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, 2001

[ ]  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             (IRS Employer Identification Number)
incorporation or organization)

       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 August 23, 2001: (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 $388,664, based on the closing sale price of
$.1875 per share on August 23, 2001.


<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.  Additional  liquidating dividends of approximately $1.2 million ($.15 per
share)  and  $790,000  ($.10 per  share)  were paid to  common  stockholders  in
February 2000 and 2001, respectively.

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

                                       2
<PAGE>

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.

     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, 2001, the Company had no employees other than its officers
and directors.

ITEM 2.   PROPERTIES

     As of August 31, 2001 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, 2001.

                                       3
<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 table sets forth the high
and low sale prices for the periods indicated.

                                                        High            Low
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
Fiscal 2001:
July 1, 2000 - September 30, 2000                       0.375          0.063
October 1, 2000 - December 31, 2000                     0.250          0.141
January 1, 2001 - March 31, 2001                        0.156          0.141
April 1, 2001 - June 30, 2001                           0.203          0.156

     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>
                                               2001 (1)      2000        1999         1998         1997
                                              ---------- ----------- ------------ ------------ -----------
Sales                                             $   -       $   -     $ 13,537     $ 24,431    $ 23,088
Gross profit                                          -           -        5,072        9,040       8,559
Selling, general and
    administrative expenses                         353         225        3,663        7,145       7,268
Litigation settlements and related fees               -           -            -            -       (752)
Interest (income) expense, net                    (155)       (199)          163          593         592
Gain on sale of substantially all assets
    and assumption of substantially all
    liabilities of the Company                        -           -       22,719            -           -
Net income (loss)                                 (129)        (17)       21,465        1,302       1,451
Earnings (loss) per common share:
    Basic and diluted                            (0.02)      (0.00)         2.69         0.12        0.13
Total assets                                      3,128       4,132        5,958       15,934      14,568
Total long-term debt                                  -           -            -        7,585       7,235
Total stockholders' equity                        2,162       3,082        4,285        5,354       4,437

(1)  July 1, 2000 through June 30, 2001
</TABLE>


                                       4
<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 - 2001 compared to 2000

     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 - 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.

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>
                                                                  Three Months Ended
                                                         (In thousands, except per share data)
                                    9/30/99   12/31/99    3/31/00    6/30/00  9/30/00   12/31/00    3/31/01    6/30/01
                                    -------   --------    -------    -------  -------   --------    -------    -------
Sales                                  $  -      $   -      $   -      $   -     $  -      $   -      $   -      $   -
Gross profit                              -          -          -          -        -          -          -          -
Net income (loss)                       (20)         5         (2)       (81)     (11)       (14)       (99)        (5)
Earnings per common share -
    basic and diluted                  $.00      $ .00      $ .00      $(.01)   $ .00      $  .00     $(.02)     $ .00
</TABLE>


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.

     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,


                                       5
<PAGE>

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. Additional  liquidating cash dividends of
approximately  $1.2 million ($.15 per share) and $790,000  ($.10 per share) were
paid to  stockholders of record on the close of business on January 31, 2000 and
2001,  respectively.  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,  $1.4 million of the remaining  escrowed funds of approximately  $2.4
million  (including  earnings on escrowed  funds to date) will be released on or
about  January  2002,  the  third  anniversary  of the  closing  date.  Up to an
additional  $1 million may be  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 2002. 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,  2001 the  Company  had  approximately
$215,000 in cash in addition to  approximately  $2.4  million held in the 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.

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.


                                       6
<PAGE>


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, 2001 and 2000.
             Consolidated Statements of Discontinued Operations for the years
               ended June 30, 2001, 2000 and 1999.
             Consolidated Statements of Stockholders' Equity for the years
               ended June 30, 2001, 2000 and 1999.
             Consolidated Statements of Cash Flows for the years ended June 30,
               2001, 2000 and 1999.
             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

---------------------
*  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.

