UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    ---------

                                    FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended June 30, 2007

                                       OR

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

Commission file number: 0-27378

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

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

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

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

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

     TITLE OF EACH CLASS               NAME OF EACH EXCHANGE ON WHICH REGISTERED
     -------------------               -----------------------------------------

common stock, $.001 par value                 Nasdaq Global Select Market

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

                                                                None.

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

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

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

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

                                                           (CONTINUED NEXT PAGE)



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

Large Accelerated Filer  |_|  Accelerated Filer |X|   Non-Accelerated Filer  |_|

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

      The  aggregate  market  value  at  December  29,  2006  of  shares  of the
Registrant's  common  stock,  $.001 par value per share  (based upon the closing
price of $24.59 per share of such stock on the Nasdaq  Global  Select  Market on
such  date),   held  by  non-affiliates  of  the  Registrant  was  approximately
$385,033,000.  Solely  for the  purposes  of this  calculation,  shares  held by
directors and executive  officers of the  Registrant  have been  excluded.  Such
exclusion should not be deemed a determination or an admission by the Registrant
that such individuals are, in fact, affiliates of the Registrant.

      At  September 5, 2007,  there were  outstanding  14,757,281  shares of the
Registrant's common stock, $.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The  information  required  by Items 10,  11, 12, 13 and 14 of Part III is
incorporated by reference to the  Registrant's  definitive proxy statement to be
filed not later than October 29, 2007 pursuant to Regulation 14A.



                                   NUCO2 INC.

                                      Index

                                                                                                     Page

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

PART II.
Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters
           and Issuer Purchases of Equity Securities.                                                  16
Item 6.    Selected Financial Data.                                                                    18
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.                                                                      19
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.                                 35
Item 8     Financial Statements and Supplementary Data.                                                36
Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure.                                                                       36
Item 9A.   Controls and Procedures.                                                                    36
Item 9B.   Other Information.                                                                          37

PART III.
Item 10.   Directors, Executive Officers and Corporate Governance.                                     37
Item 11.   Executive Compensation.                                                                     37
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters.                                                            37
Item 13.   Certain Relationships and Related Transactions, and Director Independence.                  37
Item 14.   Principal Accountant Fees and Services.                                                     37

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

Signatures                                                                                             41
Index to Financial Statements                                                                         F-1



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

1. BUSINESS.

GENERAL

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

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

o     consistent and improved beverage quality;
o     increased product yields;
o     no cylinder handling or storage requirements;
o     elimination of downtime and product waste during high pressure cylinder
      changeovers; and
o     enhanced safety for both the supplier and the customer.

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

      Since our  incorporation  in Florida in 1990, we have expanded our service
area from one  service  location  and 19  customers  in Florida  to 128  service
locations supporting  approximately  115,500 customer locations nationally as of
June 30,  2007.  Since our initial  public  offering of common stock in December
1995,  this growth has been  achieved,  in large part,  with the proceeds of our
initial public offering as well as a secondary  offering of common stock in June
1996,  borrowings under our senior credit  facilities,  the issuance in 1997 and
1999 of our 12%  senior  subordinated  notes  due  2004 and  2005,  respectively
(prepaid in August  2003),  the sale of our Series A 8%  Cumulative  Convertible
Preferred  Stock in May 2000  (converted  into 754,982 shares of common stock in
August 2004) and Series B 8% Cumulative  Convertible Preferred Stock in November
2001  (converted  into  247,420  shares of common stock in December  2004),  the
private  placement of our common  stock in August  2002,  the issuance in August


                                       1


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

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

BUSINESS STRATEGY

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

      ACCELERATE  PENETRATION AND EXPANSION OF CUSTOMER  ACCOUNTS THROUGH MASTER
SERVICE AGREEMENTS. We have entered into master service agreements which include
90 restaurant and convenience  store concepts that provide  fountain  beverages.
These master service  agreements  generally provide for a commitment on the part
of the operator for all of its  currently  owned  locations and may also include
future locations. We currently service approximately 53,000 chain and franchisee
locations  with  chains  that have  signed  master  service  agreements.  We are
actively  working on  expanding  the number of master  service  agreements  with
numerous  restaurant  chains. In addition,  we are the only supplier of bulk CO2
capable  of  offering   comprehensive  master  service  agreements  due  to  our
established national distribution and service network. By negotiating terms with
the customer on a national or regional  level,  we are generally able to offer a
customer's  franchisees  more  favorable  terms than they could achieve on their
own, with the added  benefit of avoiding the expense and time spent  negotiating
contract terms and testing our capabilities.

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

      INCREASE  DENSITY AT  EXISTING  OPERATIONS  TO IMPROVE  PROFITABILITY.  We
maintain a highly  efficient  route structure and establish  additional  service
locations as service areas expand through  geographic growth. Our strategy is to
increase the density of our customer base for our existing service  locations in
order to lower  the  average  time and  distance  between  stops  and  allow for
increased absorption of fixed costs.

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


                                       2


OPERATIONS

      We offer our customers two principal services:

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

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

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

                                          % of Fiscal
                                          2007 Service
                                              Plan
             Service Plan                    Revenue                                  Description
             ------------                    -------                                  -----------

Budget Plan                                   64%               Customer pays a flat monthly fee for bulk CO2 system
                                                                rental and bulk CO2

Equipment Lease and Product Purchase          23%               Customer rents bulk CO2 system and pays a per pound rate
Plan                                                            for bulk CO2

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

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

      At June 30, 2007, we operated 128 service locations (116 stationary and 12
mobile)  located in 42 states  along with a dedicated  fleet of 232  specialized
bulk CO2 delivery vehicles and 119 technical  service or utility vehicles.  Each
stationary  service  location is equipped  with a storage tank (up to 40 tons in
size) which receives bulk CO2 from large  capacity  tanker trucks and from which
our specialized bulk CO2 delivery vehicles are filled with bulk CO2 for delivery
to customers.

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

      We maintain a highly  efficient  delivery  route  structure  and establish
additional stationary bulk CO2 service locations as service areas expand through
geographic  growth.  Our goal is to have a service  location  centrally  located
within 75 miles of each  customer  serviced  from that service  location.  As we
increase  route  density by lowering  the  average  time and  distance  traveled
between stops, we lower the average cost per delivery.

      We  have   developed  an  automated   system  to  achieve   maximum  route
optimization.  In order to ensure  reliability and consistent  service levels to
the customer,  CO2 deliveries are made at fixed intervals.  Information from our
propriety   AccuRoute(R)  system  is  used  to  determine  the  proper  delivery
frequency. Each account is placed into the correct frequency grouping based upon
delivery history,  seasonality,  and promotions  reported to us by the customer.
The  scheduling  system  analyzes a customer's  CO2 usage (as determined by flow
meters installed on our specialized bulk CO2 delivery vehicles) to determine the
planned delivery frequency. The foundation of our scheduling


                                       3


system is the delivery information gathered by the portable account link, or PAL
System.  The PAL system  utilizes a hand-held  device to provide field personnel
with up to date delivery route and customer account  information and also serves
as an input source record for all delivery and service transaction information.

      The scheduling system further utilizes  sophisticated  computer algorithms
that consider:

        o     Latitudinal and longitudinal map location of the account
        o     Optimal driving directions to reduce drive time
        o     Safety stock margins
        o     Truck capacity
        o     Manpower capacity
        o     Any special delivery requirements

      The software  program  then  creates an optimal  route using all the above
information  to service  the  customer.  The system  also  allows both local and
senior management the ability to review performance to the routing program.

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

CUSTOMERS

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

                   QUICK SERVE RESTAURANTS                                       CASUAL/DINNER HOUSES

Arby's                            McDonald's                    Applebee's                    On the Border
Boston Market                     Panera Bread Company          Bahama Breeze                 Outback Steakhouse
Bumpers Drive-In                  Papa Gino's                   Bertucci's                    Perkins Family Restaurants
Burger King                       Pizza Hut                     Cheesecake Factory            Pizzeria Uno
Captain D's                       Pizza Inn                     Chevy's                       Ponderosa Steak House
Carl's Jr.                        Quizno's Classic Subs         Chili's                       Red Lobster/Olive Garden
Checker's Drive-In                Rubios                        Corner Bakery                 Roadhouse Grill
Chipotle Grill                    Sbarro                        Don Pablo's                   Rockfish
Church's Chicken                  Schlotzsky's Deli             Friendly's Restaurant         Romano's Macaroni Grill
D'Angelo's Sandwich Shop          Sonic Drive-In                Hard Rock Cafe                Ruby Tuesday
Dunkin' Donuts                    Steak'n Shake                 Hooters                       Ryan's Family Steak House
El Pollo Loco                     Subway                        Landry's                      Shoney's
Hardee's                          Taco Bell                     Longhorn Steakhouse           Spaghetti Warehouse
KFC                               Wendy's                       Maggiano's Little Italy
Krystal                           White Castle
                                                                                  CONVENIENCE/PETROLEUM

                                                                7-Eleven                      Phillips 66
CONTRACT FEEDERS                  WHOLESALE CLUBS               AM/PM                         Pilot Travel
                                                                BP/Amoco                      Racetrac Petroleum
ARAmark                           BJ's Wholesale                Circle K                      Shell ETD
Compass Group                     Costco                        Coastal Market                Spectrum Stores
Fine Host                         Sam's Club                    Conoco                        Speedway
Host Marriott                                                   Cumberland Farms              Thornton Oil
                                                                Exxon                         Tom Thumb


                                       4


                     SPORTS VENUES                                                  MOVIE THEATRES

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

MASTER SERVICE AGREEMENTS

      We have entered into master service agreements which include 90 restaurant
and convenience  store concepts that provide  fountain  beverages.  These master
service  agreements  generally  provide  for a  commitment  on the  part  of the
operator for all of its currently  owned  locations and may also include  future
locations.  We  currently  service  approximately  53,000  chain and  franchisee
locations  with  chains  that have  signed  master  service  agreements.  We are
actively  working on  expanding  the number of master  service  agreements  with
numerous restaurant chains.

COMPETITION

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

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

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

COMPETITIVE STRENGTHS

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


                                       5


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

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

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

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

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

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

o     As of June 30, 2007, we had a fleet of 351 delivery and technical  service
      or  utility  vehicles  operated  by 371  drivers  and 113  technicians  to
      maintain  our  installed  base of bulk CO2  systems and respond to service
      calls  allowing us to provide  on-site  service to any customer  generally
      within a matter of hours, minimizing service interruptions.  As carbonated
      fountain   beverages   represent  a  highly  profitable  product  for  our
      customers, our ability to respond quickly can minimize costly downtime due
      to lack of carbonation.

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

      HIGHLY VISIBLE  REVENUE  STREAM  SUPPORTED BY STRONG BACKLOG AND LONG-TERM
CUSTOMER CONTRACTS.  As of June 30, 2007, we had a signed contractual backlog of
approximately 5,000 new customer accounts awaiting activation. Our contracts are
typically five to six years in duration,  providing  stability and visibility to
our  revenue  base.  We  have  established  long-term   relationships  with  our
customers'  organizations  and have  experienced  strong renewal rates under our
existing contracts.  In addition, we are not overly dependent on the business of
any one customer. For the year ended June 30, 2007, no single customer accounted
for more than 5% of our revenues.


                                       6


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

      STRONG  OPERATING CASH FLOW.  Since 2002,  average EBITDA (earnings before
interest,  taxes,  depreciation and amortization)  margins have been 30%. During
the same  period,  the Company  generated  cash from  operations  totaling  $154
million.  We have  invested  this cash in the future  growth of our  business by
purchasing  bulk CO2 tanks and  equipment  and  expanding our network of service
locations.  Since 2002, our investments have enabled us to increase our customer
locations served by over 60%, to approximately 115,500 currently. We plan to use
the excess cash  generated by  operations  to invest in the future growth of our
business  both through  direct  investment in revenue  generating  equipment and
acquisitions,  and through debt repayment and share  repurchases to increase our
balance sheet flexibility.

SALES AND MARKETING

      Our  bulk  CO2  systems  and  services  are  sold by a sales  force  of 25
commission  only  independent  sales   representatives  and  43  salaried  sales
personnel.  We market our bulk CO2 systems and services to large  customers such
as restaurant  and  convenience  store chains,  movie theater  operators,  theme
parks,  resorts  and sports  venues.  Our  customers  include  many of the major
national and regional  chains  throughout the United  States.  We approach large
chains on a corporate  or regional  level for  approval to become the  exclusive
supplier  of bulk CO2  systems  and  services  on a  national  basis or within a
designated territory. We then direct our sales efforts to the managers or owners
of the individual or franchised  operating units. Our  relationships  with chain
customers in one geographic  market frequently help us to establish service with
these same chains  when we expand  into new  markets.  After  obtaining  service
relationships  for a chains'  locations  in a new market,  we attempt to rapidly
build route density by targeting independent restaurants, convenience stores and
theaters for bulk CO2 system conversion and/or service.

BACKLOG

      As of June 30,  2006 and  2007,  we had a signed  contractual  backlog  of
approximately  5,700 and 5,000 new  service  locations,  respectively,  awaiting
activation.  Activations  are dependent upon a number of factors,  including the
expiration of any existing agreements the customer may have with its current CO2
supplier.

BULK CO2 SUPPLY

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

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


                                       7


BULK CO2 SYSTEMS

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

EMPLOYEES

      At June 30, 2007,  we employed 700 full-time  employees,  216 of whom were
involved  in  management,  sales or  customer  support,  371 of whom were  route
drivers  and  113 of whom  were  in  technical  service  functions.  None of our
employees is subject to a collective bargaining agreement; however, employees in
Chicago, Illinois and Hampshire, Illinois have elected union representation.  We
consider our relationship with our employees to be good.

TRADEMARKS

      We market our  services  using the NuCO2(R)  and  AccuRoute(R)  trademarks
which have been registered by us with the U.S. Patent and Trademark Office.  The
current   registrations   for  these   trademarks   expire  in  2017  and  2013,
respectively.

SEASONALITY

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

REGULATORY MATTERS

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

1A. RISK FACTORS.

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

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

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

      o     manage effectively the expansion of our operations;
      o     implement and develop our systems, procedures or controls;
      o     adequately support our operations;
      o     achieve and manage the currently projected installations of bulk
            CO2 systems; or
      o     maintain our superior level of customer service.


                                       8


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

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

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

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

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

      As of June 30, 2007, we had a signed contractual  backlog of approximately
5,000 new customer locations awaiting activation.  However,  this backlog is not
necessarily  indicative of future growth rates in our operating  results,  which
will  depend  in part on our  ability  to  implement  new  customer  agreements.
Additionally,  these  agreements may be subject to  modification  or termination
prior to  implementation  or may not be implemented for a significant  period of
time due to customers' prior contractual commitments.

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

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

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

      As of June 30, 2007,  we had  outstanding  indebtedness  of  approximately
$34.8 million under our revolving credit facility.


                                       9


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

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

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

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

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

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

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

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

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

      o     identification of appropriate acquisition candidates or negotiation
            of acquisitions on favorable terms and valuations;
      o     integration of acquired bulk CO2 customer accounts;
      o     implementation of proper business and accounting controls;
      o     ability to obtain financing, on favorable terms or at all;
      o     diversion of management attention;
      o     retention of bulk CO2 customers;
      o     maintaining our superior level of customer service as we continue to
            grow; and
      o     unexpected costs, expenses and liabilities.

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


                                       10


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

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

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

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

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

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

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

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

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


                                       11


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

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

      Stainless  steel is used in the  manufacture  of our bulk  CO2  tanks.  We
purchase our tanks from manufacturers  under agreements,  the terms of which are
renegotiated on an annual basis. Stainless steel prices increased  significantly
during  fiscal 2007.  Future  increases in stainless  steel may result in higher
prices for the CO2 tanks we must purchase.

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

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

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

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

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

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

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

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

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


                                       12


      Our business and facilities  are subject to federal,  state and local laws
and regulations adopted for the use, storage and handling of CO2, the protection
of the  environment,  the health and  safety of our  employees  and users of our
products  and  services.  Among  these  environmental  laws are rules by which a
current or previous lessee may be liable for the costs of investigation, removal
or remediation of hazardous materials at such property. In addition,  these laws
typically  impose  liability  regardless  of  whether  the lessee  knew,  or was
responsible  for, the presence of any hazardous  materials.  Persons who arrange
for the disposal or treatment of hazardous materials may be liable for the costs
of  investigation,  removal or remediation of such substances at the disposal or
treatment  site,  regardless  of whether the affected  site is owned,  leased or
operated by them.

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

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

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

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

      Our common  stock  price has  fluctuated  substantially  since our initial
public offering in December 1995. Our common stock sales price reached a 52-week
high of $29.33 on October 16, 2006.  There can be no  assurance  that the market
price for our common  stock will remain at its  current  level and a decrease in
the market price could result in substantial losses for investors.

