UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
          (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2000

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-19343

                              VSI LIQUIDATION CORP.
             (Exact name of registrant as specified in its charter)

                    DELAWARE                                    34-1493345
(State or other jurisdiction of incorporation                  (IRS Employer
               or organization)                           Identification Number)


           2170 PIEDMONT ROAD NE, ATLANTA, GEORGIA               30324
          (Address of principal executive offices)            (zip code)

       Registrant's telephone number, including area code: (404) 888-2750

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

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

     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. [ ]

     As of September 15, 2000:  (a) 7,906,617  shares of Common Stock,  $.01 par
value, of the registrant were outstanding;  (b) 2,072,872 shares of Common Stock
were held by  non-affiliates;  and (c) the aggregate  market value of the Common
Stock held by  non-affiliates  was $145,000,  based on the closing sale price of
$.07 per share on September 15, 2000.


<PAGE>






                       DOCUMENTS INCORPORATED BY REFERENCE


Part I:   None

Part II:  None

Part III: All items - see registrant's definitive proxy statement regarding
          the election of  directors  and which is expected to be filed with the
          Securities and Exchange  Commission within 120 days after the close of
          the fiscal year.

     o    Item 10:      Directors and Executive Officers of the Registrant

     o    Item 11:      Executive Compensation

     o    Item  12:     Security   Ownership  of  Certain   Beneficial  Owners
                        and Management

     o    Item 13:      Certain Relationships and Related Transactions



                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Prior to  January 5, 1999,  the  Company  was  engaged in the  business  of
providing  specialized  industrial  cleaning and other services to divisions and
facilities of Fortune 500 companies and other substantial  businesses engaged in
heavy  industry.  Such  services  generally  involved the removal of  industrial
grime,   deposits,   wastes,   encrustations  or  coatings  from  equipment  and
facilities.  The Company's principal  customers were in the chemical,  plastics,
power  generation,   petroleum  refining  and  primary  metals  businesses.  The
Company's  industrial  cleaning  methods  included,  in  addition  to the use of
waterblasting,   vacuuming,   and  other  more  conventional   procedures,   the
application of ultra-high pressure ("UHP") waterjetting and cutting methods.

     On  September  8, 1998,  the  Company  entered  into a Second  Amended  and
Restated Asset Purchase Agreement (the "Purchase Agreement") whereby essentially
all assets of the Company would be sold to, and substantially all liabilities of
the  Company  would  be  assumed  by,  HydroChem   Industrial   Services,   Inc.
("HydroChem").   The  purchase  price  for  these  assets  and  liabilities  was
approximately  $30.0 million,  adjusted for increases or decreases in net assets
after June 30,  1998.  $4.0  million of the  proceeds  were  placed in escrow to
secure and indemnify HydroChem for any breach of the Company's covenants and for
any  environmental  liabilities.  Escrow  funds,  to the  extent  not  needed to
indemnify  HydroChem,  will be released over the three year period following the
closing. $1.0 million will also be released when the Company can provide certain
environmental  assurances  to HydroChem,  expected to be sometime in 2001.  This
transaction closed on January 5, 1999, and was effective as of January 1, 1999.

     The Company changed its name from Valley  Systems,  Inc. to VSI Liquidation
Corp. after the closing of this transaction, and does not have and will not have
any  business  operations  in the future  other than those  associated  with the
winding up and dissolution of the Company,  including distribution of any escrow
funds released to the Company. After the closing, the Company used approximately
$5.5  million of the  proceeds of the sale to redeem the  outstanding  shares of
Series C Preferred Stock,  approximately $380,000 to redeem outstanding employee
stock options and  approximately  $165,000 to pay  retention  bonuses to certain
officers and  employees.  The Company also paid a liquidating  dividend of $16.8
million ($2.13 per common share) to common stockholders from the proceeds of the
sale.  An additional  liquidating  dividend of $1.2 million ($.15 per share) was
paid to common stockholders in February 2000.

INSURANCE

     Much of the work  performed by the Company was  pursuant to contracts  that
required the Company to indemnify the customer for injury or damage occurring on
the work site.  The terms of such  indemnity  agreements  varied,  but generally
provided  that the Company was  required to  indemnify  the  customer for losses
resulting from or incurred in connection with  performance by the Company of its
services  whether  or  not  the  Company  was  negligent.   Liability  for  such
indemnification claims is generally covered by the Company's insurance policies.

                                       1
<PAGE>

     Although  the Company  believes  that its  insurance  coverage is generally
consistent  with  industry  practice,  there are  exclusions  from the Company's
insurance  coverage for matters of  environmental  pollution  and other types of
environmental  damage  claims.  An  uninsured  or partially  insured  claim,  if
successful and of sufficient magnitude,  could have a material adverse effect on
the Company or its financial condition.

PROPRIETARY TECHNOLOGY, PATENTS, TRADEMARKS AND EQUIPMENT

     All  proprietary  technology,  patents,  trademarks  and  equipment  of the
Company were sold as part of the Purchase Agreement discussed above. See "Item 1
- General".

ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATIONS

     The Company's  operations were subject to numerous rules and regulations at
the federal,  state and local levels. The Company believes that it was and is in
substantial  compliance with the various rules and regulations.  The Company has
not experienced any significant regulatory problems.

     All of the Company's  operations were subject to regulations  issued by the
United States  Department of Labor under the Occupational  Safety and Health Act
("OSHA").  Additionally,  some of the Company's  operations  were subject to the
provisions of the Federal Mine Safety and Health Act of 1977. These  regulations
have strict  requirements for protecting  employees  involved with any materials
that are classified as hazardous. Violations of these rules can result in fines.

     The Company does not believe that its past operating activities are subject
to the duties  pertaining  to  hazardous  waste  treatment,  storage or disposal
facilities,  nor those  duties  pertaining  to  hazardous  waste  generators  or
transporters.

