2,572 |      
|                                           |                    |   |       |       |      |   |       |       |  |   |       |       | 
|Depreciation and amortization:             |                    |   |       |       |      |   |       |       |  |   |       |      
|                                           | Cylinder exchange  |   | $     | 8,401 |      |   | $     | 7,132 |  |   | $     | 5,965 | 
|                                           | Products and other |   |       | 860   |      |   |       | 756   |  |   |       | 2,496 | 
|                                           |                    |   |       |       |      |   |       |       |  |   |       |      
|                                           |                    | $ | 9,261 |       |      | $ | 7,888 |       |  | $ | 8,461 |      
|                                           |                    |   |       |       |      |   |       |       |  |   |       |       | 

The following items are included in the determination of identifiable
assets:

|                                        |                    |   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------- | ------------------ | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                        |                    |   | 2003   |        | 2002 |   | 2001  
|                                        |                    |   |        |        |      |   |       
|Investments in equity method investees: |                    |   |        |        |      |   |        |        |  |   |        |       
|                                        | Cylinder exchange  |   | $      |       |      |   | $      |       |  |   | $      | 455    | 
|                                        | Products and other |   |        |       |      |   |        |       |  |   |        |       | 
|                                        |                    |   |        |        |      |   |        |        |  |   |        |       
|                                        |                    | $ |       |        |      | $ |       |        |  | $ | 455    |       
|                                        |                    |   |        |        |      |   |        |        |  |   |        |        | 
|Capital expenditures:                   |                    |   |        |        |      |   |        |        |  |   |        |       
|                                        | Cylinder exchange  |   | $      | 18,885 |      |   | $      | 19,519 |  |   | $      | 10,844 | 
|                                        | Products and other |   |        | 988    |      |   |        | 273    |  |   |        | 152    | 
|                                        |                    |   |        |        |      |   |        |        |  |   |        |        | 
|                                        |                    | $ | 19,873 |        |      | $ | 19,792 |        |  | $ | 10,996 |       
|                                        |                    |   |        |        |      |   |        |        |  |   |        |        | 
|Goodwill:                               |                    |   |        |        |      |   |        |        |  |   |        |       
|                                        | Cylinder exchange  |   | $      | 40,543 |      |   | $      | 9,558  |  |   | $      | 9,519  | 
|                                        | Products and other |   |        | 21,083 |      |   |        | 21,083 |  |   |        | 21,144 | 
|                                        |                    |   |        |        |      |   |        |        |  |   |        |       
|                                        |                    | $ | 61,626 |        |      | $ | 30,641 |        |  | $ | 30,663 |       
|                                        |                    |   |        |        |      |   |        |        |  |   |        |        | 

22.     Quarterly Financial Data (unaudited)

|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|--------------------------------------- |  | ------------------------------------- | ------ | ---------- |  | -------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                        |  | Fiscal 2003 Quarter Ended            
|                                        |  |                                      
|                                        |  | October 31                            |        | January 31 |  | April 30 |        | July 31
|                                        |  |                                       |        |            |  |          |        |        
|                                        |  | (In thousands, except per share data)
|Net revenues                            |  | $                                     | 54,815 |            |  | $        | 58,054 |         |  | $ | 59,900 |  |  | $ | 85,452 | 
|Total operating costs and expenses      |  |                                       | 51,901 |            |  |          | 55,768 |         |  |   | 55,731 |  |  |   | 70,348 | 
|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Income from operations                  |  |                                       | 2,914  |            |  |          | 2,286  |         |  |   | 4,169  |  |  |   | 15,104 | 
|Net income                              |  | $                                     | 1,259  |            |  | $        | 916    |         |  | $ | 4,290  |  |  | $ | 10,064 | 
|Preferred
dividends                     |  |                                       | 71     |            |  |          |       |         |  |   |       |  |  |   |       | 
|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Income available to common stockholders |  | $                                     | 1,188  |            |  | $        | 916    |         |  | $ | 4,290  |  |  | $ | 10,064 | 
|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Per share data:                         |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Basic earnings per common share         |  | $                                     | 0.08   |            |  | $        | 0.06   |         |  | $ | 0.24   |  |  | $ | 0.57   | 
|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Diluted earnings per common share       |  | $                                     | 0.07   |            |  | $        | 0.05   |         |  | $ | 0.22   |  |  | $ | 0.50   | 
|                                        |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 