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

      o     announcements of technological innovations or new products or
            services by us or our competitors;
      o     trends and fluctuations in the use of bulk CO2 systems;
      o     timing of bulk CO2 systems installations relative to financial
            reporting periods;
      o     release of securities analysts' reports;
      o     operating results below expectations;
      o     changes in, or our failure to meet, financial estimates by
            securities analysts;
      o     our business prospects as perceived by others;
      o     market reaction to any acquisitions, joint ventures, strategic
            investments or alliances announced by us or our competitors;
      o     industry developments;
      o     market acceptance of bulk CO2 systems;
      o     decrease in the safety record in the use of bulk CO2 systems;
      o     economic and other external factors; and
      o     period-to-period fluctuations in our financial results.

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

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


                                       13


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

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

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

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

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

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

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

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

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

      If our shareholders  sell  substantial  amounts of our common stock in the
public  market,  the market  price of our common  stock could fall.  These sales
could be due to shares issued upon exercise of outstanding options.  These sales
also  might  make it more  difficult  for us to sell  equity  or  equity-related
securities in the future at a time and price that we deem  appropriate.  At June
30, 2007, we had granted options to purchase an aggregate of 1,949,148 shares of
common stock at a weighted-average exercise price of $20.38 per share. We cannot
assure  you  that  substantial  sales of our  common  stock  resulting  from the
exercise of stock  options  will not dilute our common  stock or lower our share
price.


                                       14


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

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

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

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

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

1B.   UNRESOLVED STAFF COMMENTS

      None.

2.    PROPERTIES.

      Our  corporate  headquarters  are  located in a 32,000  square foot leased
facility  in  Stuart,  Florida  that  accommodates  corporate,   administrative,
customer  service,  marketing,  and sales.  At June 30, 2007, we also leased 116
stationary  service  locations.  These facilities are rented on terms consistent
with market  conditions  prevailing  in the area.  We believe  that our existing
facilities are suitable for our current needs and that additional or replacement
facilities, if needed, are available to meet future needs.

3.    LEGAL PROCEEDINGS.

      On May 21, 2007, Pop's Pancakes,  Inc. and  Zuccarelli's  Italian Kitchen,
Inc.  filed a lawsuit  against us in the United  States  District  Court for the
Southern  District of Florida for violations of the Florida Deceptive and Unfair
Trade Practices Act and for breach of contract. The plaintiffs are seeking class
action  status.   These  complaints  alleged  that  we  failed  to  disclose  an
administrative fee we charged to our customers. We deny wrongdoing and intend to
vigorously defend against this lawsuit.

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

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

      Not applicable.


                                       15


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

      Our common  stock  trades on the Nasdaq  Global  Select  Market  under the
symbol "NUCO".  The following  table  indicates the high and low sale prices for
our common  stock for each  quarterly  period  during  fiscal 2006 and 2007,  as
reported by the Nasdaq Global Select Market.

                                                  High                Low
                                                  ----                ---

Calendar 2005

Third Quarter                                $     27.34          $   23.42
Fourth Quarter                                     28.77              21.24

Calendar 2006

First Quarter                                $     32.57          $   27.60
Second Quarter                                     32.46              23.81
Third Quarter                                      28.43              23.00
Fourth Quarter                                     29.33              24.01

Calendar 2007

First Quarter                                $     26.35          $   19.80
Second Quarter                                     26.94              23.81

      At September 10, 2007, there were  approximately  150 holders of record of
our common stock, although there is a much larger number of beneficial owners.

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

      The  following  table  sets forth  certain  information  regarding  equity
compensation plans as of June 30, 2007.

                      EQUITY COMPENSATION PLAN INFORMATION

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

Equity compensation plans            1,949,148                   $20.38                          963,750
approved by security          shares of common stock                                     shares of common stock
holders ...

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

          Total ...                    1,949,148                 $20.38                          963,750
                                shares of common stock                                   shares of common stock


                                       16


PURCHASES OF EQUITY SECURITIES

      On January 31,  2007,  we publicly  announced  that our Board of Directors
authorized a share  repurchase  program under which we may  repurchase up to $50
million of our common stock through December 31, 2007.  During the quarter ended
June 30,  2007,  we purchased a total of 392,791  shares at an average  price of
$25.50 per share for an aggregate purchase price of $10,016,175.  As of June 30,
2007, we had  repurchased  906,109 shares of common stock at an average price of
$24.87 per share for an aggregate  purchase price of $22,530,512 since inception
of the share repurchase program,  and the remaining  authorized amount for share
repurchases was $27,469,000.

      -----------------------------------------------------------------------------------------------------------------
                                                                                                  Approximate Dollar
                                               Total       Average     Total Number of Shares    Value of Shares that
                                             Number of    Price Paid    Purchased as Part of          May Yet Be
                                               Shares     Per Share      Publicly Announced       Purchased Under the
                     Period                  Purchased                    Plans or Programs        Plans or Programs
      -----------------------------------------------------------------------------------------------------------------
      April 1, 2007 to April 30, 2007          20,225        $24.99            20,225                 $36,980,000
      -----------------------------------------------------------------------------------------------------------------
      May 1, 2007 to May 31, 2007             162,624        $24.97           162,624                 $32,919,000
      -----------------------------------------------------------------------------------------------------------------
      June 1, 2007 to June 30, 2007           209,942        $25.96           209,942                 $27,469,000
      -----------------------------------------------------------------------------------------------------------------
      Total                                   392,791        $25.50           392,791
      -----------------------------------------------------------------------------------------------------------------

PERFORMANCE GRAPH

      The following graph compares, for each of the fiscal years indicated,  the
annual  percentage  change in the  cumulative  total  shareholder  return on our
common stock with the cumulative total return of (i) the Nasdaq Composite Index,
a broad equity  market  index,  and (ii) the Russell  2000 Index,  a "small cap"
business index.

-----------------------------------------------------------------------------------
                       6/02           6/03      6/04      6/05      6/06      6/07
-----------------------------------------------------------------------------------
NuCo2 Inc.            100.00         67.21     140.21    183.36    171.71    183.36
NASDAQ Composite      100.00         109.91    139.04    141.74    155.82    191.32
Russell 2000          100.00         98.36     131.18    143.57    164.50    191.53



                                       17


6.    SELECTED FINANCIAL DATA.

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

                                                                    Fiscal Year Ended June 30,
                                                                    --------------------------
                                                    2007         2006          2005          2004         2003
                                                    ----         ----          ----          ----         ----
                                                    (in thousands, except per share amounts and Operating Data)
Income Statement Data:

Product sales ................................    $  85,865    $  75,959     $  60,518     $  49,115    $  45,027
Equipment rentals ............................       44,263       40,237        36,822        31,721       29,382
                                                  ---------    ---------     ---------     ---------    ---------

Total revenues ...............................      130,128      116,196        97,340        80,836       74,409
                                                  ---------    ---------     ---------     ---------    ---------

Cost of products sold, excluding depreciation
and amortization .............................       55,835       49,397        41,278        33,883       32,047
Cost of equipment rentals, excluding
depreciation and amortization ................        6,714        3,086         2,391         2,345        3,513
Selling, general and administrative expenses .       28,521       24,146        17,020        15,722       17,484
Depreciation and amortization ................       20,059       18,333        16,484        15,234       17,167
Loss on asset disposal .......................        2,260        1,733         1,332         1,242        1,650
                                                  ---------    ---------     ---------     ---------    ---------

Operating income .............................       16,739       19,501        18,835        12,410        2,548
Loss on early extinguishment of debt .........           --           --         5,817         1,964           --
Unrealized (gain) loss on financial instrument           --         (177)           --           177           --
Interest expense .............................        2,207        1,989         6,985         7,947        7,487
                                                  ---------    ---------     ---------     ---------    ---------

Net income (loss) before income taxes ........       14,532       17,689         6,033         2,322       (4,939)
Provision for (benefit from) income taxes ....        6,893        7,341       (19,558)          142           --
                                                  ---------    ---------     ---------     ---------    ---------
Net income (loss) ............................    $   7,639    $  10,348     $  25,591     $   2,180    $  (4,939)
                                                  =========    =========     =========     =========    =========

Net income (loss) per basic common share .....    $    0.49    $    0.67     $    1.98     $    0.13    $   (0.54)
Net income (loss) per diluted common share ...    $    0.48    $    0.65     $    1.79     $    0.12    $   (0.54)

Weighted average shares outstanding - basic ..       15,593       15,427        12,808        10,689       10,396
Weighted average shares outstanding - diluted        15,886       15,997        14,295        11,822       10,396

Other Data:

EBITDA (1) ...................................    $  36,798    $  37,834     $  35,319     $  27,644    $  19,715

Total company owned bulk CO2 systems serviced        96,000       93,000        82,000        68,000       63,000
Customer owned bulk CO2 systems serviced .....       18,000       18,000        16,000        12,000       11,000
                                                  ---------    ---------     ---------     ---------    ---------
Total bulk CO2 systems serviced ..............      114,000      111,000        98,000        80,000       74,000
Total high pressure CO2 customers ............        1,500        2,000         1,000         1,000        1,000
                                                  ---------    ---------     ---------     ---------    ---------
Total customers ..............................      115,500      113,000        99,000        81,000       75,000
Stationary depots ............................          116          113           103            97           91
Mobile depots ................................           12           12            14            11           10
Bulk CO2 trucks ..............................          232          230           203           173          168
Technical service vehicles ...................          115          117            92            83           73
High pressure cylinder delivery trucks .......            4            3            --            --           --

Balance Sheet Data:

Cash and cash equivalents ....................    $     343    $     341     $     968     $     505    $     455
Total assets .................................      190,838      199,007       173,132       128,502      125,846
Total debt (including short-term debt) .......       34,750       35,450        32,000        66,173       70,529
Redeemable preferred stock ...................           --           --            --        10,021        9,258
Total shareholders' equity ...................      139,892      146,924       129,184        40,756       34,936


                                       18


(1) RECONCILIATION OF GAAP AND EBITDA

                                                                    Fiscal Year Ended June 30,
                                                  ---------------------------------------------------------------
                                                    2007         2006          2005          2004         2003
                                                    ----         ----          ----          ----         ----
Net Income (loss)                                 $   7,639    $  10,348     $  25,591     $   2,180    $  (4,939)
Interest expense                                      2,207        1,989         6,985         7,947        7,487
Depreciation and amortization                        20,059       18,333        16,484        15,234       17,167
Provision for (benefit from) income taxes             6,893        7,341       (19,558)          142           --
Unrealized loss on financial instrument                  --         (177)           --           177           --
Loss on early extinguishment of debt                     --           --         5,817         1,964           --
                                                  ---------    ---------     ---------     ---------    ---------

EBITDA                                            $  36,798    $  37,834     $  35,319     $  27,644    $  19,715
                                                  =========    =========     =========     =========    =========

Cash flows provided by (used in):
    Operating activities                          $  42,809    $  33,578     $  29,651     $  21,657    $  15,826
    Investing activities                          $ (23,417)   $ (41,682)    $ (38,781)    $ (16,595)   $ (13,891)
    Financing activities                          $ (19,390)   $   7,477     $   9,593     $  (5,012)   $  (3,042)

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

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

OVERVIEW

      We believe we are the  leading  supplier  of bulk CO2 systems and bulk CO2
for carbonating  fountain  beverages in the United States based on the number of
bulk CO2 systems  leased to  customers  and the only  company in our industry to
operate a national network of bulk CO2 service locations. As of June 30 2007, we
operated a national  network of 128 service  locations  servicing  approximately
115,500 customer locations.  Currently, virtually all fountain beverage users in
the continental  United States are within our present service area. On September
30, 2005, we purchased the beverage  carbonation business in northern California
of Bay Area  Equipment  Co.,  Inc.  We  acquired  approximately  2,500  customer
locations,  including 1,000 tanks in service,  vehicles, parts, and supplies. In
addition,  on June 30,  2006,  we  acquired  the bulk CO2  beverage  carbonation
business  in 18 states in the  southwest  and  midwest,  as well as parts of the
southeast,  of  Coca-Cola  Enterprises  Inc.  We  acquired  approximately  3,000
locations,  including 2,400 tanks in service. These acquisitions provide further
penetration and operating efficiencies in markets in which we operate.

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


                                       19


      We have entered into master service agreements which include 90 restaurant
and convenience  store concepts that provide  fountain  beverages.  These master
service  agreements  generally  provide  for a  commitment  on the  part  of the
operator for all of its currently  owned  locations and may also include  future
locations.  We  currently  service  approximately  53,000  chain and  franchisee
locations  with  chains  that have  signed  master  service  agreements.  We are
actively  working on  expanding  the number of master  service  agreements  with
numerous restaurant chains.

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

      Generally,  our experience has been that as our service  locations  mature
their gross profit margins  improve as a result of business  volume growth while
fixed  costs  remain  essentially  unchanged.  New service  locations  typically
operate at low or negative  gross  margins in the early  stages and detract from
our highly profitable service locations in more mature markets.  Accordingly, we
believe that we are in position to build our customer base while maintaining and
improving upon our superior  levels of customer  service,  with minimal  changes
required to support our  infrastructure.  However,  while the past several years
have  been  years of  strong  growth,  for the  foreseeable  future,  we plan to
increase  our  focus  on  improving  operating  effectiveness,  pricing  for our
services and strengthening our workforce.

GENERAL

      Substantially  all of our  revenues  have been  derived from the rental of
bulk CO2 systems  installed at customers'  sites,  the sale of bulk CO2 and high
pressure  cylinder  revenues.  Revenues  have grown from $74.4 million in fiscal
2003 to $130.1  million in fiscal  2007.  We believe  that our  revenue  base is
stable due to the existence of long-term  contracts  with our  customers,  which
generally  rollover with a limited number  expiring  without  renewal in any one
year. Revenue growth is largely dependent on (1) the rate of new bulk CO2 system
installations, (2) the growth in bulk CO2 sales and (3) price increases.

      Cost of  products  sold is  comprised  of  purchased  CO2 and  vehicle and
service  location costs  associated  with the storage and delivery of CO2. As of
June 30, 2007, we operated a total of 351 specialized bulk CO2 delivery vehicles
and technical  service or utility vehicles that logged  approximately 15 million
miles over the last twelve months. While significant fluctuations in fuel prices
impact our operating  costs,  such impact is largely  offset by fuel  surcharges
billed to the majority of our customers.  Consequently,  while the impact on our
gross profit and operating income is substantially mitigated, rising fuel prices
do result in lower gross profit margins.  Cost of equipment rentals is comprised
of costs  associated with customer  equipment  leases,  including the repair and
refurbishment of leased assets.  Selling,  general and  administrative  expenses
consist of wages and benefits,  dispatch and  communications  costs,  as well as
expenses  associated  with  marketing,  administration,  accounting and employee
training. Consistent with the capital intensive nature of our business, we incur
significant   depreciation  and  amortization  expenses.  These  stem  from  the
depreciation   of  our  bulk  CO2  systems  and  related   installation   costs,
amortization of deferred lease  acquisition  costs, and amortization of deferred
financing costs and other intangible assets.  With respect to company-owned bulk
CO2  systems,   we  capitalize   direct   installation   costs  associated  with
installation of such systems with customers under  non-cancelable  contracts and
which would not be incurred but for a successful  placement.  All other service,
marketing and administrative costs are expensed as incurred.

      Since 1990, we have devoted significant  resources to building a sales and
marketing  organization,   adding  administrative  personnel  and  developing  a
national  infrastructure  to  support  the  rapid  growth  in the  number of our
installed  base of bulk  CO2  systems.  The  costs  of  this  expansion  and the
significant  depreciation  expense  recognized  on our  installed  network  have
resulted in an accumulated deficit of $12.1 million at June 30, 2007.


                                       20


RESULTS OF OPERATIONS

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

                                                   Fiscal Year Ended June 30,
                                                   --------------------------
Statements of Income Data:                         2007      2006       2005
                                                  ------    ------     ------
Product sales                                       66.0 %    65.4 %     62.2 %
Equipment rentals                                   34.0      34.6       37.8
                                                  ------    ------     ------
Total revenues                                     100.0     100.0      100.0

Cost of products sold, excluding
  depreciation and amortization                     42.9      42.5       42.4
Cost of equipment rentals, excluding
  depreciation and amortization                      5.2       2.7        2.5
Selling, general and administrative expenses        21.9      20.8       17.5
Depreciation and amortization                       15.4      15.8       16.9
Loss on asset disposal                               1.7       1.4        1.4
                                                  ------    ------     ------
Operating income                                    12.9      16.8       19.3
Loss on early extinguishment of debt                  --        --        6.0
Unrealized (gain) loss on financial instrument        --      (0.2)        --
Interest expense                                     1.7       1.7        7.1
                                                  ------    ------     ------

Income before income taxes                          11.2      15.2        6.2
Provision for (benefit from) income taxes            5.3       6.3      (20.1)
                                                  ------    ------     ------
Net income                                           5.9 %     8.9 %     26.3 %
                                                  ======    ======     ======

FISCAL YEAR ENDED JUNE 30, 2007 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2006

TOTAL REVENUES

      Total revenues  increased by $13.9 million,  or 12.0%, from $116.2 million
in 2006 to $130.1  million in 2007.  Revenues  derived from our bulk CO2 service
plans increased by $11.4 million,  primarily due to an increase in the number of
customer  locations,  while  revenues  derived  from the  sale of high  pressure
cylinder products, fuel surcharges, equipment sales and other revenues increased
by $2.5  million.  The number of customer  locations  utilizing our products and
services  increased  from  approximately  99,000  at the  beginning  of  2006 to
approximately  115,500 at June 30,  2007.  This  increase was  primarily  due to
organic growth and the  acquisition of  approximately  2,500 customer  locations
from Bay Area Equipment Co., Inc. on September 30, 2005 for which there was only
nine months of corresponding  revenue in 2006 and 3,000 customer  locations from
Coca-Cola   Enterprises   Inc.  on  June  30,  2006,  for  which  there  was  no
corresponding revenue in 2006.