     In the event the  Company  performed  a cleaning  operation  involving  the
disposal  of a waste  that  would be defined  as  hazardous  under the  Resource
Conservation and Recovery Act ("RCRA"),  the Company could also be classified as
a "generator" of hazardous waste, and therefore  responsible for manifesting and
transporting  all  such  waste  to  permitted  treatment,  storage  or  disposal
facilities  in  accordance  with RCRA.  As a  generator,  the  Company  could be
potentially liable under the Comprehensive Environmental Response,  Compensation
and Liability Act of 1980  ("CERCLA"),  also known as the Superfund  Act. To the
Company's  knowledge,  none of the sites at which the Company performed services
have been designated as Superfund sites.  Moreover,  to the Company's knowledge,
it has not sent any  hazardous  substances  or  wastes to any site that has been
designated  as a Superfund  site.  Many states  have  implemented  environmental
guidelines similar in nature to RCRA and CERCLA.

     The Company believes that it was and is in substantial  compliance with all
federal,  state and local laws and regulations  governing its business. To date,
the Company has not been subject to any  significant  fines,  penalties or other
liabilities under such laws and regulations.  However, no assurance can be given
that future changes in such law, and regulations,  or  interpretations  thereof,
will not have an adverse impact on the Company's financial position.

     The  Company's  general  liability  insurance  is  subject  to a  pollution
exclusion  endorsement.  Such  exclusion is  generally  found in the majority of
general  liability  policies.   The  Company  does  not  maintain  environmental
impairment  liability  insurance.  Thus a claim for damages  against the Company
that  involves  pollution  or  environmental  impairment  will not be covered by
insurance,  and,  depending  on the size of the  claim,  could  have a  material
adverse  effect  upon the  financial  position  of the  Company.  See  "Item 1 -
Business-Insurance".

EMPLOYEES

     As of August 31, 2000, the Company had no employees other than its officers
and directors.

ITEM 2.  PROPERTIES

     As of August 31, 2000 the Company does not own or lease any property.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the year ended June 30, 2000.

                                       2
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  Common  Stock traded on the Nasdaq  SmallCap  Market of the
Nasdaq Stock Market  under the symbol VALE until  January 5, 1999.  At that time
the  Company  was  delisted  from the  Nasdaq  Stock  Market  due to the sale of
substantially all assets to HydroChem.  The following tables sets forth the high
and low sale prices for the periods indicated.

                                                  HIGH            LOW
                                                  ----            ---
FISCAL 1999:
------------
July 1, 1998 - September 30, 1998               $ 2.688       $ 0.938
October 1, 1998 - December 31, 1998               2.438         1.625
January 1, 1999 - March 31, 1999                  2.250         0.250
April 1, 1999 - June 30, 1999                     0.500         0.063

FISCAL 2000:
------------
July 1, 1999 - September 30, 1999                 0.250         0.063
October 1, 1999 - December 31, 1999               0.500         0.130
January 1, 2000 - March 31, 2000                  0.500         0.130
April 1, 2000 - June 30, 2000                     0.130         0.130

     Based on information  furnished by certain  brokerage firms that are record
holders  of the  Company's  Common  Stock,  the  Company  has in  excess  of 800
beneficial owners of its Common Stock.

ITEM 6.   SELECTED FINANCIAL DATA

     Dollars in thousands, except per share data:

<TABLE>
<CAPTION>
<S>                                         <C>          <C>         <C>           <C>          <C>
                                             2000 (1)       1999         1998         1997         1996
                                            ------------ ------------ ------------ ------------ ------------
Sales                                        $        -   $   13,537   $   24,431   $   23,088   $   21,875
Gross profit                                          -        5,072        9,040        8,559        6,853
Selling, general and
    administrative expenses                         225        3,663        7,145        7,268        7,254
Litigation settlements and related fees               -            -            -         (752)           -
Interest (income) expense, net                     (199)         163          593          592          572
Gain on sale of substantially all assets
    and assumption of substantially all
    liabilities of the Company                        -       22,719            -            -            -
Net income (loss)                                   (17)      21,465        1,302        1,451         (973)
Earnings (loss) per common share:
    Basic and diluted                                 -         2.69         0.12         0.13         (0.16)
Total assets                                      4,132        5,958       15,934       14,568        15,123
Total long-term debt                                  -            -        7,585        7,235         7,021
Total stockholders' equity                        3,082        4,285        5,354        4,437         4,031

     (1)  July 1, 1999 through June 30, 2000

</TABLE>

                                       3
<PAGE>

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

     The  following   discussion   should  be  read  in  conjunction   with  the
Consolidated  Financial Statements and Notes thereto appearing elsewhere in this
Report.

FORWARD LOOKING STATEMENTS:

     Forward-looking  statements in this Form 10-K are made pursuant to the safe
harbor provisions of the Private Securities  Litigation Reform Act of 1995. Such
forward-looking  statements are subject to certain risks and uncertainties  that
could cause actual results to differ  materially from those  projected.  Readers
are cautioned not to place undue reliance on these  forward-looking  statements,
which  speak  only as of the date  hereof.  Potential  risks  and  uncertainties
include,   but  are  not  limited  to,  the  possibility   that  HydroChem  will
successfully  assert  claims  against  funds  held in the  escrow  account,  the
possibility that the costs of winding up the Company's  affairs could exceed the
Company's projections,  the Company's potential liability pursuant to unasserted
claims not covered by insurance and general business and economic conditions.

RESULTS OF DISCONTINUED OPERATIONS - 2000 COMPARED TO 1999

     The  results  of  operations  for the  year  ended  June  30,  2000 are not
comparable  to those for the year ended June 30, 1999. As discussed in the notes
to the consolidated  financial  statements and in "Item 1 - General,"  effective
January  1, 1999  substantially  all  assets of the  Company  were sold to,  and
substantially all liabilities were assumed by, HydroChem.  Operations since that
date have consisted only of the sale itself, distribution of the proceeds of the
sale, and other  transactions  winding down the  operations of the Company.  The
Company  will not have any  business  operations  in the future other than those
associated  with  the  winding  up and  dissolution  of the  Company,  including
distribution of any escrow funds released to the Company.

