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 December 31, 1998

     ( )  Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
                              Exchange Act of 1934

                        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)

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

        Securities registered pursuant to Section 12(g) of the Act: None

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. ( X )

The number of shares of Common  Stock of the  Registrant,  par value of $.01 per
share,  outstanding on February 28, 1999 was 100 shares. The Registrant's Common
Stock is not  registered  under  the  Securities  Act of 1933 or the  Securities
Exchange Act of 1934.

                    Documents Incorporated by Reference: None

--------------------------------------------------------------------------------
*  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 and its I.R.S.  Employer  Identification Number is
75-2512100.

<PAGE>

                                      INDEX
<TABLE>
<CAPTION>

                                                                           Page
<S>                                                                          <C> 
Part I.
                                                                                 
        Item 1.     Business..............................................    3

        Item 2.     Properties............................................   10

        Item 3.     Legal Proceedings.....................................   10

        Item 4.     Submission of Matters to a Vote of Security  Holders..   11

Part II.

        Item 5.     Market for the Registrant's Common Equity and
                     Related Stockholder Matters..........................   11

        Item 6.     Selected Financial Data...............................   12

        Item 7.     Management's Discussion and Analysis of Financial
                     Condition and Results of Operations..................   13

        Item 7a.   Quantitative and Qualitative Disclosure about Market Risk.20

        Item 8.     Financial Statements and Supplementary Data...........   21

        Item 9.     Changes in and disagreements with Accountants
                     on Accounting and Financial Disclosure...............   38

Part III.

        Item 10.   Directors and Executive Officers of the Registrant.....   38

        Item 11.   Executive Compensation.................................   40

        Item 12.   Security Ownership of Certain Beneficial
                     Owners and Management................................   42

        Item 13.   Certain Relationships and Related Transactions.........   44

Part IV.

        Item 14.   Exhibits, Financial Statement Schedules
                     and Reports on Form 8-K..............................   45

Signatures................................................................   48

Exhibit Index.............................................................   50
</TABLE>


                                       2

<PAGE>
Forward-Looking Statements

In addition to historical  information,  this Form 10-K Annual  Report  contains
forward-looking  statements.  These  forward-looking  statements  are subject to
certain  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those  reflected in these  forward-looking  statements.  Factors
that might  cause such a  difference  include,  but are not  limited  to,  those
discussed in the sections entitled  "Business" and "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations."  Readers  are
cautioned only as of the date on which such  statements are made and the Company
undertakes  no  obligation  to revise or  publicly  release  the  results of any
revision to these  forward-looking  statements.  Readers should carefully review
the risk factors  described in other  documents  the Company  files from time to
time with the  Securities  and  Exchange  Commission,  including  the  Quarterly
Reports on Form 10-Q to be filed by the Company in fiscal year 1999.

Part I.

Item 1.  BUSINESS

General

      HydroChem Industrial Services, Inc. ("HydroChem"), was formed in September
1993 for the purpose of combining,  in December 1993,  the  industrial  cleaning
businesses  of  Hydro   Environmental   Services  Limited   Partnership  ("Hydro
Services")  and the  Dowell  Industrial  Services  division  ("DIS")  of  Dowell
Schlumberger  Inc.  These  businesses  had been  operating  since 1961 and 1938,
respectively.  In January  1995,  HydroChem  acquired  the  industrial  cleaning
business of the Halliburton Industrial Services division ("HIS") of Brown & Root
Industrial  Services,  Inc.  The HIS  business  was  founded in 1962.  HydroChem
generally  conducts  business outside the United States through its wholly owned
subsidiary,  HydroChem  International,  Inc.  ("International").  (HydroChem and
International  are  hereinafter  sometimes  referred  to  either  separately  or
collectively  as the  "Company.")  HydroChem  is a wholly  owned  subsidiary  of
HydroChem Holding, Inc. ("Holding").

      On January 5, 1999, HydroChem acquired substantially all of the assets and
assumed certain liabilities of Valley Systems, Inc., and Valley Systems of Ohio,
Inc., (collectively "Valley"). The acquisition, 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,  including customer agreements, customer lists and facility leases,
and (iv) other  operating  assets.  The purchase price for the acquired  assets,
which is subject to certain post closing  adjustments,  was approximately  $29.8
million in cash of which $4 million was  deposited  into  escrow.  In  addition,
HydroChem  assumed  approximately  $2.5 million in capital lease obligations and
paid $5.3 million in cash at closing to retire Valley's bank debt.

