United States
                      Securities and Exchange Commission
                            Washington, D.C. 20549


                                  FORM 10-Q


   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
           Act of 1934 For the Quarterly Period ended September 30, 1999

                        Commission File Number 333-34323


                   HYDROCHEM INDUSTRIAL SERVICES, INC. (*)
            (Exact name of registrant as specified in its charter)


                      Delaware                          75-2503906
          (State or other jurisdiction of            (I.R.S. Employer
           incorporation or organization)           Identification Number)

                 900 Georgia Avenue
                  Deer Park, Texas                          77536
          (Address of principal executive offices)        (Zip Code)

                                 (713) 393-5600
              (Registrant's telephone number, including area code)


     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


     The  number  of shares of Common  Stock of the  Registrant  outstanding  on
     November  1, 1999  was 100 shares.  The  Registrant's  Common  Stock is not
     registered under the Securities Act of 1933, as amended,  or the Securities
     Exchange Act of 1934, as amended.



------------------------------------------------------------------------------


     * HydroChem  International,  Inc., a wholly-owned  subsidiary  of HydroChem
Industrial Services, Inc., is a Co-Registrant. It is incorporated under the laws
of  the  State  of  Delaware.  Its  I.R.S.  Employer  Identification  Number  is
75-2512100.
<PAGE>


                              TABLE OF CONTENTS


Part I. Financial Information

        Item 1. Financial Statements

              Consolidated Balance Sheets as of December 31, 1998 and
                 September 30, 1999 (unaudited).......................     3

              Consolidated  Statements of  Operations  for each of the
                 three and nine month periods ended September 30, 1998
                 and 1999 (unaudited).................................     4

              Consolidated Statement of Stockholder's Equity for the nine
                 month period ended September 30, 1999 (unaudited)....     5

              Consolidated  Statements  of Cash Flows for each of the
                 nine month periods ended September 30, 1998 and
                 1999 (unaudited).....................................     6

              Notes to Consolidated Financial Statements (unaudited)..     7

        Item 2. Management's Discussion and Analysis of Financial Condition
                   and Results of Operations..........................    11

        Item 3. Quantitative and Qualitative Disclosures About
                   Market Risk........................................    17

Part II.Other Information

        Item 1. Legal Proceedings.....................................   18

        Item 6. Exhibits and Reports on Form 8-K......................   18

Signatures............................................................   22

Exhibit Index.........................................................   23


                                       2
<PAGE>

                      HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                     December 31,  September 30,
                                                          1998          1999
                                                     ------------  -------------
                                      ASSETS
    <S>                                                 <C>          <C>
    Current assets:
        Cash and cash equivalents....................   $ 33,775     $  2,206
        Receivables, less allowance of $536 and $728,
          respectively...............................     23,941       33,169
        Inventories..................................      3,902        4,586
        Prepaid expenses and other current assets....      1,714        2,339
        Income taxes receivable......................        243          243
        Deferred income taxes........................      1,467        1,655
                                                         -------      -------
          Total current assets.......................     65,042       44,198

    Property and equipment, at cost..................     81,459       92,832
        Accumulated depreciation.....................    (33,322)     (41,061)
                                                         -------      -------
                                                          48,137       51,771

    Intangible assets, net...........................     43,246       67,906
                                                         -------      -------

          Total assets...............................   $156,425     $163,875
                                                         =======      =======

                      LIABILITIES AND STOCKHOLDER'S EQUITY
    Current liabilities:
        Accounts payable.............................   $  4,973     $  5,651
        Accrued liabilities..........................     13,193       14,543
        Current portion of long-term debt (Note 3)...        121          209
                                                         -------      -------
          Total current liabilities..................     18,287       20,403

    Long-term debt (Note 3)..........................    115,996      118,211
    Deferred income taxes............................      8,626        8,814
    Commitments and contingencies (Note 6)

    Stockholder's equity:
        Common stock, $.01 par value:

           1,000 shares authorized, 100 shares
            outstanding..............................          1            1
        Additional paid-in capital...................     16,558       16,558
        Retained deficit.............................     (3,043)        (112)
                                                         -------      -------
        Total stockholder's equity...................     13,516       16,447
                                                         -------      -------

          Total liabilities and stockholder's equity.   $156,425     $163,875
                                                         =======      =======
</TABLE>




                             See accompanying notes.

                                       3
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                       Three months ended    Nine months ended
                                          September 30,        September 30,
                                         1998       1999      1998       1999
                                       -------    -------    ------     ------
<S>                                    <C>        <C>        <C>        <C>
Revenue .............................. $40,509    $43,010    $126,464   $146,109
Cost of revenue.......................  25,632     25,709      78,702     86,409
                                        ------     ------     -------    -------
    Gross profit......................  14,877     17,301      47,762     59,700

Selling, general and administrative
 expense..............................  11,799     11,144      33,547     36,518
Depreciation..........................   2,296      2,836       6,728      8,588
                                        ------     ------      ------    -------
    Operating income..................     782      3,321       7,487     14,594

Other (income) expense:
    Interest expense, net.............   2,626      3,229       7,742      9,725
    Special charge....................      -          -          300         -
    Other (income) expense, net.......    (142)       105        (126)        37
    Amortization of intangibles.......     375        634       1,125      1,901
                                        ------     ------      ------    -------
Income (loss) before taxes............  (2,077)      (647)     (1,554)     2,931

    Income tax benefit (Note 4).......    (356)        -          (44)        -
                                        ------     ------      ------    -------
Net income (loss)..................... $(1,721)   $  (647)    $(1,510)  $  2,931
                                        ======     ======      ======    =======
</TABLE>




















                             See accompanying notes.

                                       4
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                 Additional
                                        Common    Paid-in    Retained
                                        Stock     Capital    Deficit      Total
                                        -----     -------    -------      -----
<S>                                     <C>      <C>         <C>         <C>
Balance at December 31, 1998 .......... $   1    $ 16,558    $(3,043)    $13,516


    Net income.........................     -           -      2,931       2,931
                                         ----     -------     ------     -------

Balance at September 30, 1999 ......... $   1    $ 16,558     $ (112)    $16,447
                                         ====     =======      =====      ======
</TABLE>





























                             See accompanying notes.

                                       5
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           Nine months ended
                                                              September 30,
                                                            1998        1999
                                                            ----        ----
<S>                                                         <C>         <C>
Operating activities:
    Net (loss) income.....................................  $ (1,510)  $  2,931
    Adjustments to reconcile net (loss) income
        to net cash provided by operating activities:

        Depreciation......................................     6,728      8,588
        Amortization......................................     1,125      1,901
        Amortization of deferred financing costs..........       230        356
        Deferred income tax provision.....................      (247)        -
        Loss (gain) on sale of property and equipment.....       (58)       110
    Changes in operating assets and liabilities, net of
      effects of acquisition:
        Restricted cash...................................     2,585         -
        Receivables, net..................................    (1,094)    (4,187)
        Inventories.......................................      (651)      (684)
        Prepaid expenses and other current assets.........      (846)        17
        Income taxes receivable...........................        95         -
        Accounts payable..................................     1,152        (71)
        Income taxes payable..............................       (40)        -
        Accrued liabilities...............................    (1,828)      (144)
                                                             -------     ------
           Net cash provided by operating activities......     5,641      8,817
                                                             -------     ------
Investing activities:
    Expenditures for property and equipment...............   (15,278)    (5,044)
    Proceeds from sale of property and equipment..........       244        187
    Purchase of assets, net of cash.......................        -     (32,170)
                                                             -------    -------
           Net cash used in investing activities..........   (15,034)   (37,027)
                                                             -------    -------
Financing activities:
    Proceeds from (repayments of) long-term debt, net.....     4,889     (3,359)
                                                             -------    -------
           Net cash used in financing activities..........     4,889     (3,359)
                                                             -------    -------
Net decrease in cash......................................    (4,504)   (31,569)
Cash at beginning of period...............................    33,862     33,775
                                                             -------    -------
Cash at end of period.....................................  $ 29,358   $  2,206
                                                             =======    =======
</TABLE>




                             See accompanying notes.