      The following table sets forth, for the periods indicated,  the percentage
of total revenues by service plan:

                                                     Fiscal Year Ended June 30,
                                                     -------------------------
Service Plan                                          2007               2006
                                                     ======             ======
      Bulk budget plan(1)                              51.0%              52.8%
      Equipment lease/product purchase plan(2)         18.3               16.5
      Product purchase plan(3)                         10.6               10.3
      High pressure cylinder(4)                         5.6                5.3
      Other revenues(5)                                14.5               15.1
                                                     ------             ------
                                                      100.0%             100.0%
                                                     ======             ======

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


                                       21


      PRODUCT  SALES - Revenues  derived from the product  sales  portion of our
service plans increased by $9.9 million, or 13.0%, from $76.0 million in 2006 to
$85.9  million in 2007.  The  increase in revenues is  primarily  due to a 10.0%
increase in the average number of customer  locations  serviced  combined with a
slight increase in the quantity of CO2 sold to the average customer due in large
part  to the  customers  acquired  in the  Bay  Area  Equipment  transaction  on
September 30, 2005, the Coca-Cola Enterprises  acquisition on June 30, 2006, and
the impact of new customer locations  activated under master service agreements.
In addition,  sales of products and  services  other than bulk CO2  increased by
$2.5 million due in large part to an increase in revenues  derived from cylinder
products, fuel surcharges, and other revenues, partially offset by a decrease in
equipment sales.

      EQUIPMENT RENTALS - Revenues derived from the lease portion of our service
plans increased by $4.1 million,  or 10.0%,  from $40.2 million in 2006 to $44.3
million in 2007,  primarily  due to a 9.6%  increase  in the  average  number of
customer  locations  leasing  equipment  from us,  including  the  impact of the
Coca-Cola Enterprises transaction and price increases to a significant number of
our  customers  consistent  with the Consumer  Price Index,  offset by incentive
pricing provided to multiple  national  restaurant  organizations  utilizing our
equipment under the bulk budget plan and equipment  lease/product purchase plans
pursuant to master service agreements.  The number of customer locations renting
equipment  from us  increased  from  approximately  93,000  at June 30,  2006 to
approximately 96,000 at June 30, 2007.

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost of products sold, excluding depreciation and amortization,  increased
from $49.4 million in 2006 to $55.8 million in 2007, while remaining steady as a
percentage of product sales revenue at 65.0%.

      Raw product costs increased by $2.3 million, from $19.4 million in 2006 to
$21.7  million in 2007,  due in large  part to a $2.4  million  increase  in CO2
costs. The volume of CO2 sold by us increased 10.4%,  primarily due to the 10.0%
increase in our average  customer base, while the average price of CO2 increased
3.2%. The increase in CO2 costs was primarily offset by a $0.4 million reduction
in costs related to discontinued  syrup accounts acquired in connection with the
Bay Area Equipment  acquisition  last year.  Costs associated with the rental of
high pressure cylinders increased by $0.3 million.

      Operational  costs,  primarily  wages  and  benefits  related  to  cost of
products  sold,  increased  from $18.6 million in 2006 to $21.9 million in 2007,
primarily  due to the increased  personnel  costs  associated  with an increased
customer base and normal annual  adjustments in wage rates. As of June 30, 2007,
we had 407 full-time  delivery  personnel as compared to 362 at the beginning of
fiscal 2006.

      Truck  delivery  expenses  increased  from  $7.7  million  in 2006 to $8.6
million in 2007 primarily due to the increased  customer base and fuel costs. We
have been able to continue to minimize  the impact of  increased  fuel costs and
variable  lease  costs  associated  with truck  usage by  continuing  to improve
efficiencies  in the timing and routing of  deliveries.  During the last half of
fiscal  2007,  we have  begun to  implement  a new  routing  routine  at  select
locations across the country.  The full  implantation of "alpha routing" will be
systematically implemented through the end of fiscal 2008.

      Occupancy  and shop  costs  related  to cost of  products  sold  decreased
slightly from $3.7 million in 2006 to $3.6 million in 2007.

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

      Cost  of  equipment  rentals,  excluding  depreciation  and  amortization,
increased from $3.1 million in 2006 to $6.7 million in 2007 while  increasing as
a percentage  of equipment  rentals  revenue from 7.7% to 15.2%.  During  fiscal
2007,  we made a  strategic  decision  to be more  selective  with our  customer
activations  on a going  forward  basis,  while  improving  both  operating  and
customer  service  metrics.  As part of this decision,  rather than reducing the
number of technicians, we are increasing our emphasis on the assessment, upgrade
and  service of our bulk CO2 tanks at  customer  sites.  To the degree  that our
installers and other personnel are involved in such  activities,  as compared to
initial  installation of tanks at customer sites, which consumed the substantial
majority of our  technicians'  efforts over the past several years,  the related
expense is  recognized  in our  statement  of  operations  as  incurred.  We are
increasing  capacity to repair and service tanks,  which is and will continue to
reduce  our need to  purchase  new tanks.  Tank  repair  and  service  costs are
expensed as incurred as compared to the purchase of a tank, which is capitalized
at cost.


                                       22


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and  administrative  expenses  increased by $4.4 million
from $24.1  million  in 2006 to $28.5  million in 2007,  while  increasing  as a
percentage of total revenues from 20.8% in 2006 to 21.9% in 2007.

      Selling related expenses  remained steady at $4.9 million in both 2006 and
2007. In 2006, we began to convert select  independent sales  representatives to
salaried  employees  to  improve  our  ability to  attract  and  retain  quality
personnel. However, as part of our new strategic growth plan in January 2007, we
reduced our sales force by 14 associates, the effect of which will be fully seen
in fiscal 2008.

      General and administrative  expenses increased by $4.4 million,  or 22.6%,
from $19.3 million in 2006 to $23.7 million in 2007. This increase was primarily
the  result  of  additional   headcount  and  the  related  salaries  and  other
investments  associated with  strengthening  our  infrastructure  in core areas,
incentive  performance  plans,  increased expense  associated with uncollectible
customer  receivable  accounts,  and an  increase in stock  option  compensation
expense associated with grants made to officers, key employees, and directors.

      During fiscal 2007, performance targets were set by our Board of Directors
for our  incentive  plans,  including the vesting of certain  performance  based
option awards.  Included in the 2007 results of operations is the recognition of
option  compensation  expense  consistent  with  performance.   Accordingly,  we
recognized  $4.2  million of option  compensation  in 2007 as  compared  to $3.3
million last year.

DEPRECIATION AND AMORTIZATION

      Depreciation  and  amortization  increased  from $18.3  million in 2006 to
$20.1  million in 2007.  As a percentage  of total  revenues,  depreciation  and
amortization expense decreased from 15.8% in 2006 to 15.4% in 2007.

      Depreciation expense increased from $15.3 million in 2006 to $16.7 million
in 2007.  The increase  was due in large part to the  purchase and  placement of
additional  bulk  CO2  tanks at  customer  sites  and  equipment  obtained  from
acquisitions (see "Overview").

      Amortization  expense  increased from $3.0 million in 2006 to $3.4 million
in 2007,  primarily  related to the increase in the  amortization  of intangible
assets, such as customer lists, associated with acquisitions.

LOSS ON ASSET DISPOSAL

      Loss on asset disposal increased from $1.7 million in 2006 to $2.3 million
in 2007,  increasing  as a  percentage  of total  revenues  from 1.4% to 1.7%. A
significant  portion of the increase is due to discontinuing  service to sub-par
performing customers consistent with our new strategic plan.

OPERATING INCOME

      For the reasons previously discussed, primarily the increase in technician
expense  that is not related to the initial  direct  placement  of new  customer
accounts  (see  "Cost  of  Equipment   Rentals,   Excluding   Depreciation   and
Amortization"), operating income decreased by $2.8 million from $19.5 million in
2006 to $16.7  million in 2007.  As a percentage  of total  revenues,  operating
income decreased from 16.8% to 12.9%.

GAIN ON FINANCIAL INSTRUMENT

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


                                       23


comprehensive  income, which was reversed upon the termination of the Prior Swap
in September 2005. In addition,  upon termination of the Prior Swap, we reversed
the unrealized  loss of $0.2 million  previously  recognized in our statement of
operations.

INTEREST EXPENSE

      Interest  expense  increased  from $2.0 million in 2006 to $2.2 million in
2007,  while the  effective  interest rate of our debt  increased  from 5.9% per
annum in 2006 to 6.6% per annum in 2007 due to rising  libor rates over the past
year, partially  neutralized by the impact of our interest rate swap agreements.
See "Quantitative  and Qualitative  Disclosures About Market Risk." Average debt
outstanding was relatively  steady in both periods,  despite $22.5 million spent
to repurchase over 900,000 shares of our common stock in 2007.

INCOME BEFORE PROVISION FOR INCOME TAXES

      Primarily for the reasons  described  above,  income before  provision for
income taxes decreased by $3.2 million,  or 17.8%, from $17.7 million in 2006 to
$14.5 million in 2007.

PROVISION FOR INCOME TAXES

      During 2006 and 2007, we recognized a tax  provision  consistent  with our
effective tax rate. However,  while we anticipate continuing to recognize a full
tax provision in future periods, we expect to pay only AMT and state/local taxes
until such time that our net operating loss  carryforwards  are fully  utilized.
Our  effective  rate for 2007 was  47.4%,  as  compared  with  41.5%  for  2006.
Affecting the 2007 rate was $0.6 million in income tax expense associated with a
decrease  in state and local net  operating  loss  carryforwards  expected to be
available  to offset  future  taxable  income.  Exclusive  of the  impact of the
decrease in net operating  loss  carryforwards,  the effective  rate in 2007 was
43.2%.

NET INCOME

      For the reasons  described  above, net income decreased from $10.3 million
2006 to $7.6 million in 2007.

Non-GAAP MEASURES EBITDA AND EBITDA EXCLUDING OPTION COMPENSATION

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


                                       24


                                                      Fiscal Year Ended June 30,
                                                      --------------------------
                                                          2007         2006
                                                        ========     ========
Net income                                                 7,639       10,348
Interest expense                                           2,207        1,989
Depreciation and amortization                             20,059       18,333
Provision for income taxes                                 6,893        7,341
Gain on financial instrument                                  --         (177)
                                                        --------     --------
EBITDA                                                    36,798       37,834
Noncash option compensation                                4,194        3,298
                                                        --------     --------
EBITDA excluding the impact of option compensation        40,992       41,132
                                                        ========     ========

Cash flows provided by (used in):
  Operating activities                                  $ 42,809     $ 33,578
  Investing activities                                  $(23,417)    $(41,682)
  Financing activities                                  $(19,390)    $  7,477

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

TOTAL REVENUES

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

      The following table sets forth, for the periods indicated,  the percentage
of total revenues by service plan:

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

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

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


                                       25


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

COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION

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

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

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

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

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

COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

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

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


                                       26


DEPRECIATION AND AMORTIZATION

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

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

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

LOSS ON ASSET DISPOSAL

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

OPERATING INCOME

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

LOSS ON EARLY EXTINGUISHMENT OF DEBT

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

      See "Liquidity and Capital Resources."

GAIN ON FINANCIAL INSTRUMENT

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


                                       27


INTEREST EXPENSE

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

INCOME BEFORE PROVISION FOR INCOME TAXES

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

PROVISION FOR INCOME TAXES

      During 2005 we recorded a $19.6 million  income tax benefit as compared to
a provision for income taxes of $7.3 million in 2006. As of June 30, 2005, after
consideration of all available positive and negative evidence, we concluded that
the deferred tax asset  relating to our net operating  loss  carryforwards  will
more  likely than not be realized  in the  future.  Thus,  the entire  valuation
allowance previously recorded was reversed as of that date. Accordingly,  during
the fiscal year ended June 30, 2006, we  recognized a tax  provision  consistent
with our effective tax rate.

NET INCOME

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

EBITDA

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

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


                                       28


                                                      Fiscal Year Ended June 30,
                                                      --------------------------
                                                         2006            2005
                                                       ========        ========
Net income                                               10,348          25,591
Interest expense                                          1,989           6,985
Depreciation and amortization                            18,333          16,484
Provision for income taxes                                7,341         (19,558)
Gain on financial instrument                               (177)             --
Loss on early extinguishment of debt                         --           5,817
                                                       --------        --------
EBITDA                                                   37,834          35,319
Noncash option compensation                               3,297              --
                                                       --------        --------
EBITDA excluding the impact of option compensation       41,131          35,319
                                                       ========        ========

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


RECENT ACCOUNTING PRONOUNCEMENTS

      On  September  13, 2006 the  Securities  and Exchange  Commission  ("SEC")
issued Staff Accounting  Bulletin No. 108 ("SAB 108"),  "CONSIDERING THE EFFECTS
OF PRIOR YEAR  MISSTATEMENTS  WHEN  QUALIFYING  MISSTATEMENTS  IN  CURRENT  YEAR
FINANCIAL  STATEMENTS."  The  interpretations  in SAB 108 are  being  issued  to
address diversity in practice in quantifying  financial statement  misstatements
and the potential under current practice for the build up of improper amounts on
the  balance  sheet.  SAB 108 is  effective  for fiscal  years  beginning  after
November  15, 2006.  We are  currently  evaluating  the impact of SAB 108 on our
results of operations; however we do not expect the impact to be material to our
financial position, results of operations or cash flows.

      In September  2006,  the Financial  Accounting  Standards  Board  ("FASB")
issued SFAS No. 157, "FAIR VALUE  MEASUREMENTS"  ("SFAS 157"). SFAS 157 provides
enhanced  guidance for using fair value to measure assets and liabilities.  SFAS
157 also  responds to  investors'  requests for expanded  information  about the
extent to which  companies  measure assets and  liabilities  at fair value,  the
information   used  to  measure  fair  value,  and  the  effect  of  fair  value
measurements on earnings.  SFAS 157 defines fair value,  establishes a framework
for  measuring  fair value in  generally  accepted  accounting  principles,  and
expands disclosures about fair value measurements and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods  within  those fiscal  years.  SFAS 157 applies  under other  accounting
pronouncements that require or permit fair value measurements.  We are currently
evaluating  the  impact of this  statement  on our  results  of  operations  and
financial position.

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

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


                                       29


LIQUIDITY AND CAPITAL RESOURCES

      Our cash  requirements  consist  principally  of (1) capital  expenditures
associated  with  purchasing  and placing new bulk CO2 systems  into  service at
customers'  sites;  (2)  payments  of  principal  and  interest  on  outstanding
indebtedness;  and (3) working capital. Whenever possible, we seek to obtain the
use of vehicles,  land, buildings,  and other office and service equipment under
operating  leases as a means of conserving  capital.  We anticipate  making cash
capital expenditures of approximately $23.0 million for internal growth over the
next  twelve  months,  primarily  for  purchases  of bulk  CO2  systems  for new
customers.

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

LONG-TERM DEBT

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

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

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


                                       30


       ------------------------------------------------------------------
       Pricing     Consolidated Leverage     Eurodollar Rate    Base Rate
        Level              Ratio                  Loans           Loans
       ------------------------------------------------------------------
         I      Greater than or equal to         2.000%           0.500%
                2.50x
       ------------------------------------------------------------------
         II     Less than 2.50x but greater      1.750%           0.250%
                than or equal to 2.00x
       ------------------------------------------------------------------
         III    Less than 2.00x but              1.500%           0.000%
                greater
                than or equal to 1.50x
       ------------------------------------------------------------------
         IV     Less than 1.50x but greater      1.250%           0.000%
                than or equal to 0.50x
       ------------------------------------------------------------------
         V      Less than 0.50x                  1.000%           0.000%
       ------------------------------------------------------------------

      Interest  is payable  periodically  on  borrowings  under the 2005  Credit
Facility. The 2005 Credit Facility is uncollateralized.  We are required to meet
certain affirmative and negative covenants,  including financial  covenants.  We
are required to assess our compliance with these  financial  covenants under the
2005 Credit Facility on a quarterly basis.  These financial  covenants are based
on a  measure  that  is not  consistent  with  accounting  principles  generally
accepted in the United  States of America.  Such measure is EBITDA (as defined),
which represents earnings before interest, taxes, depreciation and amortization,
as further  modified by certain defined  adjustments.  The failure to meet these
covenants, absent a waiver or amendment, would place us in default and cause the
debt outstanding  under the 2005 Credit Agreement to immediately  become due and
payable. We were in compliance with all covenants under the 2005 Credit Facility
as of June 30, 2005 and through June 30, 2007.

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

      As of June 30, 2007, a total of $34.8  million was  outstanding  under the
2005 Credit Facility,  primarily  consisting of Libor  (Eurodollar  Rate) loans,
with a weighted average interest rate of 6.8% per annum.