|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | ------------------------------------- | ------ | ---------- |  | -------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                               |  | Fiscal 2002 Quarter Ended            
|                                               |  |                                      
|                                               |  | October 31                            |        | January 31 |  | April 30 |        | July 31
|                                               |  |                                       |        |            |  |          |        |        
|                                               |  | (In thousands, except per share data)
|Net revenues                                   |  | $                                     | 36,546 |            |  | $        | 38,759 |         |  | $ | 58,933 |  |  | $ | 71,347 | 
|Total operating costs and expenses             |  |                                       | 34,155 |            |  |          | 37,064 |         |  |   | 55,087 |  |  |   | 62,907 | 
|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Income from operations                         |  |                                       | 2,391  |            |  |          | 1,695  |         |  |   | 3,846  |  |  |   | 8,440  | 
|Net income (loss)                              |  | $                                     | 573    |            |  | $        | (91    | )       |  | $ | 2,354  |  |  | $ | 6,979  | 
|Preferred
dividends                            |  |                                       | 466    |            |  |          | 641    |         |  |   | 537    |  |  |   | 145    | 
|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Income (loss) available to common stockholders |  | $                                     | 107    |            |  | $        | (732   | )       |  | $ | 1,817  |  |  | $ | 6,834  | 
|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Per share data:                                |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Basic earnings (loss) per common share         |  | $                                     | 0.01   |            |  | $        | (0.06  | )       |  | $ | 0.15   |  |  | $ | 0.49   | 
|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 
|Diluted earnings (loss) per common share       |  | $                                     | 0.01   |            |  | $        | (0.06  | )       |  | $ | 0.12   |  |  | $ | 0.40   | 
|                                               |  |                                       |        |            |  |          |        |         |  |   |        |  |  |   |        | 

Note:Quarterly amounts may not add to annual amounts due to the effect of
rounding on a quarterly basis.

48



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##### 



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

None.

Item 9A.Controls and Procedures

As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures in accordance with Rule 13a-15 under the
Exchange Act. The Chief Executive Officer and the Chief Financial Officer
concluded that, as of the date of evaluation, our disclosure controls and
procedures were effective to enable us to record, process, summarize and report
in a timely manner the information that we are required to disclose in our
Exchange Act reports.

There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

PART III

Item 10.Directors and Executive Officers of the Registrant

The information required by this item is contained in our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders, which will be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, under the captions Proposal 1  Election of Directors,
Information Concerning Executive Officers and Section 16(a) Beneficial
Ownership Reporting Compliance, which are incorporated by reference herein.

Item 11.Executive Compensation

The information required by this item is contained in our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders, which will be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, under the caption Executive Compensation, which is
incorporated by reference herein.

Item 12.Security Ownership of Certain Beneficial Owners and Management

The information required by this item is contained in our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders, which will be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, under the caption Beneficial Ownership of Directors,
Executive Officers and Certain Beneficial Owners and Equity Compensation Plan
Information, which are incorporated by reference herein.

Item 13.Certain Relationships and Related Transactions

The information required by this item is contained in our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders, which will be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, under the caption Certain Transactions, which is
incorporated by reference herein.

49



---



##### 



PART IV

Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

(1) Consolidated Financial Statements of Blue Rhino Corporation are
included in Part II, Item 8:



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Report of Independent Accountants
Consolidated Balance Sheets as of July 31, 2003 and 2002
Consolidated Statements of Operations for the years ended July 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders Equity for the years ended July 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended July 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Schedule II  Valuation and Qualifying Accounts  see additional section of this Report.

(3) Exhibits



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | See the Exhibit Index following the Signature Page, which is incorporated herein by reference.

(b)  Reports on Form 8-K filed in the fourth quarter of fiscal 2003

During the quarter ended July 31, 2003, the Company filed the following
reports on Form 8-K:

On May 27, 2003, a Form 8-K was filed pursuant to Item 12 to disclose that
on May 27, 2003, the Company issued a press release regarding its financial
results for the fiscal third quarter ended April 30, 2003.

On June 3, 2003, a Form 8-K was filed pursuant to Item 12 to disclose that
on May 27, 2003, the Company held a conference call to discuss its financial results
for the fiscal third quarter ended April 30, 2003.

(c)  See Item 14(a)(3).

(d)  The response to this portion of Item 14 is submitted under Item
14(a)(2).