      The Company is a leading  provider of  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.   Services  provided  include   high-pressure  water  cleaning
(hydroblasting),  chemical cleaning, industrial vacuuming,  mechanical services,
waste  minimization,  and  commissioning  and other  specialized  services.  The
majority of these services involve  recurring  maintenance to improve or sustain
the operating  efficiencies and extend the useful lives of process equipment and
facilities.  During the year ended  December  31,  1998,  the  Company  provided
services to approximately  2,000 customers at approximately 3,400 customer sites
from 54 operating  branch  locations  in  the United  States and one location in
Singapore.

      In 1998,  approximately  51.5% of the  Company's  1998 revenue was derived
from its 15  largest  customers,  11 of which are  Fortune  500  companies,  and
approximately  69.2% was derived from its 40 largest customers,  24 of which are
Fortune 500 companies.


                                        3

<PAGE>


      The Company's revenue by industry is set forth in the following table:

<TABLE>
<CAPTION>
                                           Year ended December 31,
                                           -----------------------
                            1996        %       1997        %       1998    %
                            ----       ---      ----       ---      ----   ---
                                           (dollars in thousands)
<S>                        <C>        <C>    <C>         <C>    <C>        <C>
Petrochemical.........    $ 72,073    46.2%  $ 77,659    48.4%  $ 84,600   50.1%
Refineries............      26,676    17.1     32,501    20.2     34,245   20.3
Electrical utility.....     22,464    14.4     16,881    10.5     16,779    9.9
Pulp and paper.........     13,104     8.4     12,342     7.7     11,985    7.1
Other..................     21,686    13.9     21,221    13.2     21,161   12.6
                          --------   -----    -------    ----    -------   -----       ------
          Total........   $156,003   100.0%  $160,604    100.0% $168,770  100.0%
                           =======   =====    =======    =====   =======   =====
</TABLE>

      The Company's revenue by service line is set forth in the following table:
<TABLE>
<CAPTION>
                                           Year ended December 31,
                                           -----------------------
                            1996        %       1997        %       1998    %
                            ----       ---      ----       ---      ----   ---
                                           (dollars in thousands)

<S>                       <C>         <C>    <C>         <C>    <C>        <C>        
Hydroblasting.........    $ 69,504    44.5%  $ 78,919    49.1%  $ 79,665   47.2%
Chemical cleaning.....      62,661    40.2     53,366    33.2     52,954   31.4
Industrial vacuuming..      11,484     7.4     17,534    10.9     24,500   14.5
Other.................      12,354     7.9     10,785     6.8     11,651    6.9
                           -------    -----   -------    ----    -------   -----       ------
          Total.......    $156,003   100.0%  $160,604   100.0%  $168,770  100.0%
                           =======   =====    =======   =====    =======  =====
</TABLE>

Services

      Hydroblasting,   chemical  cleaning  and  industrial   vacuuming  are  the
Company's  largest sources of revenue,  but the Company also offers a variety of
other  services,   including   mechanical   services,   waste  minimization  and
commissioning  services,  as described  below.  The  majority of these  services
involve  recurring  maintenance  programs  and  may be  provided  on a time  and
materials basis or bid on a project basis.

Hydroblasting Services

      The  Company's   hydroblasting   services   involve  the   application  of
high-pressure  streams of water to clean the interior  and exterior  surfaces of
process equipment,  storage tanks and other vessels, and to unplug piping, tubes
and lines.  Hydroblasting  is particularly  effective in cleaning  deposits that
cannot  be  chemically  dissolved  or that are  located  on  surfaces  where the
circulation of chemical cleaning solvents is not feasible.

      Hydroblasting is primarily used for the removal of scale and other fouling
deposits to improve the operating or energy  efficiency  of  equipment,  prevent
contamination of finished  products,  and clean equipment in preparation for, or
subsequent to, other  maintenance  work.  Hydroblasting  is also used to prepare
surfaces  for  welding,  inspection  or  painting,  to clean  exterior  surfaces
cosmetically  and,  with  special  additives  and  equipment,  to cut  steel  or
concrete.