                                       7
<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, 2001                  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/ Ed Strickland           President and Chief         September 27, 2001
--------------------        Executive Officer
Ed Strickland

/s/  Allen O. Kinzer        Director                    September 27, 2001
--------------------
Allen O. Kinzer

/s/  Joe M. Young           Director and Acting         September 27, 2001
--------------------        Financial Officer
Joe M. Young


                                       8
<PAGE>


                      VSI LIQUIDATION CORP. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                       Page
                                                                      Number
                                                                      ------

REPORTS OF INDEPENDENT ACCOUNTANTS                                     10-11

CONSOLIDATED BALANCE SHEETS - June 30, 2001 and 2000                      12

CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS - Years ended
June 30, 2001, 2000 and 1999                                              13

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended June
30, 2001, 2000 and 1999                                                   14

CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended June 30, 2001,
2000 and 1999                                                             15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             16-19

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






                                       9

<PAGE>

Report of Independent Accountants

To the Board of Directors and Stockholders
VSI Liquidation Corp.

We have audited the accompanying  consolidated balance sheets of VSI Liquidation
Corp. and subsidiary (a Delaware  corporation) as of June 30, 2001 and 2000, and
the related consolidated  statements of discontinued  operations,  stockholders'
equity, and cash flows for the years 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 audits.

We conducted  our audits in accordance  with U.S.  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 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 VSI Liquidation and subsidiary
as of June 30, 2001 and 2000, and the results of its discontinued operations and
its cash  flows for the  years  then  ended in  conformity  with U.S.  generally
accepted accounting principles.


/s/ Hall, Kistler & Company LLP

Hall, Kistler & Company LLP

Canton, Ohio
September 27, 2001

                                       10
<PAGE>


                        Report of Independent Accountants


To the Stockholders of
VSI Liquidation Corp.:

In our opinion,  the  consolidated  statements of  discontinued  operations,  of
changes  in  stockholders'  equity and of cash flows for the year ended June 30,
1999  (appearing  on  pages  13  through  15 of the VSI  Liquidation  Corp.  and
Subsidiary  consolidated  financial  statements which have been included in this
Form 10-K) present fairly, in all material  respects,  the results of operations
and cash flows of VSI  Liquidation  Corp. and subsidiary for the year 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  audit.  We  conducted  our  audit 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
audit  provides 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.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Cleveland, Ohio
September 23, 1999


1398191


                                       11
<PAGE>

Consolidated Balance Sheets
June 30, 2001 and 2000

<TABLE>
<CAPTION>
<S>                                                                    <C>                 <C>
                                                                             2001                2000
                                                                       -----------------   -----------------
                                ASSETS
Current assets:
     Cash                                                               $       215,310     $       376,752
     Cash in escrow account                                                   2,372,849           1,000,000
     Accounts receivable, net                                                         -             123,268
     Prepaid expenses and deposits                                              539,775             404,775
                                                                       -----------------   -----------------
        Total current assets                                                  3,127,934           1,904,795
Cash in escrow account                                                                -           2,227,112
                                                                       -----------------   -----------------
            Total assets                                                $     3,127,934     $     4,131,907
                                                                       =================   =================
                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                              $       163,597     $       131,677
     Income taxes payable                                                             -                   -
     Deferred income taxes                                                      802,072              84,000
                                                                       -----------------   -----------------
        Total current liabilities                                               965,669             215,677
Deferred income taxes                                                                 -             834,521
                                                                       -----------------   -----------------
        Total liabilities                                                       965,669           1,050,198
                                                                       -----------------   -----------------
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                                                          1,796,838           2,587,500
     Retained earnings                                                          286,361             415,143
                                                                       -----------------   -----------------
                                                                              2,162,265           3,081,709
                                                                       -----------------   -----------------
            Total liabilities and stockholders' equity                  $     3,127,934     $     4,131,907
                                                                       =================   =================
</TABLE>


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


                                       12
<PAGE>

Consolidated Statements of Discontinued Operations
for the years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
<S>                                            <C>                 <C>                <C>
                                                     2001                2000               1999
                                               -----------------   -----------------  ------------------
Sales                                           $             -     $             -    $     13,536,876
Cost of sales                                                 -                   -           8,464,830
                                               -----------------   -----------------  ------------------
     Gross profit                                             -                   -           5,072,046