SUBORDINATED DEBT

      On August 25,  2003,  concurrently  with the closing of the Senior  Credit
Facility,  we issued $30.0  million of our 16.3% Senior  Subordinated  Notes Due
February  27, 2009 (the "New  Notes") with  interest  only payable  quarterly in
arrears  on  February  28,  May 31,  August  31 and  November  30 of each  year,
commencing  November  30,  2003.  Interest  on the New  Notes  was 12% per annum
payable  in cash and 4.3% per annum  payable  "in kind" by adding  the amount of
such interest to the  principal  amount of the New Notes then  outstanding.  The
weighted  average  effective  interest  rate of the  New  Notes,  including  the
amortization of deferred financing costs and original issue discount,  was 18.0%
per annum.  Ten year warrants to purchase an aggregate of 425,000  shares of our
common stock at an exercise  price of $8.79 per share were issued in  connection
with the New Notes.  Utilizing the  Black-Scholes  Model, the warrants issued in
connection with the New Notes were valued at $3.70 per warrant,  or an aggregate
value  of  $1,573,000.  In  addition,  the  maturity  date of  665,403  existing
warrants,  335,101 due to expire in 2004 and 330,302 due to expire in 2005,  was
extended to February 2009,  resulting in additional value of $1.31 and $0.97 per
warrant,  respectively,  or an  aggregate  value  of  $760,090.  At the  date of
issuance,  in accordance with APB 14,  "ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT
ISSUED WITH PURCHASE  WARRANTS,"  we allocated  proceeds of $27.7 million to the
debt and $2.3 million to the warrants,  with the resulting  discount on the debt
referred to as the Original  Issue  Discount.  The Original  Issue  Discount was
being  amortized  as  interest  expense  over the life of the debt.  As with the
Senior  Credit  Facility,  we were  required  to meet  certain  affirmative  and
negative  covenants under the New Notes,  including but not limited to financial
covenants.  We were in compliance  with all covenants  under the New Notes as of
September 30, 2003 and all  subsequent  quarters up to and  including  March 31,
2005.

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


                                       31


SHAREHOLDERS' EQUITY

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

      In May 2000,  we sold 5,000 shares of Series A 8%  Cumulative  Convertible
Preferred Stock, no par value (the "Series A Preferred  Stock"),  for $1,000 per
share.  Shares of the Series A Preferred Stock were  convertible  into shares of
common stock at any time at a conversion  price of $9.28 per share. In addition,
in November  2001,  we sold 2,500 shares of Series B 8%  Cumulative  Convertible
Preferred Stock, no par value (the "Series B Preferred  Stock"),  for $1,000 per
share.  Shares of the Series B Preferred Stock were  convertible  into shares of
common  stock at any time at a conversion  price of $12.92 per share.  Effective
August 18, 2004, the holder of the Series A Preferred Stock converted its shares
into 754,982 shares of our common stock.  Effective December 7, 2004, the holder
of the Series B Preferred  Stock converted its shares into 247,420 shares of our
common stock.

      On January 29, 2007, our Board of Directors  authorized a share repurchase
program  under which we may  repurchase  up to $50  million of our common  stock
through December 31, 2007. The share repurchase program commenced on February 5,
2007. The share  repurchase  plan does not obligate us to acquire any particular
amount of shares and may be  suspended at any time.  Through  June 30, 2007,  we
purchased  a total of  906,109  shares of common  stock at an  average  price of
$24.87 per share for an aggregate  purchase price of $22.5  million.  As of that
date, the remaining authorized amount for share repurchases was $27.5 million.

OTHER

      During the fiscal year ended June 30, 2007, our capital resources included
cash flows from  operations  and  available  borrowing  capacity  under the 2005
Credit  Facility.  We  believe  that cash flows from  operations  and  available
borrowings  under the 2005 Credit  Facility  will be sufficient to fund proposed
operations for at least the next twelve months.

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

                                         Less
                                         than       1-3        3-5
Contractual Obligations      Total      1 Year     Years      Years   Thereafter
                            ====================================================
2005 Credit Facility
   Principal                $34,750    $    --    $34,750    $    --     $    --
   Interest                   6,869      2,363      4,506         --          --
                            -------    -------    -------    -------     -------
Total 2005 Credit Facility   41,619      2,363     39,256         --          --
                            -------    -------    -------    -------     -------

Employment agreements         3,019      1,607      1,412         --          --
Operating leases             18,563      5,916      8,856      3,297         494
                            -------    -------    -------    -------     -------
Total obligations           $63,201    $ 9,886    $49,524    $ 3,297     $   494
                            =======    =======    =======    =======     =======

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

      WORKING  CAPITAL.  As of June 30, 2007 and 2006, we had working capital of
$13.3 million and $16.7 million, respectively.

      CASH FLOWS  FROM  OPERATING  ACTIVITIES:  During  2007 and 2006,  net cash
generated  by  operating   activities  was  $42.8  million  and  $33.6  million,
respectively.  Cash used by our working capital assets improved by $8.6 million.
In  addition,  to the degree  that (a) our  technicians  have  shifted  from the
initial  installation  of bulk CO2 tanks at  customer  sites to the  assessment,
upgrade  and  service  of our bulk CO2 tanks at  customer  sites and (b) we have
increased our capacity to refurbish  tanks rather than purchase new tanks,  this
represents a shift in cost from  investing  activities to operating  activities.
See "Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006
- Cost of Equipment Rentals, Excluding Depreciation and Amortization."


                                       32


      CASH FLOWS FROM INVESTING ACTIVITIES.  During 2007 and 2006, net cash used
in  investing  activities  was $23.4  million and $41.7  million,  respectively.
Investing  activities in 2006 included $4.7 million paid for the  acquisition of
the beverage  carbonation  business of Bay Area Equipment Co., Inc.  ("BAE") and
related acquisition expenses on September 30, 2005 and $5.0 million paid for the
acquisition  of a portion of the  beverage  carbonation  business  of  Coca-Cola
Enterprises  Inc.  ("CCE") and related  acquisition  expenses on June 30,  2006.
Exclusive  of  acquisition   purchases,   investing   activities  are  primarily
attributable to the acquisition, installation and direct placement costs of bulk
CO2 systems.

      CASH FLOWS FROM FINANCING ACTIVITIES.  During 2006, cash flows provided by
financing  activities  was  $7.5  million,  compared  to $19.4  million  used in
financing  activities in 2007. During 2006, we borrowed $9.7 million to fund the
purchase of BAE and CCE. As previously  discussed,  in 2007 we purchased a total
of 906,109  shares of our common  stock at an average  price of $24.87 per share
for an  aggregate  purchase  price  of  $22.5  million.  In  addition,  our debt
decreased by $0.7 million since June 30, 2006, as we have  generated  sufficient
excess cash to fully fund the repurchases of our common stock.

INFLATION

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

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

      As of June 30,  2007,  we  operated  a total of 351  specialized  bulk CO2
delivery  vehicles  and  technical  service  or  utility  vehicles  that  logged
approximately  15 million miles in fiscal 2007. While  significant  increases in
fuel prices impact our operating  costs,  such impact is largely  offset by fuel
surcharges billed to the majority of our customers.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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

REVENUE RECOGNITION

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


                                       33


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

VALUATION OF LONG-LIVED ASSETS

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

      Certain  events may occur that would  materially  affect our estimates and
assumptions  related  to  depreciation.  Unforeseen  changes  in  operations  or
technology could  substantially  alter  management's  assumptions  regarding our
ability  to  realize  the  return of our  investment  in  operating  assets  and
therefore  affect the amount of  depreciation  expense  to charge  against  both
current  and future  revenues.  Because  depreciation  expense is a function  of
historical  experiences,  analytical studies and professional  judgments made of
property,  plant and  equipment,  subsequent  studies  could result in different
estimates of useful lives and net salvage values. If future depreciation studies
yield  results  indicating  that our assets  have  shorter  lives as a result of
obsolescence,  physical  condition,  changes  in  technology  or  changes in net
salvage values, the estimate of depreciation  expense could increase.  Likewise,
if studies  indicate that assets have longer lives, the estimate of depreciation
expense could decrease.  For the year ended June 30, 2007,  depreciation expense
was $16.7 million.

INSTALLER EXPENSES

      Property and equipment are stated at cost. Upon installation, the systems,
component  parts  and  direct  costs   associated  with  the   installation  are
transferred to the leased equipment  account.  These direct costs are associated
with successful  placements of such systems with customers  under  noncancelable
contracts and would not be incurred by us but for a successful placement.  These
costs are amortized over the life of the original customer contract.  Upon early
service termination, the unamortized portion of direct costs associated with the
installation  is recognized as a period expense in the statements of operations.
Such policy is analogous to SFAS No. 91,  "ACCOUNTING FOR NONREFUNDABLE FEES AND
COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND INITIAL DIRECT COSTS OF
LEASES."

GOODWILL AND OTHER INTANGIBLE ASSETS

      Goodwill  represents  the cost in excess of the fair value of the tangible
and identifiable intangible net assets of businesses acquired and, prior to July
1, 2001, was amortized on a straight-line  method over 20 years.  Effective July
1, 2001,  we adopted  Statement  of  Financial  Accounting  Standards  No.  142,
"GOODWILL  AND  OTHER  INTANGIBLE  ASSETS,"  pursuant  to  which,  goodwill  and
indefinite  life  intangible  assets are no longer  amortized but are subject to
annual impairment  tests.  Other intangible assets with finite lives continue to
be amortized  on a  straight-line  method over the periods of expected  benefit.
Other   intangible   assets  consist  of  customer  lists  and   non-competition
agreements,  principally acquired in connection with certain asset acquisitions.
Customer lists are being  amortized on a  straight-line  method over five to ten
years, and non-competition agreements,  which generally preclude the other party
from competing with us in a designated  geographical area for a stated period of
time, are being amortized on a straight line method over their contractual lives
which range from thirty to one hundred and twenty months.

RESERVES FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE

      We make ongoing assumptions relating to the collectability of our accounts
receivable.  The  accounts  receivable  amount on our balance  sheet  includes a
reserve for  accounts  that might not be paid.  Such  reserve is  evaluated  and
adjusted on a monthly basis by examining our historical  losses and  collections
experience,  aging of our trade receivables, the creditworthiness of significant
customers based on ongoing  evaluations,  and current economic trends that might
impact the level of credit losses in the future.  The composition of receivables
consists of on-time  payers,  "slow" payers,  and at risk  receivables,  such as
receivables  from customers who no longer do business with us, are bankrupt,  or
are out of business.  While we believe that our current reserves are adequate to


                                       34


cover potential credit losses, we cannot predict future changes in the financial
stability  of our  customers  and we cannot  guarantee  that our  reserves  will
continue to be adequate.  If actual credit losses are significantly greater than
the  reserve  we  have   established,   that  would  increase  our  general  and
administrative  expenses  and reduce our  reported  net income.  Conversely,  if
actual  credit  losses  are  significantly  less than our  reserve,  this  would
eventually  decrease  our general and  administrative  expenses and increase our
reported net income.

DEFERRED INCOME TAXES

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

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

o     Cumulative pretax book income

o     Both  positive  and  negative  evidence  as to our  ability to utilize our
      federal net operating loss carry  forwards  prior to  expiration,  such as
      current and projected  generation of taxable  income,  our position in the
      market place (servicing approximately 60% of customers currently utilizing
      bulk CO2),  existence of long term customer contracts  (generally for five
      to  six  years  in  duration),  growth  opportunities  and  conversion  of
      restaurants  currently utilizing  high-pressure CO2 to beverage grade bulk
      CO2

o     Future reversals of taxable temporary differences

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

      In order to utilize the entire deferred tax asset we will need to generate
taxable income of approximately $102 million.  As of June 30, 2007, we evaluated
and, in the future,  will  continue to evaluate  whether or not our net deferred
tax assets will be fully  realized  prior to  expiration.  Should it become more
likely than not that all or a portion of the net deferred tax assets will not be
realized, a valuation allowance will be recorded.

7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      As  discussed  under  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" above, as
of June 30, 2007, a total of $34.8 million was outstanding under the 2005 Credit
Facility with a weighted  average  interest  rate of 6.8% per annum.  Based upon
$34.8 million  outstanding  under the 2005 Credit Facility at June 30, 2007, our
annual  interest  cost under the 2005  Credit  Facility  would  increase by $0.3
million for each 1% increase in Eurodollar interest rates.

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


                                       35


15, 2004 through September 15, 2005, as other  comprehensive  income,  which was
reversed upon the  termination of the Prior Swap in September 2005. In addition,
upon  termination  of the Prior Swap,  we reversed the  unrealized  loss of $0.2
million previously recognized in our statement of operations.

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

8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      See page F-1.

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

      None.

9A.   CONTROLS AND PROCEDURES.

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

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

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

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

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

      The Company's  management has assessed the  effectiveness of the Company's
internal  control over  financial  reporting as of June 30, 2007. In making this
assessment, the Company used the criteria of the Integrated Framework adopted by
the Committee of Sponsoring  Organizations  of the Treadway  Commission  (COSO).
These criteria are in the areas of control environment, risk assessment, control
activities,   information  and  communication  and  monitoring.   The  Company's
assessment included extensive documenting, evaluating and testing the design and
operating effectiveness of its internal control over financial reporting.


                                       36


      Based on the  Company's  processes  and  assessment,  as described  above,
management  has  concluded  that, as of June 30, 2007,  the  Company's  internal
control over financial reporting was effective.

9B.   OTHER INFORMATION.

      Not applicable.

10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

      The  information  required by Item 10 is  incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 29,
2007 pursuant to Regulation 14A.

11.   EXECUTIVE COMPENSATION.

      The  information  required by Item 11 is  incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 29,
2007 pursuant to Regulation 14A.

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

      The  information  required by Item 12 is  incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 29,
2007 pursuant to Regulation 14A.

13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

      The  information  required by Item 13 is  incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 29,
2007 pursuant to Regulation 14A.

14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

      The  information  required by Item 14 is  incorporated by reference to our
definitive  proxy  statement  to be filed with the SEC no later than October 29,
2007 pursuant to Regulation 14A.

15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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

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

      (2) Financial Statement Schedules
          II - Valuation and Qualifying Accounts.

      (3) Exhibits:

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

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

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

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

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


                                       37


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

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

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

      3.8               --      Bylaws of the Company. (10)

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

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

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

      10.3*             --      2005 Executive Management Stock Option Plan of the Company. (15)

      10.4*             --      2005 Non-Employee Directors Stock Option Plan of the Company. (15)

      10.5*             --      2005 Employee Stock Option Plan of the Company. (15)

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

      10.7              --      First Amendment to Credit Agreement dated as of March 24, 2006. (16)

      10.8              --      Second Amendment to Credit Agreement dated as of January 29, 2007. (18)

      10.9              --      Third Amendment to Credit Agreement dated as of March 23, 2007. (19)

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

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

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

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

      10.14*            --      Amendment  No. 1 dated  September  19,  2006 to Amended and  Restated  Employment  Agreement  by and
                                between the Company and Michael E. DeDomenico. (20)

      10.15*            --      Amendment  No. 2 dated  September  13,  2007 to Amended and  Restated  Employment  Agreement  by and
                                between the Company and Michael E. DeDomenico. (1)

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


                                       38


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

      10.18*            --      Amendment  No. 2 dated  January  23,  2006 to  Employment  Agreement  by and between the Company and
                                William Scott Wade. (17)

      10.19*            --      Amendment  No. 3 dated  December  7, 2006 to  Employment  Agreement  by and  between the Company and
                                William Scott Wade. (21)

      10.20*            --      Amendment No. 4 dated  September  13,  2007 to Employment  Agreement by and between the Company and
                                William Scott Wade.  (1)

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

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

      10.23*            --      Amendment  No. 2 dated  January  23,  2006 to  Employment  Agreement  by and between the Company and
                                Robert R. Galvin. (17)

      10.24*            --      Amendment No. 3 dated  September  13,  2007 to Employment  Agreement by and between the Company and
                                Robert R. Galvin.  (1)

      10.25*            --      Employment Agreement between the Company and Eric M. Wechsler. (1)

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

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

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

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

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

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

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

      10.33*            --      Stock Option Agreement between the Company and J. Robert Vipond dated December 19, 2005. (22)

      10.34*            --      Stock Option Agreement between the Company and J. Robert Vipond dated December 19, 2005. (22)

      10.35*            --      Stock Option Agreement between the Company and Daniel Raynor dated December 19, 2005. (22)

      14                --      Code of Ethics. (9)


                                       39


      23.1              --      Consent  of  Margolin,  Winer  &  Evens  LLP to the  incorporation  by  reference  to the  Company's
                                Registration  Statements  on  Form  S-8  (Nos.  333-06705,   333-30042,  333-89096,  333-114898  and
                                333-137772) and Form S-3 (No.  333-99201) of the independent  registered  public  accounting  firm's
                                report included herein. (1)

      23.2              --      Consent  of Ernst & Young  LLP, Independent Registered Public Accounting Firm (1)

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

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

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

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

      *     Indicates a management contract or compensation plan or arrangement.