RESULTS OF DISCONTINUED OPERATIONS - 1999 COMPARED TO 1998

     The  results  of  operations  for the  year  ended  June  30,  1999 are not
comparable  to those for the year ended June 30, 1998. As discussed in the notes
to the consolidated  financial  statements and in "Item 1 - General,"  effective
January  1, 1999  substantially  all  assets of the  Company  were sold to,  and
substantially all liabilities were assumed by, HydroChem.  Operations since that
date have consisted only of the sale itself, distribution of the proceeds of the
sale, and other  transactions  winding down the  operations of the Company.  The
Company  will not have any  business  operations  in the future other than those
associated  with  the  winding  up and  dissolution  of the  Company,  including
distribution of any escrow funds released to the Company.

QUARTERLY OPERATING RESULTS (UNAUDITED)

     The following  table  presents  certain  unaudited  consolidated  quarterly
operating  information for the Company and includes all  adjustments  considered
necessary for a fair presentation of such information for the interim periods.

<TABLE>
<CAPTION>
<S>                                <C>        <C>        <C>        <C>       <C>       <C>        <C>        <C>
                                                                  THREE MONTHS ENDED
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                    9/30/98   12/31/98    3/31/99    6/30/99  9/30/99   12/31/99    3/31/00    6/30/00
                                    -------   --------    -------    -------  -------   --------    -------    -------
Sales                               $ 7,597    $ 5,940      $   -      $   -     $  -      $   -      $   -     $    -
Gross profit                          2,953      2,119          -          -        -          -          -          -
Net income (loss)                     1,027      6,437     13,661        340     (20)          5        (2)       (81)
Earnings per common share -
    basic and diluted                 $ .12      $ .80     $ 1.73     $  .04    $ .00      $ .00      $ .00     $ (.01)
</TABLE>

     Net income for the quarter  ended  December 31, 1998 includes an income tax
benefit of  $5,985,000  resulting  from reversal of a valuation  allowance.  Net
income for the quarter ended March 31, 1999 was a result of the gain on the sale
of substantially all assets to HydroChem.  Net income for the quarter ended June
30, 1999 was  primarily a result of an  adjustment  to the  purchase  price,  an
increase in the reserve for uncollectible accounts due to the return of accounts
receivable pursuant to the Purchase Agreement and interest income earned.

LIQUIDITY AND CAPITAL RESOURCES

     On January 5, 1999, the Company  completed the sale of substantially all of
its operating assets and the operating  assets of its  wholly-owned  subsidiary,
Valley Systems of Ohio,  Inc.  ("VSO"),  to HydroChem,  pursuant to the Purchase
Agreement,  for approximately  $30.0 million in cash, of which $26.0 million was
payable  immediately  and $4 million  was  deposited  into an escrow  account to
secure certain  indemnification  and other rights under the Purchase  Agreement,
and the  assumption  of the  Company's  and VSO's  bank debt and  certain  other
liabilities.

                                       4
<PAGE>

     Of  the  $26.0  million  received  at  closing,  after  payment  or  making
reasonable  provision for the payment of all known and  anticipated  liabilities
and  obligations  of the  Company,  payment  of  approximately  $5.5  million to
repurchase  all of the  55,000  shares  of the  Company's  outstanding  Series C
Preferred Stock held by Rollins Holding Company,  Inc., payment of approximately
$380,000  to  redeem   outstanding   employee   stock  options  and  payment  of
approximately  $165,000 as a retention bonus to certain  officers and employees,
approximately $16.8 million of the sale proceeds remained and were available for
distribution to stockholders pursuant to the Plan of Liquidation and Dissolution
adopted by the Company.

     On January 29, 1999, an initial  liquidating cash dividend of approximately
$16.8  million  ($2.13 per share)  was mailed to  stockholders  of record at the
close of business on January 22, 1999. An additional  liquidating  cash dividend
of approximately $1.2 million (.15 per share) was paid to stockholders of record
on the close of  business on January  31,  2000.  The Company now has no further
assets to  distribute  and  expects to have no  additional  assets in the future
other than cash  received  from the  escrow  account  referenced  above and cash
remaining  after payment of all  remaining  expenses to wind up and dissolve the
Company, if any.

     In May, 1999 certain accounts  receivable totaling  approximately  $600,000
that were sold to HydroChem  under the Purchase  Agreement and guaranteed by the
Company were returned by HydroChem to the Company and were paid for out of funds
in escrow.

     The  Company  expects  that,  subject  to any  claims  which may be made by
HydroChem, the remaining escrowed funds of approximately $3.2 million (including
earning on  escrowed  funds to date) will be released on or about the second and
third  anniversaries  of the closing date in amounts of approximately $1 million
in January 2001 and $1.2 million in 2002,  with up to an  additional  $1 million
being  released at such time as the Company  delivers to HydroChem a certificate
regarding certain environmental remediation matters, which is currently expected
to be  possible  in the year 2001.  The  balance of the escrow  fund,  including
earnings on the escrow account,  will also be released on the third  anniversary
of the closing date.  There can be no guarantee,  however,  that these funds, or
any portion thereof, will be released to the Company. As escrowed funds, if any,
are  released to the  Company,  they will be  utilized to pay any  unanticipated
unpaid  expenses,  with the remainder to be  distributed  as a liquidating  cash
dividend to stockholders as soon as is practicable.

     As of the fiscal year ended June 30,  2000 the  Company  had  approximately
$376,000 in cash in addition to  approximately  $3.2  million  held in an escrow
account.

     The Company will not engage in any further business activities and the only
remaining   activities  will  be  those  associated  with  the  winding  up  and
dissolution of the Company. The Company believes that the remaining cash on hand
and in escrow will be sufficient to meet its liabilities  and obligations  until
the Company is dissolved in accordance with Delaware law.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The  Company's  primary  market  risk is  interest  rate risk.  The Company
currently  minimizes  such risk by investing its temporary  cash in money market
funds and,  pursuant to the Escrow Agreement  entered into by and among Bank One
Texas,  N.A. and the Company,  the escrowed  funds are invested in United States
Treasury  Bills  having a maturity  of 90 days or less,  repurchase  obligations
secured by such United States Treasury Bills and demand deposits with the escrow
agent. The Company does not engage in derivative transactions,  and no financial
instrument  transactions are entered into for hedging purposes. As a result, the
Company believes that it has no material interest rate risk to manage.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  required  financial   statements  of  the  Registrant  are  set  forth
immediately  following  the  signature  page to this Form  10-K.  See "Item 14 -
Exhibits, Financial Statements, Schedules and Reports on Form 8-K", for index to
the financial statements.