Selling, general and
  administrative expenses                               352,515             224,708           3,662,704
Interest (income) expense, net                         (154,733)           (198,754)            163,264

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 (loss) from discontinued
  operations before income taxes                       (197,782)            (25,954)         23,964,657

Income taxes (benefit)                                  (69,000)             (9,000)          2,500,000
                                               -----------------   -----------------  ------------------
     Net income (loss)                          $      (128,782)    $       (16,954)   $     21,464,657
                                               =================   =================  ==================
Earnings per share:
Net earnings per common share - basic           $         (0.02)    $          0.00    $           2.69
                                               =================   =================  ==================
Net earnings per common share -
   assuming dilution                            $         (0.02)    $          0.00    $           2.69
                                               =================   =================  ==================
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.



                                       13
<PAGE>

Consolidated Statements of Stockholders' Equity
for the years ended June 30, 2001, 2000 and 1999

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

Net loss                                                                              (128,782)                          (128,782)
Distribution of $.10 per
   share to common
   stockholders                                                  (790,662)                                               (790,662)
                              ----------- ------------- ------------------ -------------------- --------------- ------------------
Balance, June 30, 2001         $       -   $    79,066   $      1,796,838   $          286,361   $           -   $      2,162,265
                              =========== ============= ================== ==================== =============== ==================

</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.


                                       14
<PAGE>


Consolidated Statements of Cash Flows
for the years ended June 30, 2001, 2000  and 1999

<TABLE>
<CAPTION>
<S>                                                                <C>               <C>                 <C>
                                                                        2001               2000                1999
                                                                   ---------------   ------------------  ------------------
Cash flows from operating activities:
   Net (loss) income                                                $    (128,782)    $        (16,954)   $     21,464,657
   Adjustments to reconcile net (loss) income  to cash
     provided by (used in) operating activities:
       Depreciation and amortization                                            -                    -           1,476,569
       Gain on disposition of property and equipment                            -                    -             (31,625)
       Gain on sale of assets and assumption of liabilities                     -                    -         (22,718,579)
       Deferred income taxes                                             (116,449)            (202,479)          1,121,000
       (Increase) decrease in assets:
           Accounts receivable                                            123,268              301,907             262,195
           Prepaid expenses and supplies                                 (135,000)             (48,124)           (383,543)
       Increase (decrease) in liabilities:
           Accounts payable and accrued expenses                           31,920             (261,683)            408,923
           Income tax payable                                                   -             (159,000)            159,000
                                                                   ---------------   ------------------  ------------------
       Cash provided by (used in) operating activities                   (225,043)            (386,333)          1,758,597
                                                                   ---------------   ------------------  ------------------
Cash flows from investing activities:
   Additions to property and equipment                                          -                    -          (1,635,104)
   Proceeds from dispositions of property and equipment                         -                    -              31,625
   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                                               854,263              183,695             589,193
                                                                   ---------------   ------------------  ------------------
       Cash provided by (used in) investing activities                    854,263              183,695          23,455,143
                                                                   ---------------   ------------------  ------------------
Cash flows from financing activities:
   Net (payments) borrowings from revolving loan                                -                    -            (505,669)
   Payments of other long-term debt                                             -                    -            (520,336)
   Additional borrowings of long-term debt                                      -                    -                   -
   Payments of preferred stock dividends                                        -                    -            (288,750)
   Redemption of Series C Preferred Stock                                       -                    -          (5,500,000)
   Distribution to common stockholders                                   (790,662)          (1,185,992)        (16,841,095)
                                                                   ---------------   ------------------  ------------------
       Cash used in financing activities                                 (790,662)          (1,185,992)        (23,655,850)
                                                                   ---------------   ------------------  ------------------
(Decrease) increase in cash                                              (161,442)          (1,388,630)          1,557,890
Cash at beginning of year                                                 376,752            1,765,382             207,492
                                                                   ---------------   ------------------  ------------------
Cash at end of year                                                 $     215,310     $        376,752    $      1,765,382
                                                                   ===============   ==================  ==================
Cash paid for:
   Interest                                                         $           -     $              -    $        303,623
   Income taxes                                                                 -                    -           1,220,000
Non-cash investing activities:
   Property and equipment acquired with capital leases                          -                    -             870,705
</TABLE>