50



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##### 



SIGNATURES

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

| |  |                        |  |                          
| |  | ---------------------- |  | -------------------------
| |  | BLUE RHINO CORPORATION
| |  |                        |  |                          
| |  | By:                    |  | /s/ BILLY D. PRIM        
| |  |                        |  |                          
| |  |                        |  | Billy D. Prim            
| |  |                        |  | Chairman of the Board and
| |  |                        |  | Chief Executive Officer  

Date: October 21, 2003

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 indicated.

|                         |  |                                   |  |                 
|------------------------ |  | --------------------------------- |  | ----------------
|Signature                |  | Title                             |  | Date            
|                         |  |                                   |  |                 
|/s/ BILLY D. PRIM        |  | Chairman of the Board and Chief   |  | October 21, 2003
|                         |  | Executive Officer (Principal      |  |                 
|Billy D. Prim            |  | Executive Officer)                |  |                 
|                         |  |                                   |  |                 
|/s/ MARK CASTANEDA       |  | Chief Financial Officer and       |  | October 21, 2003
|                         |  | Director (Principal               |  |                 
|Mark Castaneda           |  | Financial and Accounting
Officer) |  |                 
|                         |  |                                   |  |                 
|/s/ ANDREW J. FILIPOWSKI |  | Vice Chairman of the Board        |  | October 20, 2003
|                         |  |                                   |  |                 
|Andrew J. Filipowski     |  |                                   |  |                 
|                         |  |                                   |  |                 
|/s/ STEVEN D. DEVICK     |  | Director                          |  | October 20, 2003
|                         |  |                                   |  |                 
|Steven D. Devick         |  |                                   |  |                 
|                         |  |                                   |  |                 
|/s/ JOHN H. MUEHLSTEIN   |  | Director                          |  | October 20, 2003
|                         |  |                                   |  |                 
|John H. Muehlstein       |  |                                   |  |                 
|                         |  |                                   |  |                 
|/s/ RICHARD A. BRENNER   |  | Director                          |  | October 20, 2003
|                         |  |                                   |  |                 
|Richard A. Brenner       |  |                                   |  |                 
|                         |  |                                   |  |                 
|/s/ ROBERT J. LUNN       |  | Director                          |  | October 20, 2003
|                         |  |                                   |  |                 
|Robert J. Lunn           |  |                                   |  |                 
|                         |  |                                   |  |                 
|/s/ DAVID L. WARNOCK     |  | Director                          |  | October 20, 2003
|                         |  |                                   |  |                 
|David L. Warnock         |  |                                   |  |                 

51



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##### 



SCHEDULE II

BLUE RHINO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 31, 2003, 2002 AND 2001
(In thousands)

|                         |                                 |           |            |          |            |            |  |          |  |  |         |       |     |  |  |     | 
|------------------------ | ------------------------------- | --------- | ---------- | -------- | ---------- | ---------- |  | -------- |  |  | ------- | ----- | --- |  |  | --- | 
|Column A                 |                                 | Column B  |            | Column C |            | Column D   |  | Column E
|                         |                                 |           |            |          |            |            |  |         
|                         |                                 |           | Balance at |          | Charged to |            |  |          |  |  | Balance
|                         |                                 |           | Beginning  |          | Costs and  |            |  |          |  |  | End of 
|Description              |                                 | of Period |            | Expenses |            | Deductions |  | Period  
|                         |                                 |           |            |          |            |            |  |         
|Year ended July 31, 2001 |                                 |           |            |          |            |            |  |          |  |  |         |       |     |  |  |    
|                         | Allowance for doubtful accounts |           |            | 744      |            |            |  | 837      |  |  |         | 733   |     |  |  | 848 | 
|Year ended July 31, 2002 |                                 |           |            |          |            |            |  |          |  |  |         |       |     |  |  |    
|                         | Allowance for doubtful accounts |           |            | 848      |            |            |  | 1,483    |  |  |         | 1,490 |     |  |  | 841 | 
|Year ended July 31, 2003 |                                 |           |            |          |            |            |  |          |  |  |         |       |     |  |  |    
|                         | Allowance for doubtful accounts |           |            | 841      |            |            |  | 424      |  |  |         | 348   | (1) |  |  | 917 | 

(1)  Includes an allowance for doubtful accounts in the amount of $20 acquired in the Distributor acquisition