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item is expected to be set forth under the
captions   "Election  of  Directors"   and  "Executive   Compensation"   of  the
registrant's definitive proxy statement, and incorporated herein by reference.

                                       5
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is expected to be set forth under the
caption "Executive Compensation" of the registrant's definitive proxy statement,
and incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is expected to be set forth under the
caption  "Beneficial   Ownership  of  Voting  Securities"  of  the  registrant's
definitive proxy statement, and incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is expected to be set forth under the
caption  "Certain  Relationships  and Related  Transactions" of the registrant's
definitive proxy statement, and incorporated herein by reference.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
         AND REPORTS ON FORM 8-K

         (a)      (1)      FINANCIAL STATEMENTS FILED

                  VSI Liquidation Corp. and Subsidiary:
                      Reports of Independent Accountants.
                      Consolidated Balance Sheets at June 30, 2000 and 1999.
                      Consolidated Statements of Discontinued Operations for the
                        years  ended June 30,  2000,  1999 and 1998.
                      Consolidated Statements  of  Stockholders'  Equity for the
                        years  ended June 30, 2000, 1999 and 1998.
                      Consolidated  Statements of Cash  Flows for the years
                        ended June 30,  2000,  1999 and 1998.
                      Notes to Consolidated Financial Statements.

                  (2)      EXHIBITS

NO.       DESCRIPTION OF EXHIBIT
---       ----------------------

2.1       Second  Amended and Restated  Asset  Purchase  Agreement,  dated as of
          September 8, 1998, among the Company, Valley Systems of Ohio, Inc. and
          HydroChem Industrial Services,  Inc. (Incorporated herein by reference
          to Appendix A of the  Registrant's  Definitive  Information  Statement
          filed with the  Securities  and  Exchange  Commission  on December 15,
          1998)

3.1       Restated Certificate of Incorporation of the Company (filed as Exhibit
          3.1 to the Company's  Registration Statement on Form S-1 filed on June
          11, 1991, and incorporated therein by reference)

3.2       Certification  of Amendment of  Certificate  of  Incorporation  of the
          Company  (filed  as  Exhibit  3.2 to the  Company's  Form  10-K  dated
          September 25, 1995, and incorporated herein by reference)

3.3       Certificate  of Correction of  Certificate of Amendment of Certificate
          of Incorporation of the Company  (incorporated by reference to Exhibit
          3.3 to the Form 10-Q for the quarter ended December 31, 1998)

3.4       Certificate of  Elimination  of Series A Preferred  Stock and Series B
          Preference Stock of the Company  (incorporated by reference to Exhibit
          3.4 to the Form 10-Q for the quarter ended December 31, 1998)

3.5       Certificate  of  Amendment  of  Certificate  of  Incorporation  of the
          Company (incorporated by reference to Exhibit 3.5 to the Form 10-Q for
          the quarter ended December 31, 1998)

3.6       Bylaws  of the  Company,  as  amended,  (filed as  Exhibit  3.3 to the
          Company's Form 10-K dated September 25, 1995 and  incorporated  herein
          by reference)

10.1      Plan of Liquidation and Dissolution  (Incorporated herein by reference
          to Appendix C of the  Registrant's  Definitive  Information  Statement
          filed with the  Securities  and  Exchange  Commission  on December 15,
          1998)

10.2+     Purchase  Order dated June 11, 1998 between  Ohio  Edison/Pennsylvania
          Power Company and the Registrant (Incorporated by reference to Exhibit
          10.25 to the Form 10-K/A for the fiscal year June 30, 1998)

21.1*     Subsidiaries of the Registrant

27.1*     Financial Data Schedule
________________________________________

*  Filed herewith.

+ The  Company  has  applied  for  confidential  treatment  of  portions of this
Agreement.  Accordingly, portions thereof have been omitted and filed separately
with the Securities and Exchange Commission.


     (b)  REPORTS ON FORM 8-K

          None.

                                       6
<PAGE>

                                   SIGNATURES

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


                                            VSI LIQUIDATION CORP.


September 27, 2000                          By: \s\  Ed Strickland
                                               --------------------------------
                                               Ed Strickland, President
                                               and 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\  Allen O. Kinzer               Director            September 28, 2000
       ----------------------
       Allen O. Kinzer


       \s\  Joe M. Young                  Director            September 27, 2000
       ---------------------
       Joe M. Young




                                       7
<PAGE>

                      VSI LIQUIDATION CORP. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          Page
                                                                         Number
                                                                         ------

REPORTS OF INDEPENDENT  ACCOUNTANTS                                        9-10

CONSOLIDATED BALANCE SHEETS - June 30, 2000 and 1999                         11

CONSOLIDATED  STATEMENTS  OF  DISCONTINUED  OPERATIONS - Years
        ended June 30, 2000, 1999 and 1998                                   12

CONSOLIDATED  STATEMENTS OF  STOCKHOLDERS'
        EQUITY - Years ended June 30, 2000, 1999 and 1998                    13

CONSOLIDATED  STATEMENTS OF CASH FLOWS -
        Years ended June 30, 2000,  1999 and 1998                            14

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                  15

All schedules are omitted because they are not required under the  instructions,
are  inapplicable,  or the  information  is included  elsewhere in the financial
statements.








                                       8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders
VSI Liquidation Corp.

We have audited the  consolidated  balance sheet of VSI  Liquidation  Corp.  and
subsidiary  (a  Delaware  corporation)  as of June  30,  2000,  and the  related
consolidated  statements of discontinued  operations,  stockholders' equity, and
cash  flows  for  the  year  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 June 30, 2000 financial statements referred to above present
fairly, in all material respects,  the financial position of VSI Liquidation and
subsidiary as of June 30, 2000,  and the results of its  operations and its cash
flows for the year then ended in conformity with generally  accepted  accounting
principles.