      The Company  performs its  hydroblasting  services  using  equipment  that
includes  an  engine,   pump  and  high-pressure  hoses  that  are  attached  to
specialized application devices. Water typically emerges at pressures from 5,000
to 20,000 pounds per square inch, although  ultra-high-pressures of up to 40,000
pounds per square  inch are used for certain  cleaning  and  cutting  jobs.  The
deposits  and  wastes  removed  by  hydroblasting,  along with water used in the
process,  are typically deposited into the customer's waste treatment system for
further processing and disposal by the customer.

      With the acquisition of Valley, the Company's ability to provide 36,000 to
40,000 pounds per square inch, ultra-high pressure (UHP) hydroblasting  services
has been expanded. Valley has designed and fabricated special UHP

                                        4

<PAGE>


equipment  that should allow the Company to enhance the  hydroblasting  services
provided to its customers.  The Company  believes an advantage of UHP technology
to the  Company's  customers is the ability to more  effectively  clean the most
difficult to remove scale and deposits from accessible tubing and surfaces.

Chemical Cleaning Services

      Chemical cleaning typically involves circulating chemical solvents through
process  equipment,  piping, and tanks or other storage vessels under controlled
conditions of  temperature,  pressure and time to remove  fouling  deposits from
interior  surfaces.  Chemical  cleaning is generally  performed in a closed loop
process and employed to dissolve substances on surfaces that are inaccessible to
hydroblasting,  or where  chemical  cleaning  is more  effective  or safer  than
hydroblasting.  Chemical  cleaning also may involve the  application of chemical
solvents to deposits on exterior  surfaces  that cannot be cleaned with water or
the addition of chemicals to by-products or waste products.

      Chemical   cleaning  has  many  of  the  same  uses  and  applications  as
hydroblasting in industrial  cleaning.  It is also used for "degassing"  process
equipment to remove volatile  substances.  In addition,  the Company's  chemical
cleaning  services  are  required  from  time-to-time  in  connection  with  the
commissioning,  or pre-operational cleaning, of new equipment or an entire plant
to remove soil, debris and other substances that accumulate during construction.

      Most of the Company's  chemical cleaning  services involve  circulation of
chemical solvents through process equipment,  piping, and tanks or other storage
vessels. For many of these jobs, a sample of the fouling deposit or substance to
be removed is sent to the Company's  laboratory  facility in the Houston,  Texas
area,  where  the  Company's  chemists  determine  its  chemical  make-up,   the
combination and  concentration of chemicals best suited for the cleaning process
and the appropriate temperature,  pressure and timing parameters for circulation
of the chemicals.  The Company also has mobile laboratory units,  which are used
to perform limited chemical analysis on-site and to assist in monitoring ongoing
chemical cleaning jobs. After the proper procedure for the on-site work has been
determined,  a field  crew  mixes the  chemicals,  typically  on the  customer's
premises.   Using  pumping  and  circulating  equipment,  the  field  crew  then
circulates  the  solution  through  the  process  equipment  and, in most cases,
collects the waste material and used chemical  solution.  During the circulation
process,  the  concentration  levels  of the  substance  to be  removed  and the
chemicals that have been  introduced  into the system are monitored to determine
the rate at which the  deposits  are being  removed  and to ensure  that  proper
conditions  are being  maintained.  After  collection,  the waste  typically  is
emptied at the customer's  on-site  disposal or storage  facility,  or it may be
pumped into  holding  tanks that  remain on the  customer's  property  for later
disposal or treatment by the customer.

Industrial Vacuuming Services

      Industrial  vacuuming  is the  process of  removing  industrial  waste and
debris  by  conveyance  of  air  or by  traditional  vacuuming  techniques.  The
Company's  vacuuming  services typically are required to recover these materials
for  disposal or  recycling,  to move them within a plant,  to remove waste from
sumps, to prepare tanks or other storage facilities for routine maintenance, and
to assist in other types of cleaning and maintenance services.

      The Company  provides  air-moving  services using  specialized,  truck and
trailer-mounted  equipment  to  collect  and  remove  a  variety  of  solid  and
semi-solid  materials,  including dust, powder,  oil, resins,  wood chips, steel
pellets, solid catalysts and bricks. The Company also furnishes liquid vacuuming
services using conventional vacuum trucks,  which maintain a continuous negative
tank pressure,  for the removal of liquid waste,  sludge or spent process fluids
from pits,  ponds,  tanks or  process  equipment.  The  Company  often  provides
vacuuming services in connection with its other services.