                                       6
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1999

1.      ORGANIZATION, FORMATION AND BASIS OF PRESENTATION

        The consolidated  financial statements include the accounts of HydroChem
    Industrial Services,  Inc. ("HydroChem") and its wholly-owned  subsidiaries,
    including  HydroChem  International,   Inc.   ("International").   HydroChem
    generally conducts business outside the United States through International.
    (HydroChem and its subsidiaries are hereinafter sometimes referred to either
    separately or collectively  as the  "Company.")  HydroChem is a wholly-owned
    subsidiary of HydroChem Holding, Inc. ("Holding").

        The Company is engaged in the business of providing  industrial cleaning
    services to a wide range of processing industries,  including  petrochemical
    plants,  oil refineries,  electric  utilities,  pulp and paper MILLS,  STEEL
    MILLS,  ALUMINUM PLANTS,  AND RUBBER PLANTS.  This type of work is typically
    recurring  maintenance to improve or sustain the operating  efficiencies and
    extend  the useful  lives of  process  equipment  and  facilities.  Services
    provided  include  high-pressure  water cleaning  (hydroblasting),  chemical
    cleaning,  industrial  vacuuming and other services.  Other services include
    mechanical, commissioning, waste minimization and specialized services.

        The accompanying  unaudited  consolidated financial statements presented
    herein have been prepared in accordance with generally  accepted  accounting
    principles for interim  financial  information and the rules and regulations
    of the Securities and Exchange Commission.  Accordingly, they do not include
    all of the  information  and  disclosures  required  by  generally  accepted
    accounting principles for complete financial statements. Certain information
    and  disclosures  normally  included  in  financial  statements  prepared in
    accordance with generally accepted accounting principles have been condensed
    or omitted. In the opinion of management, the accompanying unaudited interim
    financial  statements  include all  adjustments,  consisting  of only normal
    recurring accruals,  necessary for a fair presentation of the results of the
    interim  periods.  Operating  results  for the three and nine month  interim
    periods  ended  September  30, 1999 are not  necessarily  indicative  of the
    results  that may be expected for the year ending  December 31, 1999.  These
    unaudited  consolidated  financial  statements should be read in conjunction
    with the Company's audited consolidated financial statements included in the
    Company's Annual Report on Form 10-K for the year ended December 31, 1998.

2.  DERIVATIVE FINANCIAL INSTRUMENTS

        HydroChem  entered into an interest rate swap  agreement  dated July 17,
    1998 (the "Interest  Rate Swap") with a financial  institution to manage the
    interest rate exposure of the Term Loan (as defined in Note 3) with the same
    financial  institution.  At September 30, 1999,  $7,420,000 was  outstanding
    under the Term Loan.  Under the Interest  Rate Swap,  HydroChem's  effective
    fixed  borrowing  rate for the Term Loan is 7.82% per annum.  The Company is
    exposed  to credit  loss in the event of  non-performance  by the  financial
    institution; however, management does not anticipate non-performance and, in
    the event of  non-performance,  no  material  loss  would be  expected.  The
    Company does not hold or issue financial instruments for trading purposes.





                                       7
<PAGE>

3.  LONG-TERM DEBT

        Long-term  debt at December 31, 1998 and September 30, 1999 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
                                                         1998            1999
                                                       --------        --------
        <S>                                            <C>             <C>
        Senior subordinated notes..................... $110,000        $110,000
        Construction loan.............................    6,117               -
        Term loan.....................................        -           7,420
        Credit facility...............................        -           1,000
                                                        -------         -------
        Total long-term debt..........................  116,117         118,420
           Less current portion of long-term debt.....     (121)           (209)
                                                        -------         -------
                                                       $115,996        $118,211
                                                        =======         =======
</TABLE>

        HydroChem has outstanding $110,000,000 of Senior Subordinated Notes (the
    "Notes").  The Notes  mature on August 1, 2007 and bear  interest at 10 3/8%
    per annum which is payable semi-annually in arrears on February 1 and August
    1 of each year.  The Notes are  redeemable  at the option of  HydroChem,  in
    whole or in part, on or after August 1, 2002 at specified redemption prices.
    In addition,  until August 4, 2000, up to 35% of the Notes are redeemable at
    the option of HydroChem with the proceeds from one or more equity  offerings
    at a  redemption  price of 109.375% of the  principal  amount  thereof.  All
    HydroChem  subsidiaries,  including  International,  are  guarantors  of the
    Notes.

        HydroChem is a party to a credit  agreement  dated December 31, 1997, as
    amended,  with a financial  institution for a credit facility which provides
    for unsecured  borrowings of up to  $25,000,000,  subject to borrowing  base
    limitations (the "Credit Facility"). The Credit Facility matures on December
    31,  2000 and any  borrowings  thereunder  bear  interest at rates which are
    adjusted quarterly. At the discretion of HydroChem, interest rates are based
    on (i) LIBOR  plus an  applicable  margin of 1.75% to  3.00%,  or,  (ii) the
    higher of (a) the prime rate plus an  applicable  margin of up to 1.00%,  or
    (b) the Federal Funds Rate plus an applicable  margin of 0.50% to 1.50%.  In
    addition,  a commitment fee of 0.25% to 0.50% per annum is payable quarterly
    on the unborrowed  portion of the Credit Facility.  The specific rate within
    each range  depends upon the  Company's  operating  performance.  The Credit
    Facility requires the Company to meet certain customary financial ratios and
    covenants,  and generally restricts the Company from pledging its assets. At
    September 30, 1999, HydroChem's borrowing base under the Credit Facility was
    $25,000,000,  of which  $3,260,000  had been  utilized and  $21,740,000  was
    available. The amounts utilized consisted of advances and standby letters of
    credit of $1,000,000 and  $2,260,000,  respectively.  The standby letters of
    credit principally were issued in connection with the Company's property and
    casualty insurance program.

        For the purpose of financing the land purchase and construction costs of
    the  Company's  headquarters  and operating  facility in the Houston,  Texas
    area,  HydroChem  is a party to a loan  agreement  dated July 17,  1998,  as
    amended,  with a financial  institution (the "Construction Loan Agreement").
    The Construction  Loan Agreement  provided for an interim  construction loan
    (the "Interim Loan") of up to $7,500,000  which was converted to a term loan
    as of March 31, 1999 (the "Term Loan").  The Term Loan is  collateralized by
    first priority liens on the land and  improvements.  Interest on the Interim
    Loan, which was payable quarterly,  was at the lender's commercial loan rate
    less 0.50%.  The Term Loan  matures on September  30,  2006.  Under the Term
    Loan, principal and interest are payable in quarterly  installments,  with a
    final  principal  payment of  $5,904,000  due at  maturity.  Pursuant to the
    Interest Rate Swap,  HydroChem's effective fixed borrowing rate for the Term
    Loan is 7.82% per  annum.  The  Construction  Loan  Agreement  requires  the
    Company  to meet  certain  customary  financial  ratios  and  covenants  and
    generally restricts the Company from transferring or pledging the facility's
    assets.  The Company obtained a waiver with respect to one of the ratios for
    non-compliance  resulting from special and  restructuring  charges  recorded
    during the quarter ended December 31, 1998. At September 30, 1999, HydroChem
    had $7,420,000  outstanding  under the Term Loan and was in compliance  with
    the  financial  ratios and  covenants  contained  in the  Construction  Loan
    Agreement.


                                       8
<PAGE>

4.  INCOME TAXES

        The Company files a consolidated tax return with Holding.  The Company's
    effective  income tax rate for the  interim  periods  presented  is based on
    management's estimate of the Company's effective tax rate for the applicable
    year and differs from the federal statutory income tax rate primarily due to
    nondeductible  permanent differences,  state income taxes and changes in the
    valuation allowance of deferred tax assets.