---------------------------
(1)   Included herein.
(2)   Incorporated by reference to the Company's Registration Statement on Form
      SB-2, filed with the Commission on November 7, 1995 (Commission File No.
      33-99078), as amended.
(3)   Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 1998.
(4)   Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 2000.
(5)   Incorporated by reference to the Company's Form 10-Q for the quarter ended
      December 31, 2001.
(6)   Incorporated by reference to the Company's Registration Statement on From
      S-3, filed with the Commission on September 5, 2002 (Commission File No.
      333- 99201).
(7)   Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 2002.
(8)   Incorporated by reference to the Company's Registration Statement on Form
      8-A, filed on March 31, 2003.
(9)   Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 2003.
(10)  Incorporated by reference to the Company's Form 10-Q for the quarter ended
      December 31, 2003.
(11)  Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 2004.
(12)  Incorporated by reference to the Company's Form 8-K dated May 27, 2005.
(13)  Incorporated by reference to the Company's Form 8-K dated October 1, 2004.
(14)  Incorporated by reference to the Company's Form 8-K dated December 8,
      2004.
(15)  Incorporated by reference to the Company's Form 8-K dated December 7,
      2005.
(16)  Incorporated by reference to the Company's Form 8-K dated March 24, 2006.
(17)  Incorporated by reference to the Company's Form 8-K dated January 23,
      2006.
(18)  Incorporated by reference to the Company's Form 10-Q for the quarter ended
      December 31, 2006.
(19)  Incorporated by reference to the Company's Form 10-Q for the quarter ended
      March 31, 2007.
(20)  Incorporated by reference to the Company's Form 8-K dated September 19,
      2006.
(21)  Incorporated by reference to the Company's Form 8-K dated December 7,
      2006.
(22)  Incorporated by reference to the Company's Form 10-K for the year ended
      June 30, 2006.


                                       40


                                   SIGNATURES

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

                                                      NUCO2 INC.


Dated:  September 13, 2007                            /s/ Michael E. DeDomenico
                                                      -------------------------
                                                      Michael E. DeDomenico
                                                      Chief Executive Officer

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

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


 /s/ Michael E. DeDomenico                      Director,                       September 13, 2007
 ---------------------------                    Chief Executive Officer
 Michael E. DeDomenico


 /s/ Robert L. Frome                            Director                        September 13, 2007
 ---------------------------
 Robert L. Frome


 /s/ Steven J. Landwehr                         Director                        September 13, 2007
 ---------------------------
 Steven J. Landwehr


 /s/ Daniel Raynor                              Director                        September 13, 2007
 ---------------------------
 Daniel Raynor


 /s/ J. Robert Vipond                           Director                        September 13, 2007
 ---------------------------
 J. Robert Vipond


 /s/ Christopher White                          Director                        September 13, 2007
 ---------------------------
 Christopher White


 /s/ Robert R. Galvin                           Chief Financial Officer         September 13, 2007
 ---------------------------
 Robert R. Galvin


                                       41



                          INDEX TO FINANCIAL STATEMENTS

                                                                                                         PAGE NO.
                                                                                                         --------

                                   NUCO2 INC.

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

REPROT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...............................................      F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS..........................      F-4

FINANCIAL STATEMENTS:

      BALANCE SHEETS AS OF JUNE 30, 2007 AND 2006.....................................................      F-5

      STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED JUNE 30, 2007, 2006 AND
         2005      ...................................................................................      F-6

      STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JUNE 30, 2007,
         2006 AND 2005................................................................................      F-7

      STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30, 2007, 2006 AND
         2005      ...................................................................................      F-9

NOTES TO FINANCIAL STATEMENTS.........................................................................      F-11

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED JUNE 30, 2007,
      2006 AND 2005...................................................................................      F-32


                                      F-1


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
NuCO2 Inc.

We have  audited  the  accompanying  balance  sheet of NuCO2 Inc. as of June 30,
2007, and the related statements of income, shareholders'  equity and cash flows
for the year then ended. We have also audited the financial  statement  schedule
listed in the accompanying  index.  These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of NuCO2 Inc. at June 30, 2007,
and the results of its operations and its cash flows for the year then ended, in
conformity with U.S.  generally  accepted  accounting  principles.  Also, in our
opinion,  the related financial  statement  schedule for the year ended June 30,
2007 when  considered in relation to the basic financial  statements  taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the  effectiveness of NuCO2 Inc.'s
internal control over financial reporting as of June 30, 2007, based on criteria
established in INTERNAL CONTROL--INTEGRATED FRAMEWORK ISSUED BY THE COMMITTEE OF
SPONSORING  ORGANIZATIONS  OF THE  TREADWAY  COMMISSION  and  our  report  dated
September 12, 2007 expressed an unqualified opinion thereon.

                                   ERNST & YOUNG LLP
                                   Certified Public Accountants

West Palm Beach, Florida
September 12, 2007


                                      F-2


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have  audited  the  accompanying  balance  sheet of NuCO2 Inc. as of June 30,
2006, and the related statements of income,  shareholders' equity and cash flows
for each of the two  years in the  period  ended  June 30,  2006.  We have  also
audited the financial  statement  schedule listed in the accompanying  index for
each of the two  years in the  period  ended  June  30,  2006.  These  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

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

As discussed in Note 9 to the financial statements,  effective July 1, 2005, the
Company  changed  its method of  accounting  for stock based  compensation  as a
result of the adoption of Statement of Financial  Accounting  Standards  No. 123
(revised  2004),  "Share-Based  Payment."

                                                     MARGOLIN, WINER & EVENS LLP

Garden City, New York
August 16, 2006


                                      F-3


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NUCO2 INC.

We have audited NuCO2 Inc.'s  internal  control over  financial  reporting as of
June 30, 2007,  based on criteria  established  in Internal  Control--Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission  (the COSO  criteria).  NuCO2 Inc.'s  management is  responsible  for
maintaining  effective  internal control over financial  reporting,  and for its
assessment of the  effectiveness of internal  control over financial  reporting.
Our  responsibility  is to express an opinion on the company's  internal control
over financial reporting based on our audit.

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

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

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

In our  opinion,  NuCO2 Inc.  maintained,  in all material  respects,  effective
internal control over financial reporting as of June 30, 2007, based on the COSO
criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board (United  States),  the balance sheet as of June 30,
2007 and the related statements of income,  shareholders'  equity and cash flows
for the year then ended of NuCO2 Inc. and our report dated  September  12, 2007,
expressed an unqualified opinion thereon.

                                                               Ernst & Young LLP
                                                    Certified Public Accountants

West Palm Beach, Florida
September 12, 2007


                                      F-4


                                   NUCO2 INC.
                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                     ASSETS
                                     ------

                                                                                                    June 30,
                                                                                       -----------------------------------
                                                                                            2007                  2006
                                                                                       ------------           ------------
Current assets:
   Cash and cash equivalents                                                           $        343           $        341
   Trade accounts receivable; net of allowance for doubtful
      accounts of $1,004 and $2,538, respectively                                            11,823                 12,955
   Inventories                                                                                  297                    302
   Prepaid insurance expense and deposits                                                     3,121                  5,846
   Prepaid expenses and other current assets                                                  1,412                  1,465
   Deferred tax assets - current portion                                                      8,264                  8,598
                                                                                       ------------           ------------
      Total current assets                                                                   25,260                 29,507

Property and equipment, net                                                                 122,364                119,603

Other assets:
   Goodwill, net                                                                             25,909                 25,794
   Deferred financing costs, net                                                                254                    333
   Customer lists, net                                                                        6,761                  8,372
   Non-competition agreements, net                                                              512                  1,181
   Deferred lease acquisition costs, net                                                      5,744                  5,225
   Deferred tax assets                                                                        3,813                  8,807
   Other                                                                                        221                    185
                                                                                       ------------           ------------
                                                                                             43,214                 49,897
                                                                                       ------------           ------------
      Total assets                                                                     $    190,838           $    199,007
                                                                                       ============           ============

                                                LIABILITIES AND SHAREHOLDERS' EQUITY
                                                ------------------------------------
Current liabilities:
   Accounts payable                                                                    $      6,061           $      6,883
   Accrued expenses                                                                           2,043                  1,208
   Accrued insurance                                                                          1,054                  3,543
   Accrued interest                                                                             121                    165
   Accrued payroll                                                                            2,357                    652
   Other current liabilities                                                                    314                    377
                                                                                       ------------           ------------
      Total current liabilities                                                              11,950                 12,828

Long-term debt                                                                               34,750                 35,450
Customer deposits                                                                             4,246                  3,805
                                                                                       ------------           ------------
      Total liabilities                                                                      50,946                 52,083
                                                                                       ============           ============

Commitments and contingencies
Shareholders' equity:
   Common stock; par value $.001 per share; 30,000,000 shares authorized;
      issued 15,921,066 shares at June 30, 2007 and
      15,654,042 shares at June 30, 2006                                                         16                     16
   Additional paid-in capital                                                               174,831                166,617
   Less treasury stock at cost; 921,409 shares at June 30, 2007
      and 8,500 shares at June 30, 2006                                                     (22,937)                  (235)
   Accumulated deficit                                                                      (12,126)               (19,765)
   Accumulated other comprehensive income                                                       108                    291
                                                                                       ------------           ------------
      Total shareholders' equity                                                            139,892                146,924
                                                                                       ------------           ------------
        Total liabilities and shareholders' equity                                     $    190,838           $    199,007
                                                                                       ============           ============

See accompanying notes to financial statements.


                                      F-5


                                   NUCO2 INC.
                              STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                                           Fiscal Year Ended June 30,
                                                                                --------------------------------------------
                                                                                   2007             2006              2005
                                                                                ---------        ---------         ---------
Revenues:
           Product sales                                                        $  85,865        $  75,959         $  60,518
           Equipment rentals                                                       44,263           40,237            36,822
                                                                                ---------        ---------         ---------
Total revenues                                                                    130,128          116,196            97,340
                                                                                ---------        ---------         ---------

Costs and expenses:
           Cost of products sold, excluding depreciation
                 and amortization                                                  55,835           49,397            41,278
           Cost of equipment rentals, excluding depreciation
                 and amortization                                                   6,714            3,086             2,391
           Selling, general and administrative expenses                            28,521           24,146            17,020
           Depreciation and amortization                                           20,059           18,333            16,484
           Loss on asset disposal                                                   2,260            1,733             1,332
                                                                                ---------        ---------         ---------
                                                                                  113,389           96,695            78,505
                                                                                ---------        ---------         ---------

Operating income                                                                   16,739           19,501            18,835

Loss on early extinguishment of debt                                                   --               --             5,817
Unrealized (gain) on financial instrument                                              --             (177)               --
Interest expense                                                                    2,207            1,989             6,985
                                                                                ---------        ---------         ---------

Income before income taxes                                                         14,532           17,689             6,033
Provision for (benefit from) income taxes                                           6,893            7,341           (19,558)
                                                                                ---------        ---------         ---------
Net income                                                                      $   7,639        $  10,348         $  25,591
                                                                                =========        =========         =========

Weighted average number of common and common
      equivalent shares outstanding
           Basic                                                                   15,593           15,427            12,808
                                                                                =========        =========         =========
           Diluted                                                                 15,886           15,997            14,295
                                                                                =========        =========         =========

Net income per basic share                                                      $    0.49        $    0.67         $    1.98
                                                                                =========        =========         =========
Net income per diluted share                                                    $    0.48        $    0.65         $    1.79
                                                                                =========        =========         =========

See accompanying notes to financial statements.


                                      F-6


                                   NUCO2 INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                          Common Stock Issued   Additional        Treasury Stock
                                                                        ----------------------    Paid-In       -------------------
                                                                          Shares       Amount     Capital       Shares     Amount
                                                                        ----------  ----------  ----------      -------  ----------
 Balance, June 30, 2004                                                 10,840,831  $       11  $   96,185           --          --
 Comprehensive income:
   Net income                                                                   --          --          --           --          --
   Other comprehensive (loss):
     Interest rate swap transaction                                             --          --          --           --          --
 Total comprehensive income
 Conversion of 5,000 shares of Redeemable
       Preferred Stock                                                     754,982           1       7,006           --          --
 Conversion of 2,500 shares of Redeemable
       Preferred Stock                                                     247,420          --       3,196           --          --
 Issuance of 953,285 shares of common stock - exercise of                  953,285           1         742           --          --
 warrants
 Issuance of 462,674 shares of common stock - exercise of                  462,674          --       3,500           --          --
 options
 Tax effect of disqualifying dispositions - exercise of options                 --          --       3,080           --          --
 Issuance of 2,041,713 shares of common stock                            2,041,713           2      45,513           --          --
 Redeemable preferred stock dividend                                            --          --        (182)          --          --
                                                                        ----------  ----------  ----------      -------  ----------
Balance, June 30, 2005                                                  15,300,905          15     159,040           --          --
Comprehensive income:                                                           --
  Net income                                                                    --          --          --           --          --
  Other comprehensive income:
    Interest rate swap transaction (net of reclassification                     --          --          --           --          --
adjustment)
Total comprehensive income                                                      --          --          --
Share-based compensation                                                        --          --       3,298           --          --
Excess tax benefits from share-based arrangements                               --          --       1,756           --          --
Issuance of 286,679 shares of common stock - exercise of options           286,679           1       2,483           --          --
Purchase of treasury stock                                                      --          --         235        8,500        (235)
Issuance of 66,458 shares of common stock - exercise of warrants            66,458          --          --           --          --
Additional costs related to prior year stock issuance                           --          --        (195)          --          --
                                                                        ----------  ----------  ----------      -------  ----------
Balance, June 30, 2006                                                  15,654,042          16     166,617        8,500        (235)
Comprehensive income:
  Net income                                                                    --          --          --           --          --
  Other comprehensive income:
    Interest rate swap transaction                                              --          --          --           --          --
Total comprehensive income                                                      --          --
Share-based compensation                                                        --          --       4,194           --          --
Excess tax benefits from share-based arrangements                               --          --       1,285           --          --
Issuance of 267,024 shares of common stock - exercise of options           267,024          --       2,735           --          --
Purchase of treasury stock                                                      --          --          --      912,909     (22,702)
                                                                        ----------  ----------  ----------      -------  ----------
Balance, June 30, 2007                                                  15,921,066  $      .16  $  174,831      921,409  $  (22,937)
                                                                        ==========  ==========  ==========      =======  ==========

See accompanying notes to financial statements.


                                      F-7


                                   NUCO2 INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                                                 Accumulated
                                                                                                    Other             Total
                                                                                 Accumulated     Comprehensive     Shareholders'
                                                                                   Deficit       Income (Loss)        Equity
                                                                                 -----------     -------------     -------------
Balance, June 30, 2004                                                           $ (55,704)       $     264        $  40,756
Comprehensive income:
  Net income                                                                        25,591               --           25,591
  Other comprehensive (loss):
    Interest rate swap transaction                                                      --              (22)             (22)
                                                                                                                   ---------

Total comprehensive income                                                                                            25,569
Conversion of 5,000 shares of Redeemable
       Preferred Stock                                                                  --               --            7,007
Conversion of 2,500 shares of Redeemable
       Preferred Stock                                                                  --               --            3,196
Issuance of 953,285 shares of common stock - exercise of warrants                       --               --              743
Issuance of 462,674 shares of common stock - exercise of options                        --               --            3,500
Tax effect of disqualifying dispositions -- exercise of options                         --               --            3,080
Issuance of 2,041,713 shares of common stock                                            --               --           45,515
Redeemable preferred stock dividend                                                     --               --             (182)
                                                                                 ---------        ---------        ---------
Balance, June 30, 2005                                                             (30,113)             242          129,184
Comprehensive income:
  Net income                                                                        10,348               --           10,348
  Other comprehensive income:
    Interest rate swap transaction (net of reclass adjustment)                          --               49               49
                                                                                                                   ---------
Total comprehensive income                                                                                            10,397
Share-based compensation                                                                --               --            3,298
Excess tax benefits from share-based arrangements                                       --               --            1,756
Issuance of 286,679 shares of common stock - exercise of options                        --               --            2,484
Purchase of treasury stock                                                              --               --               --
Issuance of 66,458 shares of common stock - exercise of warrants                        --               --               --
Additional costs related to prior year stock issuance                                   --               --             (195)
                                                                                 ---------        ---------        ---------
Balance, June 30, 2006                                                             (19,765)             291          146,924
Comprehensive income:
  Net income                                                                         7,639               --            7,639
  Other comprehensive income:
    Interest rate swap transaction                                                      --             (183)            (183)
                                                                                                                   ---------
Total comprehensive income                                                                                             7,456
Share-based compensation                                                                --               --            4,194
Excess tax benefits from share-based arrangements                                       --               --            1,285
Issuance of 267,024 shares of common stock - exercise of options                        --               --            2,735
Purchase of treasury stock                                                              --               --          (22,702)
                                                                                 ---------        ---------        ---------
Balance, June 30, 2007                                                           $ (12,126)       $     108        $ 139,892
                                                                                 =========        =========        =========

See accompanying notes to financial statements.