Hall, Kistler & Company LLP

Canton, Ohio
September 15, 2000


                                       9
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders of
VSI Liquidation Corp.:

In our  opinion,  the  consolidated  balance  sheet as of June 30,  1999 and the
related  consolidated   statements  of  discontinued   operations,   changes  in
stockholders'  equity  and cash  flows for each of the two  years in the  period
ended June 30,  1999  (appearing  on pages 14 through 17 of the VSI  Liquidation
Corp. and subsidiary  consolidated  financial statements which has been included
in this Form 10-K)  present  fairly,  in all material  respects,  the  financial
position,  results of operations  and cash flows of VSI  Liquidation  Corp.  and
subsidiary  at June 30,  1999 and for each of the two years in the period  ended
June 30, 1999, in conformity with accounting  principles  generally  accepted in
the United States of America.  These financial statements are the responsibility
of the  Company's  management;  our  responsibility  is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  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,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits  provide a  reasonable  basis for our  opinion.  We have not  audited the
consolidated  financial  statements of VSI Liquidation  Corp. and subsidiary for
any period subsequent to June 30, 1999.

As more fully described in Note 2 to the consolidated financial statements,  the
Company sold substantially all of its net operating assets on January 1, 1999.


PricewaterhouseCoopers LLP

Cleveland, Ohio
September 23, 1999



                                       10
<PAGE>
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999

<TABLE>
<CAPTION>
<S>                                                                    <C>                 <C>

                                                                            2000                1999
                                                                       -----------------   -----------------
                                ASSETS
Current assets:
     Cash                                                                  $    376,752        $  1,765,382
     Cash in escrow account                                                   1,000,000             410,807
     Accounts receivable, net                                                   123,268             425,175
     Prepaid expenses and deposits                                              404,775             356,651
                                                                       -----------------   -----------------
        Total current assets                                                  1,904,795           2,958,015
Cash in escrow account                                                        2,227,112           3,000,000
                                                                       -----------------   -----------------
            Total assets                                                   $  4,131,907        $  5,958,015
                                                                       =================   =================
                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses                                 $    131,677        $    393,360
     Income taxes payable                                                             -             159,000
     Deferred income taxes                                                            -              64,474
                                                                       -----------------   -----------------
        Total current liabilities                                               131,677             616,834
Deferred income taxes                                                           918,521           1,056,526
                                                                       -----------------   -----------------
        Total liabilities                                                     1,050,198           1,673,360
                                                                       -----------------   -----------------
Commitments and contingencies                                                         -                   -
Stockholders' equity:
     Preferred stock, $.10 par value; authorized
        2,000,000 shares, none issued and outstanding                                 -                   -
     Common stock, $.01 par value; authorized 12,000,000
        shares, issued and outstanding 7,906,617 shares                          79,066              79,066
     Paid-in capital                                                          2,587,500           3,773,492
     Retained earnings                                                          415,143             432,097
                                                                       -----------------   -----------------
                                                                              3,081,709           4,284,655
                                                                       -----------------   -----------------
         Total liabilities and stockholders' equity                        $  4,131,907        $  5,958,015
                                                                       =================   =================

</TABLE>

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

                                       11
<PAGE>

CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
for the years ended June 30, 2000,1999 and 1998

<TABLE>
<CAPTION>
<S>                                       <C>                <C>                <C>

                                                2000                1999                1998
                                          -----------------  ------------------- --------------------
Sales                                        $         -         $ 13,536,876         $ 24,431,385
Cost of sales                                          -            8,464,830           15,391,490
                                          -----------------  ------------------- --------------------
     Gross profit                                      -            5,072,046            9,039,895

Selling, general and
  administrative expenses                         224,708           3,662,704            7,144,739
Interest (income) expense, net                   (198,754)            163,264              593,127
Gain on sale of substantially all assets
  to, and assumption of substantially all
  liabilities of the Company by,
  HydroChem Industrial Services, Inc.                    -          22,718,579                   -
                                          -----------------  ------------------- --------------------
Income from discontinued operations
  before income taxes                             (25,954)          23,964,657           1,302,029
Income taxes (benefit)                             (9,000)           2,500,000                   -
                                          -----------------  ------------------- --------------------
     Net income (loss)                       $    (16,954)        $ 21,464,657        $  1,302,029
                                          =================  =================== ====================
Earnings per share:
Net earnings per common share - basic        $       0.00          $       2.69       $        .12
                                          =================  =================== ====================

Net earnings per common share -
   assuming dilution                         $       0.00          $       2.69       $        .12
                                          =================  =================== ====================
Weighted average shares used in
  computation - basic and diluted                7,906,617            7,906,617          7,906,617
                                          =================  =================== ====================

</TABLE>

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


                                       12
<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                      Retained
                         Preferred   Common         Paid-In           (Deficit)          Treasury
                         Stock (1)   Stock (2)      Capital           Earnings           Stock           Total
                        ------------ ------------   ---------------   ---------------    -------------   --------------
<S>                     <C>          <C>            <C>               <C>                <C>             <C>

Balance, July 1, 1997      $  5,500     $ 85,121     $  26,786,040    $  (21,757,089)     $  (683,008)    $  4,436,564
Net income                                                                 1,302,029                         1,302,029
Series C preferred
   dividends                                                                (385,000)                         (385,000)
                        ------------ ------------   ---------------   ---------------    -------------   --------------
Balance, June 30, 1998        5,500       85,121        26,786,040       (20,840,060)        (683,008)       5,353,593
Net income                                                                21,464,657                        21,464,657
Series C preferred
   dividends                                                                (192,500)                        (192,500)
Retirement of treasury
   stock                                  (6,055)         (676,953)                           683,008                -
Redemption of Series C
   Preferred Stock           (5,500)                    (5,494,500)                                         (5,500,000)
Distribution of $2.13
   per share to common
   stockholders                                        (16,841,095)                                        (16,841,095)
                        ------------ ------------   ---------------   ---------------    -------------   --------------
Balance, June 30, 1999            -       79,066         3,773,492           432,097                -        4,284,655
Net loss
                                                                             (16,954)                          (16,954)
Distribution of $.15
   per share to common
   stockholders                                         (1,185,992)                                         (1,185,992)
                        ------------ ------------   ---------------   ---------------    -------------   --------------