---



##### 



EXHIBITS

|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|------- | ------ |  | - | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |   |                       
|Number  |        |  |   | Description of Exhibit
|        |        |  |   |                       
|        | 2.1    |  |  |                        | Agreement and Plan of Reorganization dated October 25, 2000
by and among the Company, QuickShip Acquisition Corp.,
QuickShip, Inc., Thomas E. Brandtonies, Gold Banc
Corporation, Inc., incorporated by reference to Exhibit 2.1 to the
Companys Annual Report on Form 10-K for the year ended July 31,
2000.                                    
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 2.2    |  |  |                        | Merger Agreement among the Company, Platinum Acquisition, LLC and
Platinum Propane, L.L.C., incorporated by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K filed November 27,
2002.                                                                                                                                         
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 2.3    |  |  |                        | Merger Agreement among the Company, Ark Acquisition, LLC and Ark
Holding Company, LLC, incorporated by reference to Exhibit 2.2 to
the Companys Current Report on Form 8-K filed November 27, 2002.                                                                                                                                              
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 3.1(a) |  |  |                        | Second Amended and Restated Certificate of Incorporation of
the Company, as amended, incorporated by reference to Exhibit 3.1
to the Companys Annual Report on Form 10-K for the year ended July
31, 2000.                                                                                                                                       
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 3.1(b) |  |  |                        | Certificate of Designation, Rights and Preferences of Series A
Convertible Preferred Stock Dated September 7, 2000, incorporated
by reference to Exhibit 4.10 to the Companys Registration
Statement on Form S-3 dated September 25, 2000.                                                                                                       
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 3.1(c) |  |  |                        | Certificate of Designation, Number of Authorized Shares of Series A
Convertible Preferred Stock dated October 25, 2000, incorporated by
reference to Exhibit 4.10 to the Companys Annual Report on Form
10-K for the year ended July 31, 2000.                                                                                                   
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 3.2    |  |  |                        | Amended and Restated Bylaws of the Company, incorporated by
reference to Exhibit 3.2 to the Companys Registration Statement on
Form S-1 dated March 10, 1998.                                                                                                                                                                                    
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.1(a) |  |  |                        | Form of Certificate of Common Stock of the Company,
incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the
Companys Registration Statement on Form S-1 dated May 13, 1998.                                                                                                                                                           
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.1(b) |  |  |                        | Form of Certificate of Series A Convertible Preferred Stock
of the Company, incorporated by reference to Exhibit 4.1(b) to the
Companys Annual Report on Form 10-K for the year ended July 31,
2000.                                                                                                                                             
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.2    |  |  |                        | Amended and Restated Senior Subordinated Debenture dated November
20, 2002 in the amount of $15,000,000 from the Company payable to
Allied Capital Corporation, incorporated by reference to Exhibit
4.11 to the Companys Quarterly Report on Form 10-Q for the quarter
ended January 31, 2003.                                                  
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.3(a) |  |  |                        | Investment Agreement dated June 15, 2001 among the Company,
USA Leasing, LLC, Rhino Services, LLC, CPD Associates, Inc.,
QuickShip, Inc., Uniflame Corporation and Allied Capital
Corporation, incorporated by reference to Exhibit 10.26 to the
Companys Annual Report on Form 10-K for the year ended July 31,
2001.                           
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.3(b) |  |  |                        | First Amendment to Investment Agreement dated June 15, 2001 among
the Company, USA Leasing, LLC, Rhino Services, LLC, CPD Associates,
Inc., QuickShip, Inc., Uniflame Corporation and Allied Capital
Corporation, incorporated by reference to Exhibit 10.6 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.
|        |        |  |   |                        |                                                                                                                                                                                                                                                                                                                                                   
|        | 4.4    |  |  |                        | Warrant issued to Allied Capital Corporation dated June 15, 2001,
incorporated by reference to Exhibit 4.12 to the Companys Annual
Report on Form 10-K for the year ended July 31, 2001.                                                                                                                                                         