5.  SUMMARY FINANCIAL INFORMATION

        Summary  financial  information for  International as consolidated  with
    HydroChem is as follows (in thousands):

<TABLE>
<CAPTION>
                                                      As of            As of
                                                   December 31,    September 30,
                                                      1998             1999
                                                      ----             ----
        <S>                                          <C>             <C>
        Current assets.........................      $  1,377        $  2,291
        Noncurrent assets......................           103              92
        Current liabilities....................            68             290
        Noncurrent liabilities.................             -               -
</TABLE>
<TABLE>
<CAPTION>
                                   Three months ended        Nine months ended
                                      SEPTEMBER 30,            SEPTEMBER 30,
                                     --------------           ---------------
                                    1998       1999           1998       1999
                                    ----       ----           ----       ----
        <S>                        <C>        <C>            <C>        <C>
        Revenue..................  $ 1,075    $1,815         $2,693     $ 4,630
        Gross profit.............      296       636            833       1,743
        Net income (loss)........       (2)      199           (206)       680
</TABLE>

6.  COMMITMENTS AND CONTINGENCIES

        The Company is a  defendant  in various  lawsuits  arising in the normal
    course of business.  Substantially  all of these suits are being defended by
    the Company's insurance carriers.  While the results of litigation cannot be
    predicted with certainty,  management  believes that adequate  provision has
    been made for such claims and that the final outcome of such litigation will
    not have a material adverse effect on the Company's  consolidated  financial
    position.

        The Company is a defendant in approximately 70 lawsuits originally filed
    in the 18th Judicial  District Court for the Parish of Iberville,  Louisiana
    against Georgia Gulf  Corporation  ("Georgia  Gulf"),  the Company and other
    defendants, which have arisen from a chemical exposure incident at a Georgia
    Gulf facility in  Plaquemine,  Louisiana in September  1996. The suits cover
    claims by approximately  640 non-Company  employees  present at the facility
    (the "Worker Plaintiffs") and by approximately 1,400 persons who are related
    to or live with the Worker  Plaintiffs.  All of the plaintiffs  seek damages
    for alleged  toxic  exposure  resulting  from this  incident.  Pursuant to a
    Memorandum of Understanding  effective April 15, 1999,  virtually all of the
    plaintiffs  and  each  of  the  defendants  in  the  actions  agreed  upon a
    settlement. Under this agreement, the Company's insurance carriers deposited
    the Company's share of the settlement into escrow,  which is being disbursed
    on a pro rata  basis  upon  receipt  of a release  from  each  participating
    plaintiff  or the  dismissal  of the  claims of any  plaintiff  who does not
    participate.  as of october 31,  1999,  approximately  90% of the escrow has
    been disbursed. Separately, Georgia Gulf has agreed to indemnify the company
    against  the  claims  of any  plaintiff  who  does  not  participate  in the
    settlement,  the claims of the  approximately  twenty plaintiffs who are not
    parties to the  agreement,  and against any future claims which may arise in
    connection with this incident.

        All payments by the Company under these  arrangements  have been made by
    the Company's insurance carriers. accordingly,  subject to the completion of
    the settlement process,  management believes this litigation will not have a
    material  adverse affect on the Company's  financial  position or results of
    operations.

                                       9
<PAGE>

        The Company is also a defendant in a lawsuit filed on September 20, 1999
    in the 24th Judicial District Court for the Parish of Jefferson,  Louisiana,
    which  seeks  class   certification  on  behalf  of  an  unknown  number  of
    plaintiffs,  who allege  personal  and  property  damages  arising  from the
    release of a single  330-gallon  container of hydrochloric  acid on a public
    highway  in  Kenner,  Louisiana  in  September  1999.  The  Company is being
    defended in this suit by one of its liability insurance  carriers.  Although
    this matter is in its initial stages and its outcome is therefore  difficult
    to predict with certainty,  management  believes that any resolution will be
    within the limits of its applicable  insurance  coverage and will not have a
    material  adverse affect on the Company's  financial  position or results of
    operations.

7.  ACQUISITION

        On January 5, 1999, the Company acquired substantially all of the assets
    and assumed certain  liabilities of Valley Systems,  Inc. and Valley Systems
    of Ohio,  Inc.  (collectively  "Valley"),  a  regional  industrial  services
    provider.  The  acquisition,  which was effective as of January 1, 1999, was
    pursuant to the terms and  conditions of a Second Amended and Restated Asset
    Purchase  Agreement  dated as of  September  8, 1998.  The  assets  acquired
    consisted  primarily of (i) accounts  receivable,  (ii) property,  plant and
    equipment, (iii) intangibles,  and (iv) other operating assets. The adjusted
    purchase price for the acquired assets was $30,857,000,  of which $4,000,000
    was  deposited  into escrow.  As part of the  transaction,  the Company also
    assumed $2,493,000 in capital lease obligations and $5,594,000 in bank debt.
    The Company has converted the capital leases to operating leases and retired
    the bank debt.  The source of funds for the purchase price and retirement of
    Valley's bank debt was a combination  of cash on hand and  borrowings  under
    the Credit Facility.

        The  acquisition  has been  accounted  for using the purchase  method of
    accounting.   The  Company's  financial  statements  reflect  a  preliminary
    allocation of the purchase price based upon the Company's initial valuation.
    The  excess of the  purchase  price  over the fair  value of the net  assets
    acquired is being  amortized over periods ranging from 10 to 25 years and is
    estimated as follows (in thousands):
<TABLE>
           <S>                                           <C>
           Purchase price (as adjusted)..............    $ 30,857
           Transaction and acquisition costs.........       2,101
                                                          -------
                                                           32,958

           Fair value of net assets acquired.........       5,986
                                                          -------
           Excess of purchase price over fair value..    $ 26,972
                                                           ======
</TABLE>

        The book value of net assets acquired was determined to approximate fair
    value at the date of acquisition.  Transaction costs consisted  primarily of
    fees to attorneys,  accountants  and other outside  service  providers,  and
    costs of transferring  ownership of the acquired assets.  Acquisition  costs
    primarily  represent (i) severance and  relocation  costs for certain Valley
    employees,  (ii)  expenses  incurred  in  connection  with  the  closing  or
    consolidation of certain facilities,  and (iii) certain other costs incurred
    directly in connection with the acquisition.

        The results of operations  derived from assets  acquired from Valley are
    included in the Company's  financial  statements  from the effective date of
    acquisition.  Unaudited pro forma  consolidated  results of operations  have
    been  prepared as if the  acquisition  of the Valley  assets had occurred on
    January 1, 1998 and include (in thousands):
<TABLE>
<CAPTION>
                                         Three Months           Nine Months
                                     Ended September 30,     Ended September 30,
                                             1998                  1998
                                             ----                  ----
        <S>                                  <C>                   <C>
        Revenue............................. $48,106               $146,578
        Net loss............................  (1,233)                  (881)
</TABLE>

        The unaudited  pro forma  consolidated  results of operations  presented
    above do not purport to be  indicative  of results that would have  occurred
    had the  acquisition  been in effect for the period  presented,  nor do they
    purport to be indicative of results that will be obtained in the future.


                                       10
<PAGE>



                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

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


STATEMENT REGARDING FORWARD-LOOKING INFORMATION

        MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS  AND OTHER ITEMS IN THIS  QUARTERLY  REPORT ON FORM 10-Q  CONTAIN
FORWARD-LOOKING  STATEMENTS  AND  INFORMATION  THAT ARE  BASED  ON  MANAGEMENT'S
BELIEFS, AS WELL AS ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO,
MANAGEMENT.  WHEN  USED IN THIS  DOCUMENT,  THE WORDS  "BELIEVE",  "ANTICIPATE",
"ESTIMATE", "EXPECT", "INTEND", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING  STATEMENTS.  ALTHOUGH MANAGEMENT BELIEVES THAT THE EXPECTATIONS
REFLECTED IN SUCH  FORWARD-LOOKING  STATEMENTS  ARE  REASONABLE,  IT CAN GIVE NO
ASSURANCE  THAT  SUCH  EXPECTATIONS  WILL  PROVE  TO  HAVE  BEEN  CORRECT.  SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS,  UNCERTAINTIES AND ASSUMPTIONS.  SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES  MATERIALIZE,  OR SHOULD  UNDERLYING
ASSUMPTIONS  PROVE  INCORRECT,  ACTUAL  RESULTS MAY VARY  MATERIALLY  FROM THOSE
ANTICIPATED.  THE COMPANY  UNDERTAKES  NO  OBLIGATION  TO RELEASE  PUBLICLY  ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS
OR  CIRCUMSTANCES  AFTER  THE  DATE  HEREOF  OR TO  REFLECT  THE  OCCURRENCE  OF
UNANTICIPATED EVENTS.