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


                                       15
<PAGE>
                   Notes to Consolidated Financial Statements
                 for the years ended June 30, 2001,2000 and 1999

     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.  Approximately $2.0
million of this escrow has been  released  since the  transaction  closed.  $1.0
million of the  escrowed  funds will be  released  when the  Company can provide
certain environmental assurances to HydroChem,  expected to be sometime in 2002.
The  remaining  funds in escrow are expected to be released on or about  January
2002, the third anniversary of transaction. The Company has reserved $150,000 in
the financial  statements at June 30, 2001 for potential  future  liabilities to
HydroChem to be paid from the escrow account.

     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.
Additional  liquidating dividends of approximately $1.2 million ($.15 per common
share) and $790,000  ($.10 per common  share) were paid in fiscal  February 2000
and 2001, respectively.

     The following  summarizes the assets sold and the liabilities assumed under
the Purchase Agreement:
<TABLE>
<CAPTION>
<S>                                          <C>               <C>               <C>
                                                 Balance            Amount            Balance
                                                12/31/1998           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
                                             ================= ================= ==================
</TABLE>
                                       16
<PAGE>
                   Notes to Consolidated Financial Statements
                 for the years ended June 30, 2001,2000 and 1999

     The gain on this transaction is as follows:

<TABLE>
<CAPTION>
<S>                                                                                       <C>
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
                                                                                          ==================
</TABLE>

     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 year ended June 30, 1999 was $232,000.  Bad debt  recoveries
amounted to $100,000 in the year ended June 30, 2000.

     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,  2001  and  2000,  respectively,  the
Company's uninsured cash balances totaled $115,310 and $276,752.

     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.


                                       17
<PAGE>
                   Notes to Consolidated Financial Statements
                 for the years ended June 30, 2001,2000 and 1999


     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) 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.

     4. Property and Equipment:

     The  Company  incurred  repairs  and  maintenance  costs  on  property  and
equipment of approximately $610,000 for the year ended June 30, 1999.

     5. Income Taxes:

     The  income  tax  provision  for the three  years  ended  June 30,  2001 is
comprised of the following amounts:


<TABLE>
<CAPTION>
<S>                                                     <C>                 <C>                 <C>
                                                              2001                2000                1999
                                                        ------------------  ------------------  -----------------
Current                                                  $        (69,000)   $         (9,000)   $     1,379,000
Deferred                                                                -                   -          1,121,000
                                                        ------------------  ------------------  -----------------
     Total Provision                                     $        (69,000)   $         (9,000)   $     2,500,000
                                                        ==================  ==================  =================
Statutory Rate                                                        (34)%               (34)%               34%
State and local taxes, net of federal benefit                          (1)                 (1)                 5
Operating loss utilized                                                 -                   -                (29)
                                                        ------------------  ------------------  -----------------
     Effective rate                                                   (35)%               (35)%               10%
                                                        ==================  ==================  =================
</TABLE>


     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, 2001 and 2000, the components
of the net deferred tax assets and liabilities were as follows:

                                                  2001              2000
                                             ---------------- -----------------
Deferred tax liabilities:
    Escrow account                            $      802,072   $       918,521
                                             ---------------- -----------------
Net deferred tax liabilities                  $      802,072   $       918,521
                                             ================ =================


                                       18
<PAGE>
                   Notes to Consolidated Financial Statements
                 for the years ended June 30, 2001,2000 and 1999


     6. 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.

     7. 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  options  to  purchase  11,900  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%.

     At June 30, 2001, 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

     8. 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,  2001.  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.



                                       19

1397298