Balance, June 30, 2000       $    -     $ 79,066     $   2,587,500      $    415,143         $      -     $  3,081,709
                        ============ ============   ===============   ===============    =============   ==============
</TABLE>

     (1)  Share amounts are equivalent to ten times dollar amounts

     (2)  Share amounts are equivalent to one hundred times dollar amounts

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

                                       13
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                         2000               1999               1998
                                                                   ----------------    ----------------   ---------------
<S>                                                                <C>                 <C>                <C>

Cash flows from operating activities:
   Net (loss) income                                                     $ (16,954)        $21,464,657        $1,302,029
   Adjustments to reconcile net (loss) income  to cash
     provided by operating activities:
       Depreciation and amortization                                             -           1,476,569         2,758,868
       Gain on disposition of property and equipment                             -             (31,625)          (66,083)
       Gain on sale of assets and assumption of liabilities                      -         (22,718,579)                -
       Deferred income taxes                                              (202,479)          1,121,000                 -
       (Increase) decrease in assets:
           Accounts receivable                                             301,907             262,195          (102,044)
           Prepaid expenses and supplies                                   (48,124)           (383,543)          (47,820)
       Increase (decrease) in liabilities:
           Accounts payable and accrued expenses                          (261,683)            408,923           (63,921)
           Income tax payable                                             (159,000)            159,000                 -
                                                                   -----------------  -----------------   ---------------
       Cash provided by operating activities                              (386,333)          1,758,597         3,781,029
                                                                   -----------------  -----------------   ---------------
Cash flows from investing activities:
   Additions to property and equipment                                           -          (1,635,104)       (2,295,049)
   Proceeds from dispositions of property and equipment                          -              31,625           240,092
   Proceeds from sale of assets and assumption of
     liabilities, net of expenses of sale and cash
     sold with assets                                                            -          28,469,429                 -
   Establishment of escrow account                                               -          (4,000,000)                -
   Change in escrow account                                                183,695             589,193                 -
                                                                   -----------------  -----------------   ---------------
       Cash provided from (used in) investing activities                   183,695          23,455,143        (2,054,957)
                                                                   -----------------  -----------------   ---------------
Cash flows from financing activities:
   Net (payments) borrowings from revolving loan                                 -            (505,669)       (1,467,355)
   Payments of other long-term debt                                              -            (520,336)         (252,394)
   Additional borrowings of long-term debt                                       -                   -           386,076
   Payments of preferred stock dividends                                         -            (288,750)         (385,000)
   Redemption of Series C Preferred Stock                                        -          (5,500,000)                -
   Distribution to common stockholders                                  (1,185,992)        (16,841,095)                -
                                                                   -----------------  -----------------   ---------------
       Cash used in financing activities                                (1,185,992)        (23,655,850)       (1,718,673)
                                                                   -----------------  -----------------   ---------------
(Decrease) increase in cash                                             (1,388,630)          1,557,890             7,399
Cash at beginning of year                                                1,765,382             207,492           200,093
                                                                   -----------------  -----------------   ---------------
Cash at end of year                                                      $ 376,752          $1,765,382          $207,492
                                                                   =================  =================   ===============
Cash paid for:
   Interest                                                                  $   -           $ 303,623          $589,340
   Income taxes                                                                  -           1,220,000                 -

Non-cash investing activities:
   Property and equipment acquired with capital leases                           -             870,705         1,846,474
</TABLE>


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


                                       14
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   DESCRIPTION OF BUSINESS:

The Company was engaged in the  business  of  providing  specialized  industrial
cleaning and other services to divisions and facilities of Fortune 500 companies
and other  substantial  businesses  engaged  in heavy  industry.  Such  services
generally   involved  the  removal  of  industrial  grime,   deposits,   wastes,
encrustations  and  coatings  from  equipment  and  facilities.   The  Company's
principal customers were in the chemical, plastics, power generation,  petroleum
refining  and primary  metals  businesses.  The  Company's  industrial  cleaning
methods included,  in addition to the use of waterblasting,  vacuuming and other
more  conventional  procedures,  the application of ultra-high  pressure ("UHP")
waterjetting methods.

2.   SALE OF  SUBSTANTIALLY  ALL  ASSETS AND  ASSUMPTION  OF  SUBSTANTIALLY  ALL
     LIABILITIES OF THE COMPANY:

On September  8, 1998,  the Company  entered into a Second  Amended and Restated
Asset Purchase  Agreement (the "Purchase  Agreement")  whereby  essentially  all
assets of the Company would be sold to, and substantially all liabilities of the
Company would be assumed by, HydroChem Industrial Services,  Inc. ("HydroChem").
The purchase  price for these assets and  liabilities  was  approximately  $30.0
million,  adjusted for increases or decreases in net assets after June 30, 1998.
This  transaction  closed on January 5, 1999, and was effective as of January 1,
1999.  Costs  totaling  $1.3 million were  incurred by the Company in connection
with the sale.  $4.0 million of the proceeds were placed in escrow to secure and
indemnify  HydroChem  for any  breach  of the  Company's  covenants  and for any
environmental  liabilities.  $1.0 million of this escrow has been released since
the  transaction  closed.  The Company  has  reserved  $70,000 in the  financial
statements  for potential  future  liabilities  to HydroChem to be paid from the
escrow account.  Escrow funds, to the extent not needed to indemnify  HydroChem,
will be released  over the next two years.  $1.0  million  will also be released
when the Company can provide  certain  environmental  assurances  to  HydroChem,
expected to be sometime in 2001.

The Company changed its name from Valley Systems,  Inc. to VSI Liquidation Corp.
after the closing of this transaction, and will not have any business operations
other than those  associated with the winding up and dissolution of the Company,
including  distribution  of any escrow funds released to the Company.  After the
closing, the Company used approximately $5.5 million of the proceeds of the sale
to redeem the  outstanding  shares of Series C  Preferred  Stock,  approximately
$380,000 to redeem outstanding employee stock options and approximately $165,000
to pay retention  bonuses to certain  officers and  employees.  The Company also
paid a liquidating  dividend of $16.8 million ($2.13 per common share) to common
stockholders from the proceeds of the sale. An additional  liquidating  dividend
of $1.2 million ($.15 per common share) was paid in fiscal 2000.