    For supplemental information,  it is suggested that "Management's Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations"  be read in
conjunction  with the  corresponding  sections  included in the Company's Annual
Report on Form 10-K for the year ended  December  31,  1998.  The Form 10-K also
includes the Company's  Consolidated  Financial Statements and the Notes thereto
for certain prior  periods,  as well as other  relevant  financial and operating
information.

RESULTS OF OPERATIONS

    The  following  table sets  forth,  for the periods  indicated,  information
derived from the Company's consolidated statements of operations, expressed as a
percentage  of revenue.  There can be no assurance  that the trends in operating
results will continue in the future.
<TABLE>
<CAPTION>
                                      Three months ended      Nine months ended
                                         September 30,           September 30,
                                       1998        1999        1998      1999
                                      ------      ------      ------    ------
    <S>                               <C>         <C>         <C>       <C>
    Revenue.........................  100.0%      100.0%      100.0%    100.0%
    Cost of revenue.................   63.3        59.8        62.2      59.1
                                      -----       -----       -----     -----
       Gross profit.................   36.7        40.2        37.8      40.9
    SG&A expense....................   29.1        25.9        26.5      25.0
    Depreciation....................    5.7         6.6         5.3       5.9
                                      -----       -----       -----     -----
       Operating income.............    1.9         7.7         6.0      10.0
    Other (income) expense:
       Interest expense, net........    6.5         7.5         6.1       6.7
       Special charge...............      -           -         0.2         -
       Other (income) expense, net..   (0.3)        0.2           -         -
       Amortization of intangibles..    0.9         1.5         0.9       1.3
                                      -----       -----       -----     -----
    Income (loss) before taxes......   (5.2)       (1.5)       (1.2)      2.0
            Income tax benefit .....   (0.9)          -           -         -
                                      -----       -----       -----     -----
    Net income (loss)...............   (4.3)%      (1.5)%      (1.2)%     2.0%
                                      =====       =====       =====     =====

    EBITDA(1).......................    7.6%       14.3%       11.3%     15.9%
                                      =====       =====       =====     =====
</TABLE>
----------
(1) EBITDA for any relevant  period  presented  above  represents  income before
taxes plus interest expense,  depreciation,  amortization,  and other income and
expense  (including  a  special  charge of  $300,000  in the nine  months  ended
September  30,  1998).  EBITDA  should  not be  construed  as a  substitute  for
operating  income,  as an indicator of liquidity or as a substitute for net cash
provided by  operating  activities,  which are  determined  in  accordance  with
generally accepted accounting principles.  EBITDA is included because management
believes it to be a useful tool for analyzing operating  performance,  leverage,
liquidity and a company's ability to service debt.

                                       11
<PAGE>


Three Months Ended September 30, 1999 Compared to Three Months Ended
 September 30, 1998
--------------------------------------------------------------------------------

    REVENUE.  Revenue increased $2.5 million,  or 6.2%, to $43.0 million for the
three  months  ended  September  30,  1999 from $40.5  million in the prior year
period.  The increase resulted from an increase in industrial  vacuuming revenue
of $2.2 million, or 33.1%, from $6.8 million to $9.0 million, and an increase in
hydroblasting  revenue of $1.5  million,  or 7.9%,  from $18.7  million to $20.2
million.  These increases were partially  offset by a decrease in other services
revenue of $728,000, or 18.4%, from $3.9 million to $3.2 million, and a decrease
in chemical  cleaning revenue of $489,000,  or 4.4%, from $11.1 million to $10.6
million.  The increase in industrial  vacuuming revenue resulted from additional
vacuum  trucks  placed in  service  by the  Company  in 1998 and  1999,  and the
acquisition of the Valley assets. Hydroblasting revenue increased as a result of
the  acquisition of the Valley assets,  partially  offset by a reduced volume of
projects in other locations. The decrease in other services revenue and chemical
cleaning revenue principally resulted from a reduced volume of projects.

    GROSS  PROFIT.  Gross profit  increased  $2.4  million,  or 16.3%,  to $17.3
million  in 1999 from  $14.9  million in the prior  year  period.  Gross  profit
margins  increased from 36.7% to 40.2%. Cost of revenue  increased  $77,000,  OR
0.3%,  TO $25.7  million  in 1999 from $25.6  million  in the prior year  period
primarily due to the revenue increases described above,  partially offset by the
results of a cost reduction  program  implemented in late 1998,  which included,
among other things, a reduction in work force.

    SG&A EXPENSE.  SG&A expense decreased $655,000, or 5.6%, to $11.1 million in
1999 from $11.8  million  in the prior  year  period.  This  decrease  primarily
resulted  from the cost  reduction  program  described  above and was  partially
offset by the acquisition of the Valley assets.  SG&A expense as a percentage of
revenue decreased to 25.9% in 1999 from 29.1% in the prior year period.

    EBITDA.  Increased  gross profit and decreased  SG&A expense,  resulted in a
$3.1  million,  or 100.0%,  increase in EBITDA to $6.2 million in 1999 from $3.1
million in the prior year period.  As a percentage of revenue,  EBITDA increased
TO 14.3% IN 1999 FROM 7.6% in the prior year period.

    DEPRECIATION.  Depreciation  expense increased  $540,000,  or 23.5%, to $2.8
million in 1999 from $2.3  million in the prior  year  period,  and was 6.6% and
5.7% of revenue,  respectively. the increase in depreciation expense principally
resulted  from  the   acquisition  of  the  Valley  assets,   and  from  capital
expenditures in 1998 and 1999.

    OPERATING  INCOME.  Increased  gross profit and  decreased  SG&A,  partially
offset by increased  depreciation expense,  resulted in an increase in operating
income of $2.5 million,  or 324.7%, to $3.3 million in 1999 from $782,000 in the
prior year period.  As a percentage of revenue,  operating  income  increased to
7.7% in 1999 FROM 1.9% in the prior year period.

    INTEREST EXPENSE,  NET. Interest expense, net increased $603,000,  or 23.0%,
to $3.2 million in 1999 from $2.6  million in the prior year  period.  Increased
interest  expense,  net resulted  from (i) an increase in debt due to borrowings
under the  Construction  Loan  Agreement  beginning in July 1998 and  borrowings
under the Credit  Facility in January  1999 to finance a portion of the purchase
price of the Valley assets and the  retirement of the Valley bank debt, and (ii)
a decrease in interest income due to lower invested cash balances.

    AMORTIZATION. Amortization expense increased $259,000, or 69.1%, to $634,000
in 1999 from $375,000 in the prior year period.  Increased  amortization expense
resulted from goodwill incurred in connection with the acquisition of the Valley
assets.

    INCOME (LOSS) BEFORE TAXES.  For the reasons  described  above,  the Company
incurred a loss  before  taxes of $647,000 in 1999 as compared to a loss of $2.1
million in the prior year period.  As a percentage  of revenue,  the loss before
taxes was 1.5% in 1999 compared to 5.2% in the prior year period.


                                       12
<PAGE>


    INCOME TAX BENEFIT.  The effective income tax benefit rate decreased to zero
in 1999 from 17.1% of loss before taxes in the prior year period.  This decrease
principally  resulted  from changes in the  valuation  allowance of deferred tax
assets.

    NET INCOME (LOSS).  For the reasons  described above, the Company's net loss
decreased  $1.1  million to $647,000 in 1999 from $1.7 million in the prior year
period.  As a percentage  of revenue,  the net loss was 1.5% in 1999 compared to
4.3% in the prior year period.