                                      F-8


                                   NUCO2 INC.
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                                                              Year Ended June 30,
                                                                                              -------------------
                                                                                     2007             2006             2005
                                                                                  --------         --------         --------
Cash flows from operating activities:
Net income                                                                        $  7,639         $ 10,348         $ 25,591
  Adjustments to reconcile net income to net cash
     provided by operating activities:
        Depreciation and amortization of property and equipment                     16,652           15,344           13,751
        Bad debt expense                                                             1,816              908              595
        Amortization of other assets                                                 3,407            2,989            2,733
        Amortization of original issue discount                                         --               --              318
        Paid-in-kind interest                                                           --               --            1,014
        Loss on asset disposal                                                       2,260            1,733            1,332
        Loss on early extinguishment of debt                                            --               --            5,817
        Change in net deferred tax asset                                             6,613            7,070          (19,638)
        Share-based compensation                                                     4,194            3,298               --
        Excess tax benefits from share-based arrangements                           (1,285)          (1,756)              --
        Unrealized (gain) on financial instrument                                       --             (177)              --
        Changes in operating assets and liabilities:
           Decrease (increase) in:
             Trade accounts receivable                                                (684)          (5,296)          (3,022)
             Inventories                                                                 5              (44)             (33)
             Prepaid insurance expense and deposits                                  2,725           (1,566)             912
             Prepaid expenses and other current assets                                (132)            (385)            (191)
           Increase (decrease) in:
             Accounts payable                                                         (822)           1,705              599
             Accrued expenses                                                          871               24              201
             Accrued insurance                                                      (2,489)             (53)             166
             Accrued payroll                                                         1,704             (812)            (566)
             Accrued interest                                                          (43)              53             (328)
             Other current liabilities                                                 (65)              12               23
             Customer deposits                                                         443              183              377
                                                                                  --------         --------         --------

           Net cash provided by operating activities                                42,809           33,578           29,651
                                                                                  --------         --------         --------

Cash flows from investing activities:
  Proceeds from disposal of property and equipment                                      54               --               --
  Purchase of property and equipment                                               (21,117)         (29,776)         (19,371)
  Increase in deferred lease acquisition costs                                      (2,319)          (2,352)          (2,244)
  Acquisition of businesses                                                             --           (9,543)         (17,172)
  (Increase) decrease in other assets                                                  (35)             (11)               6
                                                                                  --------         --------         --------
           Net cash used in investing activities                                  $(23,417)        $(41,682)        $(38,781)
                                                                                  --------         --------         --------

See accompanying notes to financial statements.


                                      F-9


                                                             NUCO2 INC.
                                                      STATEMENTS OF CASH FLOWS
                                                           (IN THOUSANDS)
                                                            (CONTINUED)

                                                                                             Year Ended June 30,
                                                                                             -------------------
                                                                                   2007             2006             2005
                                                                                   ----             ----             ----
Cash flows from financing activities:
  Net proceeds from issuance of long-term debt
     and subordinated debt and warrants                                         $ 15,750         $ 20,850         $ 59,350
  Repayment of long-term debt and subordinated debt                              (16,450)         (17,400)         (98,281)
  Purchase of treasury stock                                                     (22,531)              --               --
  Proceeds from issuance of common stock                                              --               --           46,632
  Issuance costs - common stock                                                       --             (195)          (1,117)
  Increase in deferred financing costs                                                (8)             (18)          (1,234)
  Exercise of options and warrants                                                 2,564            2,484            4,243
  Excess tax benefits for share-based arrangements                                 1,285            1,756               --
                                                                                --------         --------         --------

           Net cash (used in) provided by financing activities                   (19,390)           7,477            9,593
                                                                                --------         --------         --------

Increase (decrease) in cash and cash equivalents                                       2             (627)             463
Cash and cash equivalents, beginning of year                                         341              968              505
                                                                                --------         --------         --------

Cash and cash equivalents, end of year                                          $    343         $    341         $    968
                                                                                ========         ========         ========

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

     Interest                                                                   $  2,251         $  1,936         $  5,981
                                                                                ========         ========         ========

     Income taxes                                                               $    374         $    473         $    125
                                                                                ========         ========         ========

Supplemental disclosure of non-cash investing and financing activities:

      During the fiscal year ended June 30,  2006, a certain  officer  exercised
stock options in a non-cash transaction. The officer surrendered 8,500 shares of
previously acquired common stock in exchange for 34,881 newly issued shares. The
Company recorded $235, the market value of the surrendered  shares,  as treasury
stock.  During the fiscal year ended June 30,  2007,  this  officer  surrendered
6,800 shares of  previously  acquired  common stock in exchange for 25,366 newly
issued shares.  The Company  recorded $171, the market value of the  surrendered
shares, as treasury stock.

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

See accompanying notes to financial statements.


                                      F-10


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

      (a)   DESCRIPTION OF BUSINESS

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

      (b)   CASH AND CASH EQUIVALENTS

            The Company  considers all highly liquid debt instruments  purchased
with an original  maturity of three months or less to be cash  equivalents.  The
Company  maintains cash balances with a financial  institution in an amount that
exceeds the federal government deposit insurance.

      (c)   INVENTORIES

            Inventories,  consisting primarily of carbon dioxide gas, are stated
at the lower of cost or market.  Cost is determined  by the first-in,  first-out
method.

      (d)   PROPERTY AND EQUIPMENT

            Property  and  equipment  are stated at cost.  The Company  does not
depreciate  bulk systems held for  installation  until the systems are ready for
their  intended use and leased to  customers.  Upon  installation,  the systems,
component  parts  and  direct  costs   associated  with  the   installation  are
transferred to the leased equipment  account.  These direct costs are associated
with successful  placements of such systems with customers  under  noncancelable
contracts  and which would not be  incurred by the Company but for a  successful
placement and are  amortized  over the life of the original  customer  contract.
Upon  early  service  termination,  the  unamortized  portion  of  direct  costs
associated  with the  installation  are  recognized  as a period  expense in the
statements of income.  Such policy is analogous to SFAS No. 91,  "ACCOUNTING FOR
NONREFUNDABLE  FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND
INITIAL  DIRECT COSTS OF LEASES."  Depreciation  and  amortization  are computed
using the straight-line method over the estimated useful lives of the respective
assets or the lease terms for leasehold improvements, whichever is shorter.

            The depreciable lives of property and equipment are as follows:

                                                             Estimated Life
                                                             --------------

            Leased equipment                                    5-20 years
            Equipment and cylinders                             3-20 years
            Vehicles                                            3-5 years
            Computer equipment and software                     3-7 years
            Office furniture and fixtures                       5-7 years
            Leasehold improvements                              lease term

      (e)   GOODWILL AND OTHER INTANGIBLE ASSETS

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


                                      F-11


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      (f)   IMPAIRMENT OF LONG-LIVED ASSETS

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

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

      (g)   DEFERRED FINANCING COST, NET

            Financing  costs are  amortized on a  straight-line  method over the
term of the related  indebtedness.  Accumulated  amortization of financing costs
was $188 and $101 at June 30, 2007 and 2006, respectively.

      (h)   DEFERRED LEASE ACQUISITION COSTS, NET

            Deferred lease acquisition costs, net, consist of commissions
associated with the acquisition of new leases and lease renewals are being
amortized on a straight-line basis over the life of the related leases,
generally six years which is consistent with our standard contract. Accumulated
amortization of deferred lease acquisition costs was $8,904 and $7,855 at June
30, 2007 and 2006, respectively. Upon early service termination, the unamortized
portion of deferred lease acquisition costs are expensed as a component of
operating expenses.

      (i)   REVENUE RECOGNITION

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

            The Company  recognizes  revenue in  accordance  with EITF Issue No.
00-21, "REVENUE  ARRANGEMENTS WITH MULTIPLE  DELIVERABLES." EITF 00-21 addresses
certain aspects of the accounting by a vendor for  arrangements  under which the
vendor will perform multiple revenue generating  activities.  The Company's bulk
CO2 budget plan agreements  provide for a fixed monthly payment to cover the use
of a bulk CO2 system and a predetermined maximum quantity of CO2. As of June 30,
2007,  approximately  69,000 of the Company's  customer  locations utilized this
plan.  Accordingly,  revenue  attributable to the lease of equipment,  including
equipment  leased under the budget plan,  is recorded on a  straight-line  basis
over the term of the lease and  revenue  attributable  to the  supply of CO2 and
other gases,  including  CO2 provided  under the budget plan,  is recorded  upon
delivery to the customer.

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

            Because of the large number of  customers  under the budget plan and
the fact that the  anniversary  dates for  determining  maximum  quantities  are
spread  throughout the year, the Company's  methodology  for applying EITF 00-21
involves the use of estimates and assumptions to separate the aggregate  revenue
stream  derived from  equipment  rentals to budget plan  customers,  and also to

                                      F-12


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

approximate  the  recognition of revenue from CO2 sales to budget plan customers
upon delivery. The Company believes that the adoption of EITF 00-21 has the most
impact  on the  recognition  of  revenue  on a  quarterly  basis  as  CO2  usage
fluctuates  during  a  fiscal  year  based  on  factors  such  as  weather,  and
traditional summer and holiday periods. However, over a twelve-month period, the
Company believes that the effect is less significant as seasonal  variations are
largely  eliminated and CO2 allowances under budget plan agreements are measured
and reset annually.

      (j)   INCOME TAXES AND OTHER

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

            The Company has a policy of  collecting  property tax amounts due to
governmental authorities from its customers.  These payments are remitted to the
appropriate  taxing  authority and included in our statements of income on a net
basis.


      (k)   NET INCOME PER COMMON SHARE

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

      (l)   USE OF ESTIMATES

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

      (m)   EMPLOYEE BENEFIT PLAN

            On June 1, 1996, the Company  adopted a deferred  compensation  plan
under Section  401(k) of the Internal  Revenue  Code,  which covers all eligible
employees.  Under the  provisions  of the plan,  eligible  employees may defer a
percentage of their compensation subject to the Internal Revenue Service limits.
Contributions  to the plan are made by  employees  and matched at the  Company's
discretion,  up to a maximum of 1% of employee's wages. For the years ended June
30,  2007,  2006  and  2005,  the  Company   contributed  $123,  $115  and  $94,
respectively.

      (n)   STOCK-BASED COMPENSATION

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

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


                                      F-13


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

      (o)   VENDOR REBATES

            Pursuant  to EITF  02-16,  "ACCOUNTING  BY A CUSTOMER  (INCLUDING  A
RESELLER)  FOR  CERTAIN  CONSIDERATION  RECEIVED  FROM A  VENDOR,"  the  Company
recognizes  rebates received from its suppliers of bulk CO2 tanks as a reduction
of capitalizable  cost. The Company  received  rebates of $907,  $1,104 and $886
during the fiscal years ended June 30, 2007, 2006, and 2005, respectively.

      (p)   TRADE RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

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

            As part of the  ongoing  evaluation  of its  trade  receivables  and
collections  from its customers during the year ended June 30, 2007, the Company
determined  that tank billings to delinquent  customers  should be recorded on a
cash recognition  basis. As a result,  the accounts  receivable related to these
tank billings have been written off and are no longer included in gross accounts
receivable  or the  related  allowance  for  doubtful  accounts.  Such change is
immaterial to the Company's revenues and statement of income.

      (q)   RECENT ACCOUNTING PRONOUNCEMENTS

      On  September  13, 2006 the  Securities  and Exchange  Commission  ("SEC")
issued Staff Accounting  Bulletin No. 108 ("SAB 108"),  "CONSIDERING THE EFFECTS
OF PRIOR YEAR  MISSTATEMENTS  WHEN  QUALIFYING  MISSTATEMENTS  IN  CURRENT  YEAR
FINANCIAL  STATEMENTS."  The  interpretations  in SAB 108 are  being  issued  to
address diversity in practice in quantifying  financial statement  misstatements
and the potential under current practice for the build up of improper amounts on
the  balance  sheet.  SAB 108 is  effective  for fiscal  years  beginning  after
November 15, 2006. The Company is currently  evaluating the impact of SAB 108 on
our results of operations;  however the Company does not expect the impact to be
material to our financial position, results of operations or cash flows.

      In September  2006,  the Financial  Accounting  Standards  Board  ("FASB")
issued SFAS No. 157, "FAIR VALUE  MEASUREMENTS"  ("SFAS 157"). SFAS 157 provides
enhanced  guidance for using fair value to measure assets and liabilities.  SFAS
157 also  responds to  investors'  requests for expanded  information  about the
extent to which  companies  measure assets and  liabilities  at fair value,  the
information   used  to  measure  fair  value,  and  the  effect  of  fair  value
measurements on earnings.  SFAS 157 defines fair value,  establishes a framework
for  measuring  fair value in  generally  accepted  accounting  principles,  and
expands disclosures about fair value measurements and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods  within  those fiscal  years.  SFAS 157 applies  under other  accounting
pronouncements  that require or permit fair value  measurements.  The Company is
currently  evaluating  the impact of this statement on our results of operations
and financial position.

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


                                      F-14


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

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

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

NOTE 2 - PROPERTY AND EQUIPMENT, NET

         Property and equipment, net consists of the following:

                                                                                                   As of June 30,
                                                                                        -----------------------------------
                                                                                           2007                     2006
                                                                                        -----------             -----------
                  Leased equipment                                                      $   197,131             $   183,204
                  Equipment and cylinders                                                    26,294                  24,590
                  Vehicles                                                                    1,097                   1,298
                  Computer equipment and software                                             5,715                   5,588
                  Office furniture and fixtures                                               2,178                   2,155
                  Leasehold improvements                                                      2,210                   2,083
                                                                                        -----------              ----------
                                                                                            234,625                 218,918
                  Less accumulated depreciation and amortization                            112,261                  99,315
                                                                                        -----------              ----------

                                                                                        $   122,364              $  119,603
                                                                                        ===========              ==========

            Total accumulated  depreciation related to leased equipment was $91,
875 and  $80,885 at June 30,  2007 and 2006,  respectively.  Included  in leased
equipment  are  capitalized  component  parts and direct costs  associated  with
installation  of  equipment  leased to others of $59,558 and $54,652 at June 30,
2007 and 2006, respectively.  Accumulated depreciation and amortization of these
costs was  $37,527 and  $33,248 at June 30,  2007 and 2006,  respectively.  Upon
early service  termination,  the Company writes off the remaining net book value
of direct costs associated with the installation of equipment.

      Depreciation  and  amortization  of property  and  equipment  was $16,652,
$15,344,  and  $13,751  for the  years  ended  June 30,  2007,  2006,  and 2005,
respectively.

NOTE 3 - ACQUISITIONS

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


                                      F-15


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

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

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

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

      The purchase  price was  allocated  between  tangible  assets,  intangible
assets, and goodwill as follows:  $1.5 million for tangible assets, $1.9 million
for intangible  assets and $1.8 million for goodwill.  Tangible assets are being
depreciated over a weighted average life of 8.3 years,  while intangible assets,
excluding  goodwill,  are being  amortized  over a weighted  average life of 4.9
years.

      On June 30, 2006,  the Company  acquired  approximately  3,000  additional
customer locations and 2,400 bulk CO2 tanks, most of which were in service, from
CCE for approximately  $4.9 million ("CCE II"). The purchase price was allocated
between  tangible and  intangible  assets as follows:  $1.8 million for tangible
assets,  and $1.8 million for  intangible  assets and $1.3 million for goodwill.
Tangible  assets  are being  depreciated  over a weighted  average  life of 11.0
years, while intangible assets,  excluding goodwill,  are being amortized over a
weighted average life of 10.0 years.

      As of December 31, 2006,  the Company  evaluated the assets  received from
CCE,  including  customer  accounts  and  bulk CO2  tanks,  as  compared  to the
preliminary  listing  provided by CCE and adjusted the purchase price allocation
accordingly.  The final  allocation  resulted in a decrease in customer lists of
$0.1 million, offset by an increase in goodwill of $0.1 million.

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

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


                                      F-16


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Unaudited Pro Forma:                                  Fiscal Year Ended June 30,
                                                      --------------------------
                                                          2006          2005
                                                       ----------    ----------
Total revenues                                         $  119,941    $  106,527
Operating income (a)                                       21,033        21,719
Income before provision
    for income taxes                                       18,888         8,074
Provision for (benefit from) income taxes                   7,391       (19,473)
                                                       ----------    ----------
Net income                                                 11,497        27,547
Preferred stock dividends                                      --          (182)
                                                       ----------    ----------
Net income available to
    common shareholders                                $   11,497    $   27,365
                                                       ==========    ==========
Basic income per share                                 $     0.75    $     2.14
                                                       ==========    ==========
Diluted income per share                               $     0.72    $     1.93
                                                       ==========    ==========

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

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

      The Company adopted SFAS 142 as of July 1, 2001,  resulting in no goodwill
amortization  expense for the years ended June 30, 2007, 2006 and 2005. Goodwill
and indefinite life intangible assets are no longer amortized but are subject to
annual impairment tests. The Company  determined that there was no impairment of
goodwill during 2007, 2006 and 2005.