---



##### 



|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | ------- |  | - | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |   |                       
|Number  |         |  |   | Description of Exhibit
|        |         |  |   |                       
|        | 4.5     |  |  |                        | Investor Rights Agreement dated June 15, 2001 among the Company,
Allied Capital Corporation and certain stockholders of the Company,
incorporated by reference to Exhibit 4.13 to the Companys Annual
Report on Form 10-K for the year ended July 31, 2001.                                                                                                                                           
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.6     |  |  |                        | Revolving Credit Note of the Company dated November 20, 2002 in
favor of Bank of America, N.A. in the amount of $11,250,000,
incorporated by reference to Exhibit 4.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2003.                                                                                                                                           
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.7     |  |  |                        | Revolving Credit Note of the Company dated November 20, 2002 in
favor of SunTrust Bank in the amount of $7,500,000, incorporated by
reference to Exhibit 4.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended January 31, 2003.                                                                                                                                                    
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.8     |  |  |                        | Revolving Credit Note of the Company dated November 20, 2002 in
favor of RBC Centura Bank in the amount of $7,500,000, incorporated
by reference to Exhibit 4.3 to the Companys Quarterly Report on
Form 10-Q for the quarter ended January 31, 2003.                                                                                                                                                 
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.9     |  |  |                        | Revolving Credit Note of the Company dated November 20, 2002 in
favor of Wachovia Bank, National Association in the amount of
$11,250,000, incorporated by reference to Exhibit 4.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.                                                                                                                             
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.10    |  |  |                        | Revolving Credit Note of the Company dated November 20, 2002 in
favor of LaSalle Bank National Association in the amount of
$7,500,000, incorporated by reference to Exhibit 4.5 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.                                                                                                                                
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.11    |  |  |                        | Term Note of the Company dated November 20, 2002 in favor of Bank
of America, N.A. in the amount of $3,750,000, incorporated by
reference to Exhibit 4.6 to the Companys Quarterly Report on Form
10-Q for the quarter ended January 31, 2003.                                                                                                                                                        
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.12    |  |  |                        | Term Note of the Company dated November 20, 2002 in favor of
SunTrust Bank in the amount of $2,500,000, incorporated by
reference to Exhibit 4.7 to the Companys Quarterly Report on Form
10-Q for the quarter ended January 31, 2003.                                                                                                                                                                
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.13    |  |  |                        | Term Note of the Company dated November 20, 2002 in favor of RBC
Centura Bank in the amount of $2,500,000, incorporated by reference
to Exhibit 4.8 to the Companys Quarterly Report on Form 10-Q for
the quarter ended January 31, 2003.                                                                                                                                                             
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.14    |  |  |                        | Term Note of the Company dated November 20, 2002 in favor of
Wachovia Bank, National Association in the amount of $3,750,000,
incorporated by reference to Exhibit 4.9 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2003.                                                                                                                                          
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.15    |  |  |                        | Term Note of the Company dated November 20, 2002 in favor of
LaSalle Bank National Association in the amount of $2,500,000,
incorporated by reference to Exhibit 4.10 to the Companys
Quarterly Report on Form 10-Q for the quarter ended January 31,
2003.                                                                                                                                           
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.1(a) |  |  |                        | Credit Agreement dated as of November 20, 2002 among the Company,
as the Borrower, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Wachovia Bank, National
Association, as Syndication Agent and the Other Lenders Party
Thereto, incorporated by reference to Exhibit 10.1(a) to the
Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.1(b) |  |  |                        | First Amendment to Credit Agreement dated as of February 25, 2003
among the Company, as the Borrower, the Lenders referred to in the
Credit Agreement dated November 20, 2002 and Bank of America, N.A.,
as Administrative Agent for the Lenders, incorporated by reference
to Exhibit 10.1(b) to the Companys Quarterly Report on Form 10-Q
for the quarter ended January 31, 2003.                  
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.1(c) |  |  |                        | Second Amendment to
Credit Agreement dated as of April 29, 2003
among the Company, as the Borrower, the Lenders referred to in the
Credit Agreement dated November 20, 2002, as amended, and Bank of America, N.A.,
as Administrative Agent for the Lenders, incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ended April 30, 2003.            
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.1(d) |  |  |                        | Guaranty Agreement dated November 20, 2002, by and among certain
Subsidiaries of the Company as Guarantors, in favor of Bank of
America, N.A., as Administrative Agent, incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended January 31, 2003.                                                                                               