Nine Months Ended September 30, 1999 Compared to Nine Months Ended
 September 30, 1998
--------------------------------------------------------------------------------
    REVENUE.  Revenue  increased $19.6 million,  or 15.5%, to $146.1 million for
the nine months ended  september 30, 1999 from $126.5  million in the prior year
period.  The increase in revenue,  which applied to all service lines,  resulted
from increases in industrial  vacuuming revenue of $9.1 million,  or 52.6%, from
$17.2 million to $26.3 million;  hydroblasting  revenue of $5.9 million, or 9.5%
from $62.3 million to $68.2 million;  other services revenue of $2.9 million, or
38.7%, from $7.7 million to $10.6 million; and chemical cleaning revenue of $1.7
million,  or  4.3%,  from  $39.3  million  to $41.0  million.  The  increase  in
industrial  vacuuming  revenue resulted from additional  vacuum trucks placed in
service  by the  Company  in 1998 and 1999,  and the  acquisition  of the Valley
assets. Hydroblasting revenue increased primarily as a result of the acquisition
of the Valley assets,  partially offset by a reduced volume of projects in other
locations.  The increase in other  services  revenue  principally  resulted from
mechanical services projects,  which the Company began performing in april 1998,
and an increased  volume of  commissioning  services  projects.  The increase in
chemical  cleaning  revenue  principally  resulted  from an increased  volume of
projects.

    GROSS PROFIT.  Gross profit  increased  $11.9  million,  or 25.0%,  to $59.7
million  in 1999 from  $47.8  million in the prior  year  period.  Gross  profit
margins  increased from 37.8% to 40.9%.  Cost of revenue increased $7.7 million,
or 9.8%,  to $86.4  million in 1999 from $78.7  million in the prior year period
primarily due to the revenue increases described above,  partially offset by the
results of a cost reduction  program  implemented in late 1998,  which included,
among other things, a reduction in work force.

    SG&A EXPENSE. SG&A expense increased $3.0 million, or 8.9%, to $36.5 million
in 1999 from $33.5  million in the prior year period.  This  increase  primarily
resulted from the  acquisition of the Valley assets and was partially  offset by
the cost  reduction  program  described  above.  SG&A expense as a percentage of
revenue decreased to 25.0% in 1999 from 26.5% in the prior year period.

    EBITDA.  Increased gross profit, partially offset by increased SG&A expense,
resulted in a $9.0  million,  or 63.1%,  increase in ebitda to $23.2  million in
1999 from $14.2  million in the prior year period.  As a percentage  of revenue,
EBITDA increased to 15.9% in 1999 from 11.3% in the prior year period.

    DEPRECIATION. Depreciation expense increased $1.9 million, or 27.6%, to $8.6
million in 1999 from $6.7  million in the prior  year  period,  and was 5.9% and
5.3% of revenue,  respectively. The increase in depreciation expense principally
resulted  from  the   acquisition  of  the  Valley  assets,   and  from  capital
expenditures in 1998 and 1999.

    OPERATING INCOME. Increased gross profit, partially offset by increased SG&A
and  depreciation  expense,  resulted in an increase in operating income of $7.1
million,  or 94.9%, to $14.6 million in 1999 from $7.5 million in the prior year
period. As a percentage of revenue,  operating income increased to 10.0% in 1999
from 6.0% in the prior year period.

    INTEREST  EXPENSE,  NET. Interest  expense,  net increased $2.0 million,  or
25.6%,  to $9.7  million in 1999 from $7.7  million  in the prior  year  period.
Increased  interest  expense,  net resulted  from (i) an increase in debt due to
borrowings  under the  Construction  Loan  Agreement  beginning in July 1998 and
borrowings under the credit facility in January 1999 to finance a portion of the
purchase  price of the Valley assets and the retirement of the Valley bank debt,
and (ii) a decrease in interest income due to lower invested cash balances.


                                       13
<PAGE>


    SPECIAL CHARGE.  The Company incurred  approximately  $300,000 of expense in
the prior year period related to a terminated acquisition.

    AMORTIZATION.  Amortization  expense increased  $776,000,  or 69.0%, to $1.9
million  in  1999  from  $1.1  million  in  the  prior  year  period.  Increased
amortization  expense  resulted  from goodwill  incurred in connection  with the
acquisition of the Valley assets.

    INCOME (LOSS) BEFORE TAXES. For the reasons  described above,  income before
taxes increased $4.5 million to $2.9 million in 1999 from a loss of $1.6 million
in the prior year period.  As a percentage  of revenue,  income before taxes was
2.0% in 1999 compared to a loss of 1.2% in the prior year period.

    INCOME TAX BENEFIT.  The effective income tax benefit rate decreased to zero
in 1999 from 2.8% of income before taxes in the prior year period. This decrease
principally  resulted  from changes in the  valuation  allowance of deferred tax
assets.

    NET INCOME (LOSS). For the reasons described above, the Company's net income
increased  $4.4  million to $2.9 million in 1999 from a $1.5 million net loss in
the prior year period.  As a percentage of revenue,  net income was 2.0% in 1999
compared to a net loss of 1.2% in the prior year period.


LIQUIDITY AND CAPITAL RESOURCES

    The  Company  principally  has  financed  its  operations  through  net cash
provided by operating  activities,  existing  cash  balances,  available  credit
facilities,  and capital  contributions from Holding.  HydroChem has outstanding
$110.0 million of Senior  Subordinated Notes (the "Notes").  The Notes mature on
August  1,  2007  and  bear  interest  at 10 3/8% per  annum  which  is  payable
semi-annually  in arrears on February 1 and August 1 of each year. The Notes are
redeemable at the option of  HydroChem,  in whole or in part, on or after August
1, 2002 at specified redemption prices. In addition, until August 4, 2000, up to
35% of the Notes are  redeemable  at the option of  HydroChem  with the proceeds
from one or more  equity  offerings  at a  redemption  price of  109.375% of the
principal amount thereof. All HydroChem subsidiaries,  including  International,
are guarantors of the Notes.

    HydroChem is a party to a credit  agreement  dated  December  31,  1997,  as
amended,  with a financial  institution for a credit facility which provides for
unsecured  borrowings  of  up  to  $25.0  million,  subject  to  borrowing  base
limitations (the "Credit Facility"). The Credit Facility matures on December 31,
2000 and any  borrowings  thereunder  bear  interest at rates which are adjusted
quarterly. At the discretion of HydroChem, interest rates are based on (i) LIBOR
plus an  applicable  margin of 1.75% to 3.00%,  or,  (ii) the  higher of (a) the
prime rate plus an  applicable  margin of up to 1.00%,  or (b) the Federal Funds
Rate plus an applicable margin of 0.50% to 1.50%. In addition,  a commitment fee
of 0.25% to 0.50% per annum is payable  quarterly on the  unborrowed  portion of
the Credit  Facility.  The  specific  rate  within each range  depends  upon the
Company's  operating  performance.  The Credit Facility  requires the Company to
meet certain customary  financial ratios and covenants,  and generally restricts
the Company  from  pledging  its assets.  At  September  30,  1999,  HydroChem's
borrowing  base  under the  Credit  Facility  was $25.0  million,  of which $3.3
million had been utilized and $21.7 million was available.  The amounts utilized
consisted  of advances  and standby  letters of credit of $1.0  million and $2.3
million,  respectively. The standby letters of credit principally were issued in
connection with the Company's property and casualty insurance program.

    For the purpose of financing the land purchase and construction costs of the
Company's  headquarters  and  operating  facility  in the  Houston,  Texas area,
HydroChem is a party to a loan agreement dated July 17, 1998, as amended, with a
financial institution (the "Construction Loan Agreement"). The Construction Loan
Agreement  provided for an interim  construction loan (the "Interim Loan") of up
to $7.5  million  which was  converted  to a term loan as of March 31, 1999 (the
"Term Loan").  The Term Loan is  collateralized  by first  priority liens on the
land  and  improvements.  Interest  on  the  Interim  Loan,  which  was  payable
quarterly,  was at the lender's  commercial loan rate less 0.50%.  The Term Loan
matures on September 30, 2006.  Under the Term Loan,  principal and interest are
payable  in  quarterly  installments,  with a final  principal  payment  of $5.9
million  due at  maturity.  Pursuant  to the  Interest  Rate  Swap,  HydroChem's


                                       14
<PAGE>


effective  fixed  borrowing  rate for the  Term  Loan is 7.82%  per  annum.  The
Construction  Loan  Agreement  requires  the Company to meet  certain  customary
financial  ratios  and  covenants  and  generally  restricts  the  Company  from
transferring or pledging the facility's  assets.  The Company  obtained a waiver
with respect to one of the ratios for non-compliance  resulting from special and
restructuring  charges  recorded  during the quarter ended December 31, 1998. At
September 30, 1999,  HydroChem had outstanding  $7.4 million under the Term Loan
and was in compliance with the financial  ratios and covenants  contained in the
Construction Loan Agreement.