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

                                                     Accumulated      Net Book
As of June 30, 2007:                    Cost        Amortization       Value
                                    ------------    ------------    ------------
Goodwill                            $     30,915    $      5,006    $     25,909
Non-competition agreements                 3,840           3,328             512
Customer lists                             9,258           2,497           6,761
                                    ------------    ------------    ------------
                                    $     44,013    $     10,831    $     33,182
                                    ============    ============    ============

As of June 30, 2006
Goodwill                            $     30,800    $      5,006    $     25,794
Non-competition agreements                 3,840           2,659           1,181
Customer lists                             9,823           1,451           8,372
                                    ------------    ------------    ------------
                                          44,463    $      9,116    $     35,347
                                    ============    ============    ============


Changes in goodwill are summarized as follows:

Year Ended June 30,         Beginning     Additions      Disposals        Ending
-------------------         ---------     ---------      ---------       -------
2005                         $24,228         2,872              --       $27,100
2006                         $27,100       $ 3,700              --       $30,800
2007                         $30,800       $   115              --       $30,915

      Amortization  expense for other intangible assets was $1,790,  $1,524, and
$986 for the years ended June 30, 2007, 2006 and 2005, respectively.

      Estimated  amortization expense for each of the next five years is $1,496,
$1,191,  $828, $744 and $744 for fiscal years ending June 30, 2008,  2009, 2010,
2011 and 2012, respectively.


                                      F-17


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 5 - LEASES

      The  Company  leases  equipment  to its  customers  generally  pursuant to
five-year or six-year  non-cancelable  operating  leases which expire on varying
dates through October 2013. At June 30, 2007,  future minimum  payments due from
customers  include,  where  applicable,  amounts for a continuous  supply of CO2
under the budget plan,  which provides  bundled pricing for tank rental and CO2.
The revenue stream has been segregated in conformity with EITF 00-21 between the
estimated  rental of equipment and the sale of CO2. The following table presents
the separate minimum revenue streams  attributable to the lease of the equipment
and the sale of the CO2:

          Year Ended June 30,           Equipment                     CO2
          -------------------           ---------                  ---------
          2008                          $ 33,941                   $  24,353
          2009                            28,973                      20,739
          2010                            21,402                      15,546
          2011                            15,096                      11,111
          2012                             9,299                       6,926
          Thereafter                       3,273              `        2,276
                                        --------                   ---------
                                        $111,984                   $  80,951
                                        ========                   =========

NOTE 6 - LONG-TERM DEBT

Long-term debt consists of the following:

                                                                                       As of June 30,
                                                                                       --------------
                                                                                      2007        2006
                                                                                    --------    --------

Notes payable to banks under credit facility. Drawings at June 30, 2007 and 2006
    are at a weighted average interest rate of 6.8% and 6.7%, respectively.         $ 34,750    $ 35,450

Less current maturities of long-term debt                                                 --          --
                                                                                    --------    --------
    Long-term debt, excluding current maturities                                    $ 34,750    $ 35,450
                                                                                    ========    ========

      (a) PREVIOUS FACILITIES

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

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

      (b) CURRENT FACILITY

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


                                      F-18


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      --------------------------------------------------------------------------
      Pricing        Consolidated Leverage         Eurodollar Rate     Base Rate
       Level                 Ratio                      Loans            Loans
      --------------------------------------------------------------------------
         I        Greater than or equal to              2.000%          0.500%
                  2.50x
      --------------------------------------------------------------------------
         II       Less than 2.50x but greater           1.750%          0.250%
                  than or equal to 2.00x
      --------------------------------------------------------------------------
         III      Less than 2.00x but greater           1.500%          0.000%
                  than or equal to 1.50x
      --------------------------------------------------------------------------
         IV       Less than 1.50x but greater           1.250%          0.000%
                  than or equal to 0.50x
      --------------------------------------------------------------------------
         V        Less than 0.50x                       1.000%          0.000%
      --------------------------------------------------------------------------

      Interest  is payable  periodically  on  borrowings  under the 2005  Credit
Facility. The 2005 Credit Facility is uncollateralized. The Company is required,
on a  quarterly  basis,  to assess and meet  certain  affirmative  and  negative
covenants, including financial covenants. These financial covenants are based on
a measure that is not consistent with accounting  principles  generally accepted
in the United  States of America.  Such  measure is EBITDA (as  defined),  which
represents earnings before interest,  taxes,  depreciation and amortization,  as
further  modified  by certain  defined  adjustments.  The  failure to meet these
covenants,  absent a waiver or amendment, would place the Company in default and
cause the debt outstanding under the 2005 Credit Facility to immediately  become
due and payable.  In connection  with the  Company's  share  repurchase  program
announced  during the quarter ended March 31, 2007, the 2005 Credit Facility was
amended to modify certain covenants (see Note 9b). The Company was in compliance
with all  covenants  under the 2005 Credit  Facility as of the first  assessment
date on June 30, 2005 and through June 30, 2007.

      As of June 30, 2007, a total of $34.8  million was  outstanding  under the
2005 Credit Facility,  primarily  consisting of Libor  (Eurodollar  Rate) loans,
with a weighted  average  interest rate of 6.8% per annum.  All borrowings as of
June 30, 2007 and 2006 are under a long-term  credit  facility  and there are no
short-term  obligations  that are due and payable under the agreement.  The debt
agreement provides for letters of credit, however the Company had no outstanding
letters of credit as of June 30, 2007 and June 30, 2006.

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

      (c) HEDGING ACTIVITIES

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

      The Company uses  derivative  instruments  to manage  exposure to interest
rate risks. The Company's objectives for holding derivatives are to minimize the
risks using the most effective methods to eliminate or reduce the impact of this
exposure.

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


                                      F-19


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

date. As of March 15, 2004, the Swap met the  requirements to be designated as a
cash flow hedge and was deemed a highly effective transaction.  Accordingly, the
Company recorded $0.2 million  representing the change in fair value of the Swap
from March 15, 2004 through September 15, 2005, as other  comprehensive  income,
and  the  previously  recorded  loss of  $0.2  million  was  reversed  upon  the
termination  of the Swap in  September  2005  and  recognized  in the  Company's
statement of operations during the fiscal year ended June 30, 2006.

      In order to reduce the  Company's  exposure  to  increases  in  Eurodollar
rates, and consequently to increases in interest  payments,  the Company entered
into a new interest rate swap  transaction  (the "2005 Swap"),  comprised of two
instruments  ("Swap A" and "Swap B"), on September  28, 2005,  with an effective
date of October 3, 2005. Swap A, in the amount of $15.0 million (the "A Notional
Amount"),  matures on October 3, 2008 and Swap B, in the amount of $5.0  million
(the "B Notional Amount"), matured on April 3, 2007. Pursuant to Swap A and Swap
B,  the  Company  pays a fixed  interest  rate of 4.69%  and  4.64%  per  annum,
respectively,  and receives a Eurodollar-based  floating rate. The effect of the
2005 Swap is to  neutralize  any changes in  Eurodollar  rates on the A Notional
Amount and the B Notional  Amount.  The 2005 Swap meets the  requirements  to be
designated  as a cash flow hedge and is deemed a highly  effective  transaction.
Accordingly,  changes  in the fair  value of Swap A and Swap B are  recorded  as
other  comprehensive   income.  The  Company  recorded  $0.3  million  as  other
comprehensive income during the fiscal year ended June 30, 2006 and $0.2 million
as other  comprehensive  loss during the year ended June 30, 2007,  representing
the change in fair value of the 2005 Swap during those periods.

NOTE 7 - SUBORDINATED DEBT

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

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

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

      During fiscal 2005,  warrants to purchase  893,956 shares of the Company's
common stock issued in connection with the 1997 Notes,  1999 Notes and New Notes
were  exercised  for  proceeds of $743.  In  connection  with  certain  cashless
exercises,  warrants to purchase  389,528  shares of the Company's  common stock
were  canceled.  As of June 30,  2005 and  thereafter,  no  warrants  issued  in
connection with the New Notes were outstanding.

NOTE 8 - REDEEMABLE PREFERRED STOCK

      In May 2000,  the Company sold 5,000 shares of its Series A 8%  Cumulative
Convertible  Preferred Stock, no par value (the "Series A Preferred Stock"), for
$1,000 per share (the initial  "Liquidation  Preference").  Cumulative dividends
were payable quarterly in arrears at the rate of 8% per annum on the Liquidation
Preference,  and, to the extent not paid in cash,  were added to the Liquidation
Preference.  Shares of the Series A Preferred Stock were convertible into shares
of common stock at any time at a conversion  price of $9.28 per share. In August
2004,  the holder of the Series A  Preferred  Stock  converted  its shares  into
754,982  shares  of common  stock,  and  $7,007,  representing  the  Liquidation
Preference,  was reclassified to common stock and additional  paid-in capital on
the Company's balance sheet.


                                      F-20


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

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

NOTE 9 - SHAREHOLDERS' EQUITY

      (a) OFFERING

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

      (b) SHARE REPURCHASE PLAN

      On January 31,  2007,  the Company  publicly  announced  that its Board of
Directors  authorized  a share  repurchase  program  under which the Company may
repurchase up to $50 million of its common shares through  December 31, 2007. As
of June 30, 2007,  the Company  purchased a total of 906,109 common shares at an
average  price of  $24.87  per share for an  aggregate  purchase  price of $22.5
million.  As of June  30,  2007,  the  remaining  authorized  amount  for  share
repurchases was $27.5 million.

      (c) WARRANTS

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

      (d) NON-EMPLOYEE DIRECTOR PLANS

      From  time to time,  the  Company  grants to each  non-employee  directors
options to purchase shares of common stock. The exercise price for all grants is
equal to the average  closing  price of the common stock on the Nasdaq  National
Market for the 20 trading days prior to the grant date.  All options vest in two
to five equal annual  installments  commencing upon issuance and have a ten-year
term.  During the fiscal year ended June 30, 2006, an additional  18,000 options
were granted to two  non-employee  directors at an exercise  price of $23.14 per
share.

      The  weighted-average  fair value per share of options  granted during the
fiscal year ended June 30, 2006 was $5.27.


                                      F-21


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

                                                         Weighted Average
                                                        Exercise Price Per
                                Options Outstanding           Option           Options Exercisable
                                -------------------     -------------------    -------------------
Outstanding at June 30, 2004                136,000     $              7.76                 78,667
         Exercised                          (51,333)                   6.88
                                -------------------
Outstanding at June 30, 2005                 84,667                    8.29                 66,001
         Granted                             18,000                   23.14
                                -------------------
Outstanding at June 30, 2006                102,667                   10.90                 94,667
         Exercised                           (2,000)                   4.85
                                -------------------
Outstanding at June 30, 2007                100,667     $             11.02                100,667
                                ===================

      The following table sets forth certain information as of June 30, 2007:

                                      Options Outstanding                                       Options Exercisable
                    ------------------------------------------------------    ------------------------------------------------------
                                   Weighted      Weighted                                    Weighted      Weighted
                                    Average       Average       Aggregate                     Average       Average       Aggregate
Range of Exercise     Options      Remaining     Exercise       Intrinsic       Options      Remaining     Exercise       Intrinsic
      Prices        Outstanding      Life          Price       Value (000)    Exercisable      Life          Price       Value (000)
-----------------   -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
$ 4.85 - $10.00          76,667          5.23   $      7.76    $     1,373         76,667          5.23   $      7.76    $     1,373
$ 10.01 - $15.00             --            --            --             --             --            --            --             --
$ 15.01 - $20.00          6,000          6.75         16.25             57          6,000          6.75         16.25             57
$ 20.01 - $23.14         18,000          7.45         23.14             46         18,000          7.45         23.14             46
                    -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
                        100,667          5.72   $     11.02    $     1,475        100,667          5.72   $     11.02    $     1,475
                    ===========   ===========   ===========    ===========    ===========   ===========   ===========    ===========

      (e) EMPLOYEE STOCK OPTION PLANS

      In 1995,  the Board of  Directors  adopted the 1995 Stock Option Plan (the
"1995  Plan"),  which  terminated  in November  2005.  Under the 1995 Plan,  the
Company reserved  2,400,000 shares of common stock for employees of the Company.
Under the terms of the 1995 Plan,  options  granted were either  incentive stock
options or  non-qualified  stock options.  The exercise price of incentive stock
options was  required  to be at least equal to 100% of the fair market  value of
the Company's  common stock at the date of the grant,  and the exercise price of
non-qualified stock options was not to be less than 75% of the fair market value
of the Company's common stock at the date of the grant. The maximum term for all
options was ten years.  Options  granted prior to  termination  of the 1995 Plan
generally vest in equal annual  installments from three to five years,  though a
limited number of grants were partially vested at the grant date. As of June 30,
2007,  options to purchase  841,981  shares of the  Company'  common  stock were
outstanding  under the 1995 Plan. In addition,  in September  2005, the Board of
Directors  adopted  the 2005  Employee  Stock  Option  Plan (the "2005  Employee
Plan"). Under the 2005 Employee Plan, the Company has reserved 250,000 shares of
common stock for employees of the Company.

      The  weighted-average  fair value per share of options  granted  under the
1995 Plan  during the fiscal  years  ended June 30,  2006 and 2005 was $5.42 and
$7.80, respectively. No options were granted under the 1995 Plan during the year
ended June 30, 2007.


                                      F-22


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      The following table summarizes transactions pursuant to the 1995 Plan:

                                                         Weighted Average
                                                             Exercise
                                Options Outstanding       Price Per Option     Options Exercisable
                                -------------------     -------------------    -------------------
Outstanding at June 30, 2004              1,504,523     $             10.55                865,653
         Granted                            290,500                   25.42
         Expired or canceled                (12,713)                  13.50
         Exercised                         (362,408)                   7.66
                                -------------------
Outstanding at June 30, 2005              1,419,902                   14.31                921,002
         Granted                              8,225                   25.52
         Expired or canceled                (18,174)                  22.04
         Exercised                         (286,679)                   9.48
                                -------------------
Outstanding at June 30, 2006              1,123,274                   15.49                877,661
         Expired or canceled                (29,019)                  22.20
         Exercised                         (252,274)                   9.59
                                -------------------
Outstanding at June 30, 2007                841,981     $             17.03                774,181
                                ===================

      The following table sets forth certain information as of June 30, 2007:

                                      Options Outstanding                                       Options Exercisable
                    ------------------------------------------------------    ------------------------------------------------------
                                   Weighted      Weighted                                    Weighted      Weighted
                                    Average       Average       Aggregate                     Average       Average       Aggregate
Range of Exercise     Options      Remaining     Exercise       Intrinsic       Options      Remaining     Exercise       Intrinsic
      Prices        Outstanding      Life          Price       Value (000)    Exercisable      Life          Price       Value (000)
-----------------   -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
$ 4.49 - $10.00         145,407          4.66   $      7.83    $     2,594        142,220          4.62   $      7.81    $     2,540
$ 10.01 - $15.00        287,108          4.98         12.77          3,704        287,108          4.98         12.77          3,704
$ 15.01 - $20.00        147,734          7.00         19.29            943        144,734          7.00         19.28            925
$ 20.01 - $25.00         20,000          7.94         24.01             33         20,000          7.94         24.01             33
$ 25.01 - $25.67        241,732          8.01         25.67             --        180,120          8.01         25.67             --
                    -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
                        841,981          6.22   $     17.03    $     7,273        774,181          6.07   $     16.37    $     7,202
                    ===========   ===========   ===========    ===========    ===========   ===========   ===========    ===========

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

      During the fiscal year ended June 30, 2006, the Company granted  1,069,000
options under the 2005 Executive  Plan with a weighted  exercise price of $24.49
per  share and a  weighted-average  grant  date  fair  value per share of $9.30.
During the fiscal year ended June 30, 2007,  the Company  granted an  additional
55,000 options under the 2005 Executive Plan, with a weighted  average  exercise
price of $24.47 per share and a grant date fair value of $8.06 per share.


                                      F-23


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

                                                         Weighted Average
                                                             Exercise
                                Options Outstanding       Price Per Option     Options Exercisable
                                -------------------     -------------------    -------------------
Outstanding at June 30, 2005                     --     $                --                     --
         Granted                          1,069,000                   24.49
         Forfeited                          (36,000)                  24.00
                                -------------------
Outstanding at June 30, 2006              1,033,000                   24.51                258,249
         Granted                             55,000                   24.47
         Expired or canceled                (12,750)                  24.00
         Forfeited                         (186,750)                  25.53
                                -------------------
Outstanding at June 30, 2007                888,500     $             24.30                525,139
                                ===================

      The following table sets forth certain information as of June 30, 2007:

                                      Options Outstanding                                       Options Exercisable
                    ------------------------------------------------------    ------------------------------------------------------
                                   Weighted      Weighted                                    Weighted      Weighted
                                    Average       Average       Aggregate                     Average       Average       Aggregate
Range of Exercise     Options      Remaining     Exercise       Intrinsic       Options      Remaining     Exercise       Intrinsic
      Prices        Outstanding      Life          Price       Value (000)    Exercisable      Life          Price       Value (000)
-----------------   -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
$24.00 - $30.18         888,500          8.41   $     24.30    $     1,217        525,139          8.38   $     24.36    $       688
                    ===========   ===========   ===========    ===========    ===========   ===========   ===========    ===========


      (f) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLANS

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

      The maximum term for all options under both plans (the "Directors' Plans")
is ten years. The weighted-average fair value per share of options granted under
the 1995 Directors'  Plans during the fiscal years ended June 30, 2007, 2006 and
2005 was $7.61, $7.96 and $5.94, respectively.