---



##### 



|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|------- | ------- |  | - | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |   |                       
|Number  |         |  |   | Description of Exhibit
|        |         |  |   |                       
|        | 10.1(e) |  |  |                        | Collateral Agreement dated November 20, 2002, by and among the
Company and certain of its Subsidiaries as Grantors in favor of
Bank of America, N.A., as Administrative Agent, incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form
10-Q for the quarter ended January 31, 2003.
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.1(f) |  |  |                        | Patent Security Agreement dated November 20, 2002 by the Company,
CPD Associates, Inc. and Uniflame Corporation in favor of Bank of
America, N.A., as Administrative Agent, incorporated by reference
to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for
the quarter ended January 31, 2003.   
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.1(g) |  |  |                        | Trademark Security Agreement dated November 20, 2002 by the
Company, CPD Associates, Inc. and Uniflame Corporation in favor of
Bank of America, N.A., as Administrative Agent, incorporated by
reference to Exhibit 10.5 to the Companys Quarterly Report on Form
10-Q for the quarter ended January 31, 2003.
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.2(a) |  |  |                        | Form of Distribution Agreement of the Company and Its
Distributors, incorporated by reference to Exhibit 10.7(a) to the
Companys Registration Statement on Form S-1 dated
March 10, 1998.                                                                                                                     
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.2(b) |  |  |                        | Form of Sublease of Personal Property between the Company
and Its Distributors, incorporated by reference to Exhibit
10.7(b) to the Companys Registration Statement on Form S-1
dated March 10, 1998.                                                                                                         
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.3(a) |  |  |                        | Form of Security Agreement to Secure the Sale of Cylinders
between the Company and Its Distributors, incorporated by
reference to Exhibit 10.8(a) to Amendment No. 1 to the Companys
Registration Statement on Form S-1 dated April 22, 1998.                                                                 
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.3(b) |  |  |                        | Form of Promissory Note Evidencing the Sale of Cylinders
between the Company and Its Distributors, incorporated by
reference to Exhibit 10.8(b) to Amendment No. 1 to the Companys
Registration Statement on Form S-1 dated April 22, 1998.                                                                   
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.4    |  |  |                        | Blue Rhino Corporation Amended and Restated Stock Option Plan for
Non-Employee Directors, as amended and restated through February
21, 2003, incorporated by reference to Exhibit 10.10 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.*                                
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.5    |  |  |                        | Distributor Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.13 to Amendment No. 1 to the Companys
Registration Statement on Form S-1 dated April 22, 1998.                                                                                                                          
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.6    |  |  |                        | Blue Rhino Corporation 1994 Stock Incentive Plan, incorporated by
reference to Exhibit 10.14 to the Companys Registration
Statement on Form S-1 dated March 10, 1998.*                                                                                                                                        
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.7    |  |  |                        | Blue Rhino Corporation 1998 Stock Incentive Plan, as amended August
30, 2001 and November 8, 2002, incorporated by reference to Exhibit
99 to the Companys Registration Statement on Form S-8 dated
January 7, 2003.*                                                                                         
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.8    |  |  |                        | Lease Agreement dated December 4, 1998 between the Company and
Rhino Real Estate, L.L.C., incorporated by reference to Exhibit
10.14 to the Companys Registration Statement on Form S-1 dated
January 5, 1999.                                                                                                
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.9    |  |  |                        | Asset Purchase Agreement among the Company, Bison Valve,
L.L.C. and Michael A. Waters dated September 17, 2000,
incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K dated September 23, 2000.                                                                                
|        |         |  |   |                        |                                                                                                                                                                                                                                                                                                                
|        | 10.10   |  |  |                        | Employment Agreement between the Company and Billy D. Prim
dated May 31, 1999 effective as of January 1, 1999,
incorporated by reference to Exhibit 10.20 to the Companys
Annual Report on Form 10-K for the year ended July 31, 1999.*                                                                       