    For the nine months ended  September 30, 1999,  the Company used net cash of
$28.2  million in operating and investing  activities,  which  consisted of $8.8
million  provided by operating  activities  and $37.0  million used in investing
activities.  For the nine months ended  September 30, 1998,  $9.4 million of net
cash was used in operating and  investing  activities,  which  consisted of $5.6
million  provided by operating  activities  and $15.0  million used in investing
activities.  Except for the purchase of the Valley assets in the current period,
investing  activities for both periods  consisted  primarily of expenditures for
property and equipment.

    Expenditures  for property and equipment for the nine months ended September
30, 1999 were $5.0 million.  Of this amount,  $3.1 million was used  principally
for  purchases of operating  equipment,  $1.1 million to implement new field and
corporate  software and hardware  systems,  and $770,000 in connection  with the
CONSTRUCTION OF THE COMPANY'S headquarters and operating facility.

    On January 5, 1999, the Company acquired substantially all of the assets and
assumed certain  liabilities of Valley. The assets acquired consisted  primarily
of  (i)  accounts  receivable,   (ii)  property,  plant  and  equipment,   (iii)
intangibles,  and (iv) other operating  assets.  The adjusted purchase price for
the acquired  assets was $30.9  million,  of which $4 million was deposited into
escrow.  As part of the  transaction,  the Company  also assumed $2.5 million in
capital  lease  obligations  and $5.6  million in bank  debt.  The  Company  has
converted the capital leases to operating  leases and retired the bank debt. The
source of funds for the purchase  price and retirement of Valley's bank debt was
a combination of cash on hand and borrowings under the Credit Facility.

    Management  believes that cash and cash  equivalents  at September 30, 1999,
net cash  expected to be provided by operating  activities  and funds  available
from  its  existing  credit  facilities  will be  sufficient  to meet  its  cash
requirements  for operations and expenditures for property and equipment for the
next twelve months and the foreseeable future thereafter. From time to time, the
Company engages in discussions with respect to selected acquisitions and expects
to continue to assess these and other  acquisition  opportunities  as the arise.
The  Company  may  also  require  additional  financing  if it  decides  to make
additional  acquisitions.  There  can be no  assurance,  however,  that any such
opportunities will arise, that any such acquisitions will be consummated or that
any  needed  additional  financing  will be  available  when  required  on terms
satisfactory to the Company.


IMPACT OF YEAR 2000

    The Year 2000 issue is the result of computer  programs  being written using
two digits  rather than four digits to define the  applicable  year.  This could
result in a system failure or miscalculation if, for example, a computer program
recognizes  a date of "00" as the year  1900  instead  of 2000.  Management  has
assessed the Year 2000 issue with regard to the Company's internal financial and
operating  systems as well as certain  third  parties with which the Company has
material relationships.

    With regard to the Company's financial and operating systems,  HydroChem has
developed,  acquired and  implemented  software and  hardware  systems  which it
believes to be Year 2000 compliant,  including new software and hardware systems
for  which  the  Company  expended  a total of $2.2  million  in 1998 and  1999.
Management estimates it will incur an aggregate of approximately $2.7 million in
connection  with these systems by the end of 1999. The Company has  successfully
completed testing these systems for Year 2000 compliance,  however, there can be
no assurance that all Year 2000 issues have been detected. The Company is in the
process of completing a contingency  plan to address  situations that may result
if the Company is unable to achieve complete Year 2000 readiness.  The Company's


                                       15
<PAGE>


Year 2000  compliance  program is ongoing and its ultimate scope, as well as the
consideration  of  contingency  plans,  will  continue  to be  evaluated  as new
information becomes available.

    As part of its Year  2000  compliance  program,  management  has  identified
certain third parties with which the Company has material  relationships.  These
parties  are  primarily  large  financial,   telecommunication  and  information
processing  entities,  and other third party  suppliers.  Certain of these third
parties  have  reported  to the  Company  that they are on  schedule  with their
projects to remediate Year 2000 issues, and that they anticipate being Year 2000
compliant on a timely  basis.  Management  is  monitoring  the progress of these
third parties and expects to develop  contingency plans in the event one or more
of these third parties fail to remediate their Year 2000 issues in such a way as
to materially affect the operations of the Company.

    The Year 2000 issue involves  significant  risks.  There can be no assurance
that the Company will succeed in implementing its Year 2000 program, potentially
as a result of factors,  which are beyond the Company's  control.  The following
describes  the Company's  most  reasonably  likely  worst-case  scenario,  given
current uncertainties: if any of the Company's software applications or embedded
microprocessors  central  to the  Company's  operations  are  overlooked  in the
assessment  or  implementation  phases  of  the  Company's  Year  2000  program,
significant  problems could occur,  including delays in accounting and financial
reporting.  It is also possible,  given the numerous other  uncertainties  which
could occur,  that the Company's  business,  financial  condition and results of
operations  could be  adversely  affected.  Management  is unable to assess  the
likelihood  of such events  occurring  or the extent of their  effect.  Although
there can be no  assurance,  management  has no reason to believe  that any Year
2000 issues that the Company may experience will have a material  adverse effect
on its operations.

    The foregoing Year 2000 discussion contains forward-looking statements. Such
statements,  including  without  limitation  anticipated  costs and the dates by
which management expects to complete certain actions,  are based on management's
best current estimates,  which were derived utilizing numerous assumptions about
future  events,  including  the  continued  availability  of certain  resources,
representations  received from third parties, and other factors.  However, there
can be no guarantee that these  estimates  will be achieved,  and actual results
could differ  materially  from those  anticipated.  Specific  factors that might
cause such material  differences include, but are not limited to, the ability to
identify and remediate all relevant  information  technology and non-information
technology  systems,  results of Year 2000 testing,  adequate resolution of Year
2000 issues by  businesses  and other third  parties who are service  providers,
suppliers or customers of the Company,  unanticipated system costs, the adequacy
of  and  ability  to  develop  and  implement  contingency  plans,  and  similar
uncertainties.  The forward  looking  statements made in the foregoing Year 2000
discussion  speak only as of the date on which such statements are made, and the
Company  undertakes no obligation  to update any  forward-looking  statements to
reflect events or circumstances after the date on which such statements are made
or to reflect the occurrence of unanticipated events.

                                       16
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                    QUANTITATIVE AND QUALITATIVE DISCLOSURES
                                ABOUT MARKET RISK


    The  following  discussion  regarding  the  Company's  market risk  includes
forward-looking  statements that involve risk and uncertainties.  Actual results
could differ materially from those projected in the forward-looking statements.

    The  Company is exposed to certain  market  risks  which  include  financial
instruments such as short-term  investments,  trade  receivables,  and long-term
debt.  The  adverse  effects  of  potential  changes in these  market  risks are
discussed below. The sensitivity  analyses  discussed below do not reflect:  (i)
the effects that such adverse changes may have on overall economic activity; or,
(ii) additional  actions  management may take to mitigate the Company's exposure
to such changes.  The Company does not engage in  speculative  transactions  and
does not use derivative instruments or engage in hedging activities,  except for
the Interest Rate Swap which is being utilized in connection with the Term Loan.

    The  Company  provides  industrial  cleaning  services  to a wide  range  of
processing industries including  petrochemical plants, oil refineries,  electric
utilities,  pulp and paper mills, rubber plants, and aluminum plants. Management
believes the Company's portfolio of accounts receivable is well diversified and,
as  a  result,   its  credit  risks  are  minimal.   Management   evaluates  the
creditworthiness  of the Company's customers and monitors accounts on a periodic
basis,  but  typically  does  not  require   collateral.   The  Company's  trade
receivables  are  primarily  denominated  in U.S.  dollars and are generally due
within 30 days. In general,  trade receivables are collected in a timely manner,
and  historically  bad  debts  have  been  immaterial  and  within  management's
expectations.  Management believes that diversification and timely collection of
accounts receivable reduces associated credit risk.