                                      F-24


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

                                                         Weighted Average
                                                             Exercise
                                Options Outstanding       Price Per Option     Options Exercisable
                                -------------------     -------------------    -------------------
Outstanding at June 30, 2004                 84,000     $             10.35                 60,000
         Granted                              6,000                   22.70
         Expired or canceled                 (9,981)                   7.82
         Exercised                          (47,019)                   8.82
                                -------------------
Outstanding at June 30, 2005                 33,000                   15.53                 19,000
         Granted                             60,000                   25.77
                                -------------------
Outstanding at June 30, 2006                 93,000                   22.14                 40,000
         Granted                             25,000                   24.97
                                -------------------
Outstanding at June 30, 2007                118,000     $             22.74                 66,000
                                ===================

      The following table sets forth certain information as of June 30, 2007:


                                      Options Outstanding                                       Options Exercisable
                    ------------------------------------------------------    ------------------------------------------------------
                                   Weighted      Weighted                                    Weighted      Weighted
                                    Average       Average       Aggregate                     Average       Average       Aggregate
Range of Exercise     Options      Remaining     Exercise       Intrinsic       Options      Remaining     Exercise       Intrinsic
      Prices        Outstanding      Life          Price       Value (000)    Exercisable      Life          Price       Value (000)
-----------------   -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
$ 10.01 - $15.00         15,000          2.60   $     12.50    $       198         15,000          2.60   $     12.50    $       198
$ 15.01 - $20.00         12,000          6.70         15.74            119         12,000          6.70         15.74            119
$ 20.01 - $25.00         36,000          8.28         23.49             78         19,000          7.80         23.05             50
$ 25.01 - $30.87         55,000          8.69         26.56             --         20,000          8.36         27.09             --
                    -----------   -----------   -----------    -----------    -----------   -----------   -----------    -----------
                        118,000          7.59   $     22.74    $       395         66,000          6.59   $     20.57    $       366
                    ===========   ===========   ===========    ===========    ===========   ===========   ===========    ===========

      (g) SHARE-BASED COMPENSATION

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

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

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


                                      F-25


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                              For the Year Ended June 30,
                                       -----------------------------------------
                                         2007            2006            2005
                                       ---------       ---------       ---------
Weighted average of grants awarded:

Volatility                               32.3%           32.0%           31.8%
Risk free interest rate                   4.5%            4.4%            3.7%
Expected dividend yield                     0%              0%              0%
Expected term (in years)               4.2 years       3.0 years       4.0 years

      The  Company  recognized  $4.2  million  and $3.3  million  ($3.0 and $2.4
million  net of income  taxes) in stock  option  compensation  during the fiscal
years ended June 30, 2007 and 2006, respectively.  In December 2006, the Company
changed the method to calculate stock option  volatility  based on closing stock
price in accordance with SFAS No. 123R, "SHARE BASED PAYMENTS." In addition, the
Company  revised the estimate of fair value for certain awards granted in fiscal
2006 under the  Company's  2005 stock  option plans to reflect the date the 2005
plans were approved by the Company's  shareholders.  The additional expense from
these actions,  $0.5 million  recognized in the Company's  results of operations
for the year ended June 30, 2007 is not material to the prior year's  results of
operations, nor is it material to the current year's results of operations.


      The following table  illustrates the effect on net income and earnings per
share as if the Company had applied  the fair value  recognition  provisions  of
SFAS  123 to  share-based  compensation  prior  to the  adoption  of SFAS  123-R
effective July 1, 2005. However,  no share-based  compensation was recognized in
the financial statements during that period pursuant to APB 25.

                                                         For the Year Ended June 30,
                                                  -----------------------------------------
                                                    2007            2006            2005
                                                  ---------       ---------       ---------
Net income, as reported                           $   7,639       $  10,348       $  25,591
Less:
   Stock-based compensation - fair value
   measurement prior to adoption of SFAS 123-R           --              --          (1,691)
                                                  ---------       ---------       ---------
Net income, pro forma                                 7,639          10,348          23,900
Preferred stock dividends                                --              --            (182)
                                                  ---------       ---------       ---------
Net income available to
    common shareholders - pro forma               $   7,639       $  10,348       $  23,718
                                                  =========       =========       =========

Basic income per share - reported                 $    0.49       $    0.67       $    1.98
                                                  =========       =========       =========
Basic income per share - pro forma                $    0.49       $    0.67       $    1.85
                                                  =========       =========       =========

Diluted income per share - reported               $    0.48       $    0.65       $    1.79
                                                  =========       =========       =========
Diluted income per share - pro forma              $    0.48       $    0.65       $    1.67
                                                  =========       =========       =========

      A  summary  of  the  Company's   nonvested   options   granted  under  the
aforementioned  plans as of June 30, 2007 and changes  during the 12 months then
ended, is presented as follows:

                                                             Weighted Average
                                              Shares       Grant-Date Fair Value
                                              ------       ---------------------
Nonvested as of June 30, 2006                1,081,363          $     8.52
Granted                                         80,000                7.94
Vested during the year                        (464,283)               8.02
Forfeited                                     (213,919)               8.59
                                            ----------          ----------
Nonvested as of June 30, 2007                  483,161          $     8.87
                                            ==========          ==========

      The aggregate  intrinsic value of options exercised during the years ended
June 30, 2007,  2006 and 2004 was $3.6  million,  $4.5 million and $7.2 million,
respectively.  As of June 30, 2007, there was $4.2 million of total unrecognized
compensation  cost related to nonvested  share-based  compensation  arrangements
granted under the aforementioned plans, which will be recognized over a weighted
average life of 1.4 years.

      Shares  issued upon  exercise of vested stock  options are issued from our
authorized common stock pool.


                                      F-26


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 10 - EARNINGS PER SHARE

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

                                                      For the Year Ended June 30,
                                               -----------------------------------------
                                                 2007            2006            2005
                                               ---------       ---------       ---------
Net income                                     $   7,639       $  10,348       $  25,591

Redeemable preferred stock dividends                  --              --            (182)
                                               ---------       ---------       ---------
Net income-
    available to common shareholders           $   7,639       $  10,348       $  25,409
                                               =========       =========       =========

Weighted average outstanding shares of
    common stock:

Basic                                             15,593          15,427          12,808
Diluted                                           15,886          15,997          14,295

Earnings per basic share of common stock       $    0.49       $    0.67       $    1.98
                                               =========       =========       =========
Earnings per diluted share of common stock     $    0.48       $    0.65       $    1.79
                                               =========       =========       =========

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

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

                                                       2007      2006      2005
                                                      ------    ------    ------
Weighted average shares outstanding - basic           15,593    15,427    12,808

Outstanding options and warrants to purchase
  shares of common stock - remaining shares
  after assuming repurchase with proceeds
  from exercise                                          293       570     1,487
                                                      ------    ------    ------

Weighted average shares outstanding - diluted         15,886    15,997    14,295
                                                      ======    ======    ======

      During the year ended June 30, 2007, 2006 and 2005, the Company excluded
the equivalent shares listed in the table below as these options and warrants to
purchase common stock were anti-dilutive.

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


                                      F-27


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                          As of June 30,
                                                   -----------------------------
 Range of Exercise Prices                            2007       2006       2005
 ------------------------                          -------    -------    -------
    $ 10.01 - $15.00                                    --         --         --
    $ 15.01 - $20.00                                    --         --         --
    $ 20.01 - $25.00                                    --         --    295,000
    $ 25.01 - $30.87                               342,482    132,000         --
                                                   -------    -------    -------
                                                   342,482    132,000    295,000
                                                   =======    =======    =======

NOTE 11 - INCOME TAXES

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

                                                              As of June 30,
                                                          ---------------------
                                                            2007         2006
                                                          --------     --------
Deferred tax assets:
Current
         Allowance for doubtful accounts                  $    783     $    998
         Other                                                  --          133
         Net operating loss carryforwards                    7,481        7,467
                                                          --------     --------
                                                             8,264        8,598
                                                          --------     --------
Non-current
         Intangible assets                                   1,685        1,298
         Other                                               2,351        1,003
         Net operating loss carryforwards                   27,667       32,549
                                                          --------     --------
                                                            31,703       34,850
                                                          --------     --------
Total deferred tax assets                                   39,967       43,448
                                                          --------     --------
Deferred tax liabilities:
Non-current
         Goodwill                                           (4,565)      (3,778)
         Fixed assets                                      (23,325)     (22,265)
                                                          --------     --------
Total deferred tax liabilities                             (27,890)     (26,043)
                                                          --------     --------
Net deferred tax assets                                   $ 12,077     $ 17,405
                                                          ========     ========

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

      However,  as of  June  30,  2005,  after  consideration  of all  available
positive and negative  evidence,  it was  concluded  that the deferred tax asset
relating to the Company's net operating loss carryforwards will more likely than
not be realized in the future. Thus, the entire valuation allowance was reversed
and  reported  as a  component  of the  fiscal  2005  income tax  provision.  In
considering  whether or not a valuation  allowance was  appropriate  at June 30,
2007 and 2006,  the  Company  considered  several  aspects,  including,  but not
limited to the following items:

o     Cumulative  pretax book income  during the three years ended June 30, 2007
      and 2006.

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


                                      F-28


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

o     Future reversals of taxable temporary differences

o     Tax planning strategies

      As of June 30,  2007,  the Company  evaluated  and,  in the  future,  will
continue to evaluate  whether or not its net  deferred  tax assets will be fully
realized prior to expiration. In order to utilize the entire deferred tax asset,
the Company will need to generate taxable income of approximately  $102 million.
Should it become more likely than not that all or a portion of the net  deferred
tax assets will not be realized, a valuation allowance will be recorded.

      As of June 30, 2007, the Company had net operating loss  carryforwards for
federal income tax purposes of approximately  $91 million and for state purposes
in varying amounts.  The federal net operating loss carryforwards expire through
June 2025 as follows:

           Year of Expiration
           ------------------
               2008-2012                           $    --
               2013-2017                             4,069
               2018-2022                            69,775
               Thereafter                           16,998
                                                   -------
                                                   $90,842
                                                   =======

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

      The significant components for income taxes attributable to continuing
operations for the years ended June 30, 2007, 2006, and 2005 were as follows:

                                                      2007         2006         2005
                                                    --------     --------     --------
Current
    Federal                                         $    141     $    155     $     --
    State                                                139          116           80
                                                    --------     --------     --------
Total - Current                                     $    280     $    271     $     80
                                                    ========     ========     ========
Deferred
    Federal                                         $  5,547     $  5,991     $(16,397)
    State                                              1,066        1,079       (3,241)
                                                    --------     --------     --------
Total - Deferred                                    $  6,613     $  7,070     $(19,638)
                                                    --------     --------     --------
  Total                                             $  6,893     $  7,341     $(19,558)
                                                    ========     ========     ========

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

Tax at U.S. statutory rate                          $  5,086    $  6,191        2,112
State taxes, net of federal benefit                      635         761          301
Non-deductible items                                     377         477          445
Expiring State net operating loss carry forwards         619          --           --
Other                                                    176         (88)          --
Change in valuation allowance                             --          --      (22,416)
                                                    --------    --------     --------
                                                    $  6,893    $  7,341     $(19,558)
                                                    ========    ========     ========


                                      F-29


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      The change in the net deferred tax valuation  allowance of $22,416  during
the year  ended  June 30,  2005 is net of $268 tax  impact of the  disqualifying
dispositions of incentive stock options reflected as additional paid-in capital.
In  addition,  during  the year  ended  June 30,  2005,  the tax  impact  of the
disqualifying   dispositions   of  incentive   stock  options  and  exercise  of
non-qualified  stock options reflected as additional  paid-in capital was $2,812
recorded as additional paid-in capital.  During the year ended June 30, 2006 and
2007,  the Company  recorded  $1,756 and $1,285 as  additional  paid-in  capital
representing  the excess of the tax benefit  associated  with the  disqualifying
disposition  of  incentive  stock  options and exercise of  non-qualified  stock
options over the tax deduction from  compensation  expense  recognized for those
options.

NOTE 12 - LEASE COMMITMENTS

      The Company leases office equipment, trucks and warehouse/depot and office
facilities  under  operating  leases that expire at various  dates  through June
2012.  Primarily  all  of  the  facility  leases  contain  renewal  options  and
escalations  for real estate taxes,  common  charges,  etc. Future minimum lease
payments under non-cancelable  operating leases (that have initial noncancelable
lease terms in excess of one year) are as follows:

           Year Ending June 30,
           --------------------
                   2008                            $ 5,916
                   2009                              4,893
                   2010                              3,963
                   2011                              2,324
                   2012                                974
                Thereafter                             493
                                                   -------
                                                   $18,563
                                                   =======

      Total   rental   costs   under   non-cancelable   operating   leases  were
approximately $6,701, $5,936 and $5,650 in 2007, 2006 and 2005, respectively.

      As of June 30, 2007, the Company has 357 vehicles  classified as operating
leases with a  transportation  company,  under  individual lease agreements with
terms ranging generally from five to six years.

NOTE 13 - CONCENTRATION OF CREDIT AND BUSINESS RISKS

      The  Company's  business  activity is with  customers  located  within the
United  States.  For each of the  years  ended  June 30,  2007,  2006 and  2005,
virtually  all the  Company's  sales were to  customers in the food and beverage
industry.

      There were no customers  that accounted for greater than 5% of total sales
for each of the three years ended June 30,  2007,  nor were there any  customers
that accounted for greater than 5% of total accounts receivable at June 30, 2007
or 2006.

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

NOTE 14 - COMMITMENTS AND CONTINGENCIES

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

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

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


                                      F-30


                          NOTES TO FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 15 - RELATED PARTY TRANSACTIONS

      Robert L. Frome, a Director of the Company, is a member of the law firm of
Olshan Grundman Frome Rosenzweig & Wolosky LLP, which law firm has been retained
by the  Company.  Fees paid by the Company to such law firm during  fiscal 2007,
2006 and 2005, were $122, $125 and $631, respectively.

NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

      (b)   Long-term debt:

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

      The  carrying   amounts  and  fair  values  of  the  Company's   financial
instruments are as follows:

                                                                As of June 30,
                                                              ------------------
                                                                2007       2006
                                                              -------    -------
Cash and cash equivalents                                     $   343    $   341
Accounts receivable                                            11,823     12,955
Accounts payable and accrued expenses                          11,636     12,451
Long-term debt                                                 34,750     35,450
Fair value of swap - asset                                        108        291

NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                              1st Quarter           2nd Quarter           3rd Quarter           4th Quarter
                           ------------------    ------------------    ------------------    ------------------
                            2007       2006       2007       2006       2007       2006       2007       2006
                           -------    -------    -------    -------    -------    -------    -------    -------
Total revenues             $32,356    $27,865    $31,961    $28,753    $31,914    $29,197    $33,897    $30,381
Gross profit                17,579     15,202     16,215     15,872     16,187     15,593     17,599     17,046
Operating income             5,735      5,008      2,942      4,746      2,555      4,189      5,508      5,558
Net income                   2,519      2,955      1,383      2,639      1,111      2,180      2,626      2,574

Earnings per share (a):
   Basic                   $  0.16    $  0.19    $  0.09    $  0.17    $  0.07    $  0.14    $  0.17    $  0.17
   Diluted                 $  0.16    $  0.19    $  0.09    $  0.17    $  0.07    $  0.14    $  0.17    $  0.16

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

      In December 2006, the Company changed the method to calculate stock option
volatility  based on closing  stock price in  accordance  with SFAS No. 123R. In
addition,  the  Company  revised the  estimate of fair value for certain  awards
granted in fiscal 2006 under the  Company's  2005 stock  option plans to reflect
the date  the 2005  plans  were  approved  by the  Company's  shareholders.  The
additional expense from these actions,  $0.5 million recognized in the Company's
results of operations  for the three months ended  December 31, 2006 (the second
fiscal  quarter of 2007),  is not material to the results of operations  for the
fiscal years ended June 30, 2007 and 2006.


                                      F-31


                                   NUCO2 INC.
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                                  IN THOUSANDS

                                          Column B                     Column C - Additions            Column D        Column E
                                          --------                     --------------------            --------        --------
                                    Balance at beginning    Charge to costs and    Charged to other                Balance at end of
                                          of period              expenses              accounts       Deductions        period
                                    --------------------    -------------------    ----------------   ----------   -----------------
Year ended June 30, 2005
   Allowance for doubtful accounts     $        2,095          $          595       $         --      $      840    $        1,850
Year ended June 30, 2006
   Allowance for doubtful accounts     $        1,850          $          908       $         --      $      220    $        2,538
Year ended June 30, 2007
   Allowance for doubtful accounts     $        2,538          $        1,816       $         --      $    3,350    $        1,004

      As part of the ongoing evaluation of its trade receivables and collections
from its customers  during the year ended June 30, 2007, the Company  determined
that  tank  billings  to  delinquent  customers  should  be  recorded  on a cash
recognition  basis. As a result,  the accounts  receivable related to these tank
billings  have been  written off and are no longer  included in gross  accounts
receivable  or the  related  allowance  for  doubtful  accounts.  Such change is
immaterial to the Company's revenues and statement of income.


                                      F-32