---



##### 



|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|------- | -------- |  | - | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |   |                       
|Number  |          |  |   | Description of Exhibit
|        |          |  |   |                       
|        | 10.11    |  |  |                        | Asset Purchase Agreement by and among the Company, Uniflame,
Mac R. McQuilkin and James E. Harris dated as of March 31,
2000, incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated April 18, 2000.                                                                                                                          
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.12    |  |  |                        | Asset Purchase Agreement by and among the Company,
International Propane Products, LLC and Michael A. Waters
dated as of March 31, 2000, incorporated by reference to
Exhibit 10.4 to the Companys Current Report on Form 8-K
dated April 18, 2000.                                                                                                               
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.13    |  |  |                        | Indemnification Agreement by and among the Company,
International Propane Products, LLC and Michael A. Waters
dated as of March 31, 2000, incorporated by reference to
Exhibit 10.5 to the Companys Current Report on Form 8-K
dated April 18, 2000.                                                                                                              
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.14    |  |  |                        | License Agreement by and among the Company, International
Propane Products, LLC and Michael A. Waters dated as of
March 31, 2000, incorporated by reference to Exhibit 10.6 to
the Companys Current Report on Form 8-K dated April 18,
2000.                                                                                                                      
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.15(a) |  |  |                        | Limited Liability Company Agreement of R4 Technical
Center  North Carolina, LLC dated April 28, 2000, incorporated
by reference to Exhibit 10.24 to the Companys Annual Report on
Form 10-K for the year ended July 31, 2000.                                                                                                                                    
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.15(b) |  |  |                        | First Amendment to Limited Liability Company Agreement of R4
Technical Center  North Carolina, LLC, dated September 30, 2001,
by and among Blue Rhino Corporation, Manchester Tank & Equipment
Co., and Platinum Propane, L.L.C., incorporated by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the
quarter ended October 31, 2001.
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.16    |  |  |                        | Real Estate Lease between Uniflame, Inc. and H & M Enterprises,
L.L.C. dated March 1, 1995, as amended February 8, 2000,
incorporated by reference to Exhibit 10.25 to the Companys Annual
Report on Form 10-K for the year ended July 31, 2000.                                                                                                                  
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.17    |  |  |                        | Agreement dated September 30, 2001, by and between Blue Rhino
Corporation and R4 Technical Center  North Carolina, LLC,
incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended October 31,
2001.                                                                                                          
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.18    |  |  |                        | Bill of Sale dated October 30, 2001, by R4 Technical Center  North
Carolina, LLC and Blue Rhino Corporation, incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended October 31, 2001.                                                                                                                     
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.19    |  |  |                        | Master Lease Agreement dated September 30, 2001, between Blue Rhino
Corporation, Landlord, and R4 Technical Center  North Carolina,
LLC, Tenant, for premises located at 1309 Buck Shoals Road, Yadkin
County, North Carolina, incorporated by reference to Exhibit 10.3
to the Companys Quarterly Report on Form 10-Q for the quarter
ended October 31, 2001.   
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.20    |  |  |                        | Executive Incentive Plan for the fiscal year ending July 31, 2002,
incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended January 31,
2002.*                                                                                                                                                               
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.21    |  |  |                        | Stock Purchase Agreement dated as of April 19, 2002, by and among
Blue Rhino Corporation and those purchasers named on Schedule 1
thereto, incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended April 30, 2002.                                                                                          
|        |          |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.22    |  |  |                        | Registration Rights Agreement among the Company and the
purchasers of Common Stock and Warrants dated September 7,
1999, incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated September 23,
1999.                                                                                                                            