    The Company's  surplus cash is placed in overnight  investments  with a high
quality financial institution, in accordance with investment guidelines relative
to credit quality,  diversification  and maturity to reduce risk and provide for
liquidity.  As of  September  30,  1999,  the Company had  overnight  investment
deposits in a cash reserves money market mutual fund totaling $2.2 million.  Due
to the short-term nature of these investments,  management believes the carrying
value  approximates  market  value.  Management  expects to  continue  to invest
surplus  cash  amounts in  overnight  deposits  during 1999 and, as a result,  a
decrease of 1.0% from current average investment rates would not have a material
effect on the Company's consolidated financial position.

    As of September 30, 1999, the Company's outstanding long-term debt consisted
of the Credit  Facility,  the Term Loan, and the Notes. The Notes totaled $110.0
million,  are due August 1, 2007,  and bear  interest at a fixed rate of 10 3/8%
per annum. As of September 30, 1999, the market value of the Notes was estimated
to be $99.0 million.

    At the same date,  outstanding  borrowings under the Credit Facility and the
Term Loan  totaled  $8.4  million and  approximated  their fair  values.  At the
discretion of HydroChem,  interest rates under the Credit  Facility are based on
(i) a range from LIBOR plus 1.75% to LIBOR plus 3.00%, or (ii) the higher of (a)
the prime rate or (b) the  Federal  Funds Rate plus  0.50%,  plus an  applicable
margin of up to 1.00%.  The Term Loan bears  interest  at LIBOR rates plus 1.75%
adjusted quarterly. To protect the Term Loan against interest rate fluctuations,
the Company  entered into the  Interest  Rate Swap which  effectively  fixes the
interest rate at 7.82% per annum.

    Market  risk,  estimated  as a  potential  increase  in fair  value  of debt
instruments  resulting from a hypothetical  1.0% decrease in interest  rates, is
estimated not to be material to the Company's  consolidated  financial  position
during 1999.


                                       17
<PAGE>


PART II.  OTHER INFORMATION

    Item 1.Legal Proceedings

        The Company is a defendant in approximately 70 lawsuits originally filed
in the 18th  Judicial  District  Court for the  Parish of  Iberville,  Louisiana
against  Georgia  Gulf  Corporation  ("Georgia  Gulf"),  the  Company  and other
defendants,  which have  arisen from a chemical  exposure  incident at a Georgia
Gulf facility in Plaquemine, Louisiana in September 1996. The suits cover claims
by approximately 640 non-Company  employees present at the facility (the "Worker
Plaintiffs") and by approximately  1,400 persons who are related to or live with
the Worker  Plaintiffs.  All of the  plaintiffs  seek damages for alleged  toxic
exposure resulting from this incident. Pursuant to a Memorandum of Understanding
effective  April  15,  1999,  virtually  all of the  plaintiffs  and each of the
defendants in the actions agreed upon a settlement.  Under this  agreement,  the
Company's  insurance  carriers  deposited the Company's  share of the settlement
into  escrow,  which is being  disbursed  on a pro rata basis upon  receipt of a
release from each participating  plaintiff or the dismissal of the claims of any
plaintiff who does not participate. As of October 31, 1999, approximately 90% of
the escrow has been disbursed.  Separately, Georgia Gulf has agreed to indemnify
the Company  against the claims of any plaintiff who does not participate in the
settlement,  the  claims  of the  approximately  twenty  plaintiffs  who are not
parties to the  agreement,  and  against  any future  claims  which may arise in
connection with this incident.

        All payments by the Company under these  arrangements  have been made by
the Company's insurance carriers. Accordingly,  subject to the completion of the
settlement process, management believes this litigation will not have a material
adverse affect on the Company's financial position or results of operations.

        The Company is also a defendant in a lawsuit recently filed on September
20,  1999 in the 24th  Judicial  District  Court for the  Parish  of  Jefferson,
Louisiana,  which seeks class  certification  on behalf of an unknown  number of
plaintiffs, who allege personal and property damages arising from the release of
a single  330-gallon  container  of  hydrochloric  acid on a public  highway  in
Kenner,  Louisiana in September 1999. The Company is being defended in this suit
by one of its  liability  insurance  carriers.  Although  this  matter is in its
initial stages and its outcome is therefore difficult to predict with certainty,
management  believes  that any  resolution  will be  within  the  limits  of its
applicable insurance coverage and will not have a material adverse affect on the
Company's financial position or result of operations.

    Item 6.Exhibits and Reports on Form 8-K
           (a) Exhibits

               Exhibit
               Number     Description
               ------     -----------

               3.1        Certificate of Incorporation  of HydroChem  Industrial
                          Services,  Inc.  as  amended.   (Exhibit  3.1  to  the
                          Company's  Registration  Statement on Form S-4,  filed
                          August 25, 1997, is hereby incorporated by reference.)

               3.2        Certificate    of     Incorporation    of    HydroChem
                          International,  Inc., as amended.  (Exhibit 3.2 to the
                          Company's  Registration  Statement on Form S-4,  filed
                          August 25, 1997, is hereby incorporated by reference.)

               3.3        By-Laws  of  HydroChem   Industrial   Services,   Inc.
                          (Exhibit 3.3 to the Company's  Registration  Statement
                          on  Form  S-4,   filed  August  25,  1997,  is  hereby
                          incorporated by reference.)

               3.4        By-Laws of HydroChem International,  Inc. (Exhibit 3.4
                          to the Company's  Registration  Statement on Form S-4,
                          filed  August  25,  1997,  is hereby  incorporated  by
                          reference.)


                                       18
<PAGE>


               4.1        Purchase Agreement,  dated as of July 30, 1997, by and
                          among HydroChem Industrial  Services,  Inc., HydroChem
                          International,  Inc. and Donaldson,  Lufkin & Jenrette
                          Securities Corporation, as Initial Purchaser, relating
                          to the 10 3/8% Series A Senior  Subordinated Notes due
                          2007.  (Exhibit  4.1  to  the  Company's  Registration
                          Statement  on Form S-4,  filed  August  25,  1997,  is
                          hereby incorporated by reference.)

               4.2        Indenture, dated as of August 1, 1997, among HydroChem
                          Industrial Services,  Inc.,  HydroChem  International,
                          Inc., as Guarantor, and Norwest Bank, Minnesota, N.A.,
                          as Trustee. (Exhibit 4.2 to the Company's Registration
                          Statement  on Form S-4,  filed  August  25,  1997,  is
                          hereby incorporated by reference.)

               4.3        Registration Rights Agreement dated August 4, 1997, by
                          and  among  HydroChem   Industrial   Services,   Inc.,
                          HydroChem International,  Inc. and Donaldson, Lufkin &
                          Jenrette Securities Corporation, as Initial Purchaser.
                          (Exhibit 4.3 to the Company's  Registration  Statement
                          on  Form  S-4,   filed  August  25,  1997,  is  hereby
                          incorporated by reference.)

               10.1       HydroChem  Holding,   Inc.  1994  Stock  Option  Plan.
                          (Exhibit 10.1 to the Company's Registration  Statement
                          on  Form  S-4,  filed  August  25,  1997,   is  hereby
                          incorporated by reference.)

               10.2       Employment  Agreement  dated  December 15, 1993 by and
                          among HydroChem Holding,  Inc.,  HydroChem  Industrial
                          Services,  Inc.  and B. Tom  Carter,  Jr.,  as amended
                          through  December  9,  1996.   (Exhibit  10.5  to  the
                          Company's  Registration  Statement on Form S-4,  filed
                          August 25, 1997, is hereby incorporated by reference.)