The following  summarizes the assets sold and the liabilities  assumed under the
Purchase Agreement:

                                        Balance         Amount          Balance
                                        12/31/98         Sold         After Sale
                                        --------         ----         ----------

    Cash                              $   222,800     $   222,800    $         -
    Accounts receivable                 5,053.024       5,053,024              -
    Prepaid supplies                      626,348         626,348              -
    Prepaid expenses                      159,350          78,574         80,776
    Deferred expenses of asset sale     1,132,091               -      1,132,091
    Deferred income taxes               5,985,000               -      5,985,000
    Property and equipment, net         9,994,390       9,994,390              -
    Intangible assets                     342,500         342,500              -
                                     ------------    ------------    -----------
        Total assets                   23,515,503      16,317,636      7,197,867
                                     ------------    ------------    -----------
    Accounts payable                      748,083         748,083              -
    Accrued expenses                    2,053,086       1,607,353        445,733
    Long-term debt                      8,088,550       8,088,550              -
                                     ------------    ------------    -----------
        Total liabilities              10,889,719      10,443,986        445,733
                                     ------------    ------------    -----------
          Net assets                 $ 12,625,784    $  5,873,650    $ 6,752,134
                                     ============    ============    ===========



                                       15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gain on this transaction is as follows:

   Proceeds from sale                                               $ 29,960,308
   Less:
     Net basis of assets sold and liabilities assumed                  5,873,650
     Expenses of sale                                                  1,268,079
     Reserve for liabilities resulting from indemnities
        and guaranties under the Purchase Agreement                      100,000
                                                                    ------------
   Gain on sale                                                     $ 22,718,579
                                                                    ============


Revenues earned and expenses incurred by the Company from the sale on January 1,
1999 to June 30, 1999 include  $87,000 of interest  income earned on cash in the
escrow account and $394,000 of selling, general and administrative expenses.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:  The consolidated  financial statements include the
accounts  of  the  Company  and  its  wholly-owned   subsidiary.   All  material
intercompany  transactions have been eliminated in the accompanying consolidated
financial statements.

REVENUE  RECOGNITION:  Sales and the related cost of sales for services provided
were recorded as the services were performed.

CASH IN ESCROW ACCOUNT: Cash in escrow includes highly liquid investments with a
maturity  of three  months  or less  when  purchased.  Carrying  values  of such
investments  approximate  fair  value  due to the  short-term  nature  of  these
instruments.

ACCOUNTS  RECEIVABLE:  The Company's customers were located primarily throughout
the United States. The Company monitored potential credit losses and such losses
have been within  management's  expectations.  Accounts  receivable which become
uncollectible are written off against  operations at the time they are deemed to
be worthless.  The total  uncollectible  accounts  charged to operations for the
years ended June 30, 1999 and 1998 were $232,000 and $14,000  respectively.  Bad
debt  recoveries  amounted  to  $100,000  in the year ended June 30,  2000.  The
allowance  for doubtful  accounts was zero at June 30, 2000 and $300,000 at June
30, 1999.

CONCENTRATIONS  OF CREDIT RISK ARISING  FROM CASH  DEPOSITS IN EXCESS OF INSURED
LIMITS:  The Company  maintains its cash balances in one financial  institution.
The  balances are insured by the Federal  Deposit  Insurance  Corporation  up to
$100,000. At June 30, 2000 and 1999, respectively,  the Company's uninsured cash
balances totaled $276,752 and $1,665,382.

PROPERTY AND  EQUIPMENT:  Property and equipment was stated at cost. The Company
used the straight-line  method of depreciation for financial reporting purposes.
For income tax purposes,  depreciation was computed by either the accelerated or
modified  cost  recovery  methods.  The  estimated  useful  lives for  financial
reporting purposes were as follows:

      Building and leasehold improvements                      7 to 20 years
      Automobiles and trucks                                   3 to 7 years
      Equipment                                                3 to 7 years

The cost  and  related  accumulated  depreciation  of  assets  retired,  sold or
otherwise  disposed of were  removed  from the accounts and any gain or loss was
reflected in the current years' results of operations.

INCOME TAXES:  Deferred  income taxes are provided to reflect the tax effects of
temporary  differences between financial and tax reporting,  principally related
to depreciation.

INTANGIBLE  ASSETS:  Intangible  assets  included  the cost of certain  patents,
technology,  trademarks, and a non-compete agreement. These items were amortized
to operations on a  straight-line  basis over 10 years,  the period in which the
economic benefits were estimated to be realized.



                                       16
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS  PER  COMMON  SHARE:  Earnings  per  share of  common  stock  have been
calculated  according to the  guidelines of Financial  Accounting  Standards No.
128, "Earnings Per Share."

Basic  earnings  per common  share are  computed  by  dividing  net income  less
preferred stock dividend requirements ($192,500 for the year ended June 30, 1999
and  $385,000  for the year ended June 30,  1998) for the period by the weighted
average  number of shares of common stock  outstanding  for the period.  Diluted
earnings per common  share do not vary from basic  earnings per share for any of
the periods presented because there were no dilutive  potential shares of common
stock outstanding. The dilutive effect of outstanding potential shares of common
stock was computed using the treasury stock method.

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 amounts of assets and liabilities and disclosure
of contingent  assets and  liabilities at the dates of the financial  statements
and the reported amounts of revenues and expenses during the reporting  periods.
Actual results may differ from those estimates.

BUSINESS  SEGMENT  INFORMATION:  Management  has  determined  that  the  Company
consists  of a single  operating  segment,  therefore,  there are no  disclosure
requirements under Financial  Accounting  Standards No. 131,  "Disclosures about
Segments of an Enterprise and Related Information."