---



##### 



|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- |  | - | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |   |                       
|Number  |       |  |   | Description of Exhibit
|        |       |  |   |                       
|        | 10.23 |  |  |                        | Registration Rights Agreement among the Company and the
Buyers of its Convertible Notes dated September 22, 1999,
incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K dated September 23, 1999.                                                                                                                                                                                                                                                                
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.24 |  |  |                        | Amended and Restated Registration Rights Agreement, dated as
of March 1, 1997, among the Company, Forsythe Technology/Lunn
Partners Venture Leasing, L.P., Platinum Propane Holding,
L.L.C., the Purchasers of Units pursuant to the Unit
Purchase Agreement dated October 11, 1995 and the Purchasers
of the Companys Series A Convertible Participating
Preferred Stock, incorporated by reference to Exhibit 10.15
to the Companys Registration Statement on Form S-1 dated
March 10, 1998.
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.25 |  |  |                        | First Amendment to Amended and Restated Registration Rights
Agreement among the Company and certain holders of its
common stock dated September 7, 1999, incorporated by
reference to Exhibit 4.3 to the Companys Current Report on
Form 8-K dated September 23, 1999.                                                                                                                                                                                                                         
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.26 |  |  |                        | Form of Warrant to Purchase Common Stock of the Company
issued to purchasers of the Companys Common Stock in its
private offering dated September 7, 1999, incorporated by
reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K dated September 23, 1999.                                                                                                                                                                                                                      
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.27 |  |  |                        | Form of Warrant to Purchase Common Stock of the Company
issued to purchasers of the Companys Convertible Notes on
September 20, 1999, incorporated by reference to Exhibit 4.5
to the Companys Current Report on Form 8-K dated September
23, 1999.                                                                                                                                                                                                                                           
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.28 |  |  |                        | Form of Warrant issued to Michael A. Waters dated September
17, 1999, incorporated by reference to Exhibit 4.6 to the
Companys Current Report on Form 8-K dated September 23,
1999.                                                                                                                                                                                                                                                                                                            
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.29 |  |  |                        | Registration Rights Agreement among the Company and the
stockholders and certain employees of Uniflame, Inc. dated
March 31, 2000, incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated April 18, 2000.                                                                                                                                                                                                                                                   
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.30 |  |  |                        | Amended and Restated Registration Rights Agreement dated
October 25, 2000 among the Company, the investors listed
therein and the former stockholders of QuickShip, Inc., incorporated
by reference to Exhibit 4.12 to the Companys Annual Report on
Form 10-K for the year ended July 31, 2000.                                                                                                                                                                                               
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.31 |  |  |                        | Form of Warrant issued to Thomas E. Brandtonies dated October 26,
2000, incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K dated November 13, 2000.                                                                                                                                                                                                                                                                                                           
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.32 |  |  |                        | Registration Rights Agreement dated April 19, 2002, among the
Company and the purchasers named on Schedule 1 thereto,
incorporated by reference to Exhibit 4.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended April 30, 2002.                                                                                                                                                                                                                                             
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.33 |  |  |                        | Securities Purchase Agreement dated as of December 20, 2002 among
the Company and the purchasers identified on the signature pages
thereto, incorporated by reference to Exhibit 10.7 to the Companys
Quarterly Report on Form 10-Q for the quarter ended January 31,
2003.                                                                                                                                                                                                                    
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.34 |  |  |                        | Letter Agreement among the Company and the purchasers identified on
the signature pages to the Securities Purchase Agreement dated as
of December 20, 2002, incorporated by reference to Exhibit 10.9 to
the Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2003.                                                                                                                                                                                                    
|        |       |  |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.35 |  |  |                        | Release and Settlement Agreement dated as of February 26, 2003 by
and between the Company and PricewaterhouseCoopers LLP.**                                                                                                                                                                                                                                                                                                                                                                     





---



##### 



|        |       |  |   |                        |                                                                                                                                                                                
|------- | ----- |  | - | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |   |                       
|Number  |       |  |   | Description of Exhibit
|        |       |  |   |                       
|        | 10.36 |  |  |                        | Lease dated July 17,
2003 between Platinum Propane of Chicago, LLC and BR Partners Two,
LLC.                                                                                   
|        |       |  |   |                        |                                                                                                                                                                                
|        | 10.37 |  |  |                        | Guaranty dated July
17, 2003 by Blue Rhino Corporation in favor of BR Partners Two, LLC.                                                                                       
|        |       |  |   |                        |                                                                                                                                                                                
|        | 10.38 |  |  |                        | Lease dated February
6, 2003 between Buffalo Propane, LLC and BR Partners One, LLC.                                                                                            
|        |       |  |   |                        |                                                                                                                                                                                
|        | 10.39 |  |  |                        | Guaranty dated
February 6, 2003 by Blue Rhino Corporation in favor of BR Partners
One, LLC.                                                                                    
|        |       |  |   |                        |                                                                                                                                                                                
|        | 10.40 |  |  |                        | Lease dated May 14,
2003 between Platinum Propane of Los Angeles, LLC and BR Partners
Three, LLC.                                                                              
|        |       |  |   |                        |                                                                                                                                                                                
|        | 10.41 |  |  |                        | Guaranty dated May
14, 2003 by Blue Rhino Corporation in favor of BR Partners Three, LLC.                                                                                      
|        |       |  |   |                        |                                                                                                                                                                                
|        | 21.1  |  |  |                        | Subsidiaries of the Company.                                                                                                                                                   
|        |       |  |   |                        |                                                                                                                                                                                
|        | 23.1  |  |  |                        | Consent of Ernst & Young LLP.                                                                                                                                                  
|        |       |  |   |                        |                                                                                                                                                                                
|        | 31.1  |  |  |                        | Certification of the Chief Executive Officer pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |       |  |   |                        |                                                                                                                                                                                
|        | 31.2  |  |  |                        | Certification of the Chief Financial Officer pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |       |  |   |                        |                                                                                                                                                                                
|        | 32.1  |  |  |                        | Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.                         
|        |       |  |   |                        |                                                                                                                                                                                
|        | 32.2  |  |  |                        | Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.                         

*  Executive compensation plan or agreement.

**  Confidential treatment has been requested with respect to specified portions of this exhibit.