               10.3       Fourth  Amendment to Employment  Agreement dated April
                          9,  1998  by  and  among  HydroChem   Holding,   Inc.,
                          HydroChem Industrial Services, Inc. and B. Tom Carter,
                          Jr.  (Exhibit 10.8 to the Company's  Form 10-Q,  filed
                          May 14, 1998, is hereby incorporated by reference.)

               10.4       Secured  Promissory  Note dated April 30, 1999 from B.
                          Tom Carter,  Jr. to HydroChem  Holding,  Inc. (Exhibit
                          10.4 to the Company's  Form 10-Q,  filed May 11, 1999,
                          is hereby incorporated by reference.)

               10.5       Pledge   Agreement   dated  April  30,  1999   between
                          HydroChem  Holding,   Inc.  and  B.  Tom  Carter,  Jr.
                          (Exhibit  10.5 to the Company's  Form 10-Q,  filed May
                          11, 1999, is hereby incorporated by reference.)

               10.6       Employment  Agreement  dated  November 1, 1992 between
                          HydroChem  Industrial  Services,  Inc.  and Gary Noto.
                          (Exhibit 10.3 to the Company's  Registration Statement
                          on  Form  S-4,   filed  August  25,  1997,  is  hereby
                          incorporated by reference.)

               10.7       Amendment   dated   January  27,  1999  to  Employment
                          Agreement  dated  November 1, 1992  between  HydroChem
                          Industrial  Services,  Inc. and Gary D. Noto. (Exhibit
                          10.8 to the Company's Form 10-K, filed March 29, 1999,
                          is hereby incorporated by reference.)

               10.8       Employment  Agreement  dated  November 1, 1992 between
                          HydroChem Industrial Services, Inc. and J. Pat DeBusk.
                          (Exhibit 10.2 to the Company's  Registration Statement
                          on  Form  S-4,   filed  August  25,  1997,  is  hereby
                          incorporated by reference.)


                                       19
<PAGE>


               10.9       Employment  Agreement dated September 26, 1997 between
                          HydroChem  Industrial  Services,  Inc.  and Donovan W.
                          Boyd. (Exhibit 10.10 to the Company's Form 10-K, filed
                          March 29, 1999, is hereby incorporated by reference.)

               10.10      First  Amendment  dated  June 28,  1999 to  Employment
                          Agreement dated  September 26, 1997 between  HydroChem
                          Industrial   Services,   Inc.  and  Donovan  W.  Boyd.
                          (Exhibit  10.10  to the  Company's  Form  10-Q,  filed
                          August 10, 1999, is hereby incorporated by reference.)

               10.11      Employment  Offer  Letter  dated  June  3,  1996  from
                          HydroChem  Industrial  Services,   Inc.  to  Selby  F.
                          Little,   III.   (Exhibit   10.6   to  the   Company's
                          Registration  Statement on Form S-4,  filed August 25,
                          1997, is hereby incorporated by reference.)

               10.12      Letter  Agreement   regarding  severance  compensation
                          dated  October 31, 1997  between HydroChem  Industrial
                          Services, Inc. and Pelham H. A. Smith.  (Exhibit  10.7
                          to the  Company's  Form 10-Q, filed November 14, 1997,
                          is hereby incorporated by reference.)


               10.13      Form of  Indemnification  Agreement  entered into with
                          directors and officers. (Exhibit 10.8 to the Company's
                          Amendment No. 1 to the Registration  Statement on Form
                          S-4, filed October 3, 1997, is hereby  incorporated by
                          reference.)

               10.14      Deferred Bonus Plan of HydroChem  Industrial Services,
                          Inc.  effective  May 1,  1999.  (Exhibit  10.14 to the
                          Company's Form 10-Q,  filed August 10, 1999, is hereby
                          incorporated by reference.)

               10.15      Credit   Agreement   dated  December  31,  1997  among
                          HydroChem Industrial  Services,  Inc. and NationsBank,
                          N. A. and financial  institutions  named in the Credit
                          Agreement.  (Exhibit 10.10 to the Company's Form 10-K,
                          filed  March  30,  1998,  is  hereby  incorporated  by
                          reference.)

               10.16      Letter  Agreement dated March 6, 1998 regarding Credit
                          Agreement  dated  December 31, 1997 between  HydroChem
                          Industrial  Services,   Inc.  and  NationsBank,   N.A.
                          (Exhibit 10.11 to the Company's Form 10-K, filed March
                          30, 1998, is hereby incorporated by reference.)

               10.17      Letter  Agreement  dated  August  14,  1998  regarding
                          Credit  Agreement  dated  December  31,  1997  between
                          HydroChem Industrial  Services,  Inc. and NationsBank,
                          N.A.  (Exhibit 10.15 to the Company's Form 10-Q, filed
                          November  16,   1998,   is  hereby   incorporated   by
                          reference.)

               10.18      Amendment  No. 1 dated  as of  September  30,  1998 to
                          Credit Agreement dated as of December 31, 1997 between
                          HydroChem Industrial Services, Inc., NationsBank, N.A.
                          and  financial   institutions   named  in  the  Credit
                          Agreement.  (Exhibit 10.16 to the Company's Form 10-Q,
                          filed  November 16, 1998,  is hereby  incorporated  by
                          reference.)

               10.19      Amendment  No.  2 dated  as of  December  31,  1998 to
                          Credit Agreement dated as of December 31, 1997 between
                          HydroChem Industrial Services, Inc., NationsBank, N.A.
                          and  financial   institutions   named  in  the  Credit
                          Agreement.  (Exhibit 10.19 to the Company's Form 10-K,
                          filed  March  29,  1999,  is  hereby  incorporated  by
                          reference.)

               10.20      Loan Agreement  dated July 17, 1998 between  HydroChem
                          Industrial   Services,   Inc.  and  Bank  One,  Texas,
                          National Association.  (Exhibit 10.15 to the Company's
                          Form  10-Q,   filed   August  14,   1998,   is  hereby
                          incorporated by reference.)

                                       20
<PAGE>


               10.21      Amendment  No. 1 dated as of  February 2, 1999 to Loan
                          Agreement  dated  July  17,  1998  between   HydroChem
                          Industrial Services, Inc. and Bank One, Texas National
                          Association.  (Exhibit  10.21  to the  Company's  Form
                          10-K, filed March 29, 1999, is hereby  incorporated by
                          reference.)

               10.22      Extension  Agreement  dated as of  February 2, 1999 to
                          Loan Agreement  dated July 17, 1998 between  HydroChem
                          Industrial   Services,   Inc.  and  Bank  One,  Texas,
                          National Association.  (Exhibit 10.22 to the Company's
                          Form   10-K,   filed   March  29,   1999,   is  hereby
                          incorporated by reference.)

               10.23      International Swap Dealers  Association,  Inc.  Master
                          Agreement and  Schedule  dated  July 17, 1998  between
                          HydroChem  Industrial  Services,  Inc.  and  Bank One,
                          Texas, National  Association.  (Exhibit 10.16  to  the
                          Company's  Form 10-Q, filed August 14, 1998, is hereby
                          incorporated by reference.)

               10.24      Amended and Restated  Asset Purchase  Agreement by and
                          among  HydroChem  Industrial  Services,  Inc.,  Valley
                          Systems of Ohio, Inc. and Valley  Systems,  Inc. dated
                          as  of  September  8,  1998.   (Exhibit  10.1  to  the
                          Company's  Form 8-K, filed January 20, 1999, is hereby
                          incorporated by reference.)

               27.1       Financial Data Schedule.  (Filed herewith.)

    (b)    Reports on Form 8-K.

           None.



                                       21
<PAGE>



                                  SIGNATURES


   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  each
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                  HYDROCHEM INDUSTRIAL SERVICES, INC.


   Date: November 9, 1999         By: /s/  Selby F.  Little, III
                                      ---------------------------
                                  Selby F. Little, III, Executive Vice President
                                  and Chief Financial Officer






                                  HYDROCHEM INTERNATIONAL, INC.


   Date: November 9, 1999         By: /s/ Selby F.  Little, III
                                      ---------------------------
                                  Selby F. Little, III, Executive Vice President
                                  and Chief Financial Officer





                                       22
<PAGE>



                                  EXHIBIT INDEX

        27.1   Financial Data Schedule









                                       23