FAIR VALUE OF FINANCIAL INSTRUMENTS:  The carrying values of accounts receivable
and short-term  borrowings  represent reasonable estimates of the fair values of
these  instruments  due to their short  maturities.  The fair value of long-term
debt is estimated  by  discounting  the future cash flows using rates  currently
available to the Company for debt with similar terms and  remaining  maturities.
The estimated  fair values of the long-term  debt at June 30, 1998  approximated
its carrying values.

RECLASSIFICATIONS: Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.

4.   PROPERTY AND EQUIPMENT:

The Company incurred repairs and maintenance  costs on property and equipment of
approximately  $610,000  and  $1,350,000  for the years  ended June 30, 1999 and
1998, respectively.

5.   INCOME TAXES:

The income tax provision for the three years ended June 30, 2000 is comprised of
the following amounts:

                                      2000              1999            1998
                                 ------------       ------------    ------------
     Current                     $   (9,000)        $ 1,379,000     $         -
     Deferred                             -           1,121,000               -
                                 ------------       ------------    ------------
       Total Provision           $   (9,000)        $ 2,500,000     $         -
                                 ============       ============    ============

    Statutory Rate                     (34)%                 34%           34%
    State and local taxes,
      net of federal benefit            (1)                   5             5
    Operating loss utilized               -                 (29)          (39)
                                 ------------       ------------    ------------
       Effective rate                  (35)%                 10%            0%
                                 ============       ============    ============

Deferred  federal  income  taxes  reflect  the  impact for  financial  statement
reporting purposes of temporary  differences between the financial statement and
tax basis of assets and  liabilities.  At June 30, 2000 and 1999, the components
of the net deferred tax assets and liabilities were as follows:

                                       17
<PAGE>
                                                       2000             1999
                                                   -------------    ------------
     Deferred tax asssets:
        Allowance for doubtful accounts                             $   117,000
        Vacation accrual                                                      -
        Net operating loss carryforwards                                      -
        Other                                      -------------    ------------
                                                               -        117,000
                                                   -------------    ------------

    Deferred tax liabilities:
       Basis difference in fixed assets                                       -
       Escrow account                                                (1,200,598)
       Other                                                            (37,402)
                                                   -------------    ------------
                                                               -     (1,238,000)
                                                   -------------    ------------
    Net deferred tax (liabilities) assets                      -     (1,121,000)

    Valuation allowance                                        -              -
                                                   -------------    ------------
    Net deferred taxes recognized                   $          -    $(1,121,000)
                                                   =============    ============

8.   LITIGATION:

The Company is involved in various  litigation arising in the ordinary course of
business.  Management  believes that the ultimate  resolution of such litigation
will not have a material effect on the Company's operations,  financial position
or cash flows.

9.   STOCKHOLDERS' EQUITY:

In September  1994, the Company issued 55,000 shares of Series C Preferred Stock
to its majority stockholder,  which then transferred them to an affiliate.  Each
share of the  Series C  Preferred  Stock was  entitled  to a  cumulative  annual
dividend  of  $7.00,  payable  quarterly.  The  proceeds  from  the  sale of the
preferred  shares  totaled $5.5 million;  $3.0 million in the conversion of debt
for  equity  and $2.5  million  of cash.  In the event the  Company is merged or
consolidated  such that the majority  shareholder  no longer holds a controlling
interest in the  surviving  or resulting  entity,  the  preferred  stock must be
redeemed  and retired for $5.5  million  plus any accrued and unpaid  cumulative
dividends. In accordance with this provision, the preferred shares were redeemed
and  retired  after the sale of  substantially  all of the  Company's  assets to
HydroChem in January 1999.

10.  STOCK OPTIONS AND WARRANTS:

A.   In 1991,  the Company  adopted a stock option plan. Up to 400,000 shares of
     common  stock  could  be  issued  under  the  plan.  Due  to  the  sale  of
     substantially all assets of the Company, all outstanding options on January
     1, 1999 were  redeemed  by the  Company  using a market  value of $2.50 per
     share.  The  difference  between the market  price and the option price was
     paid to the  option  holder  in cash,  with a total  cost of  approximately
     $380,000. No further options will be issued under the plan.

B.   In October  1994,  the Company  issued  stock  options to its  directors to
     purchase a total of 50,000  shares of its common  stock at $1.50 per share.
     These  options  are not  part of the  stock  option  plan  above,  and were
     redeemed  at the same time and under the same terms as those  options  that
     were part of the plan, with a total cost of $50,000.

C.   In 1999 and 1998,  respectively,  options to  purchase  11,900,  and 46,700
     shares of common stock were forfeited.

D.   The  Company  has  elected  to adopt the  "disclosure-only"  provisions  of
     Financial  Accounting  Standards  No.  123,  "Accounting  for  Stock  Based
     Compensation"  ("SFAS No. 123"),  with no compensation  cost recognized for
     options granted at or above market value.  For SFAS No. 123, the fair value
     of each  option  granted  was  estimated  on the  date of grant  using  the
     Black-Scholes option pricing model with the following assumptions for 1998:
     (a) risk-free  interest rates of 6.40% to 7.04%; (b) no dividend yield; (c)
     expected terms of 8 years; and (d) volatility of 95%.

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If the Company  had  elected to  recognize  the  compensation  cost of its stock
option plan based on the fair value of the awards under that plan in  accordance
with SFAS No. 123,  net income  would have  increased  to  $1,383,952  ($.13 per
common share, assuming dilution) for the year ended June 30, 1998.

At June 30, 2000, warrants to purchase shares of the Company's common stock were
outstanding as follows:

           WARRANT
            PRICE           SHARES     EXPIRATION DATE
            -----           ------     ---------------
             $ 15.00       100,000     September 2001

11.   EMPLOYEE BENEFIT PLAN:

In 1991,  the  Company  adopted a 401(k)  plan  that  covers  substantially  all
employees.  The plan is a discretionary  plan in that the Company may or may not
make  contributions  to the plan.  The  Company did not  contribute  to the plan
during the three  years  ended June 30,  2000.  Effective  January 1, 1999,  the
Company terminated this plan as a result of the sale of substantially all of the
Company's  assets  to  HydroChem.  On  April  20,  1999  the  Company  filed  an
application  for  termination  of the plan with the  Internal  Revenue  Service.
Termination was completed in December 1999.




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