      During 1997 and 1998,  the Company  increased  its fleet of vacuum  trucks
from 131 to 228  units.  Over  the same  period,  industrial  vacuuming  revenue
increased from $11.5 million in 1996 to $17.5 million in 1997, or 52.7%,  and to
$24.5 million in 1998, or 39.7%.  Industrial vacuuming revenue is generally more
capital  intensive  than other  services  provided by the Company,  resulting in
higher  depreciation and operating lease expense.  However,  because  industrial
vacuuming  services can be marketed and  administered by the Company's  existing
sales and support operations, increased depreciation and operating lease expense
is more than offset by  proportionately  lower  levels of  incremental  selling,
general and administrative expense.

                                       5
<PAGE>

Mechanical Services

     In 1998,  the Company began  offering  certain  mechanical  services to its
customers,  including  specialized  "turnkey" heat exchanger,  piping, tower and
vessel services.  These turnkey  services involve  providing both mechanical and
industrial  cleaning  services  to  customers,  usually  in  conjunction  with a
scheduled plant shutdown or "turnaround."

      Mechanical services typically involve heat exchangers. Heat exchangers are
made up of tube bundles,  and are essential components of petroleum refining and
petrochemical  processing.  Heat  exchangers  require  periodic  maintenance and
cleaning. The Company's newly-developed,  mechanical services capabilities allow
it to provide customers with services in addition to industrial cleaning.  These
include  disassembling heat exchangers prior to in-place cleaning or extraction.
If extracted, the tube bundles are placed on nearby concrete slabs for cleaning.
After slab cleaning, the tube bundles are reinserted.  Following either in-place
or slab cleaning, heat exchangers are reassembled and pressure tested.

      The Company  intends to further  enhance  its  capabilities  in  providing
mechanical  services.  The Company  expects  that this will  require  additional
experienced  mechanical  services  professionals and increased  expenditures for
property and equipment.

Waste Minimization Services

      The Company  employs  several  techniques to reduce customer waste volumes
collected  in  the  cleaning   process  before  customer   disposal,   including
de-watering  and  chemical  treatment  techniques,  as  well  as  on-line  water
recycling.  Equipment  often  employed  in these  processes  are plate and frame
filter presses and centrifuges,  which are used to reduce the customer's cost of
disposing  of waste.  Revenue  from waste  minimization  services  is  generally
included in the other services category.

Commissioning Services

      Commissioning  services  include a variety of processes  utilized to clean
newly constructed systems of industrial processing plants prior to their initial
operation.  These  services  include the  Company's  SILENTSTEAM(R)  process for
cleaning steam path components, as well as the application of flushing, cleaning
and passivation  technologies to piping,  vessels,  boilers, and lubrication and
hydraulic oil systems.  Depending on the nature of the  commissioning  services,
the revenue derived  therefrom may be attributable  to  hydroblasting,  chemical
cleaning, industrial vacuuming or other services.

Competition and Market Factors

      The  industrial  cleaning  service  business  is highly  competitive.  The
Company  believes  that the principal  competitive  factors in this business are
price,  quality  of  service,  safety  record,  reputation,   responsiveness  of
personnel,   efficiency  of  service,  and  knowledge  of  customer  plants  and
operations.  Location is an important factor in being able to provide timely and
cost-effective services, although this is more of a factor with respect to daily
or more frequently recurring maintenance services than project work.

      The Company competes with a large number of companies in substantially all
of the  regions in which it  operates.  Many of these  competitors  are local or
regional  operations  servicing a limited geographic area;  however,  others are
larger  companies  with  broader  geographic  coverage,  similar to the Company.
Accordingly,  HydroChem's  competitors in any particular  geographic  market may
differ.  In addition,  competitors  tend to be stronger in certain  services and
weaker in others,  or may not offer a full range of services.  While most of the
Company's direct competitors do not offer as extensive a line of services as the
Company,  future  expansion by such companies or the  development of alternative
cleaning methods represent potential competition for the Company.

      The  Company  believes  that  factors  such as  maintenance  for  improved
efficiency, a trend toward outsourcing, industry consolidation and environmental
regulations  have  favorably  affected  the demand for its  industrial  cleaning

                                       6
<PAGE>


services.  The Company also believes that it benefits from competitive strengths
which  include  industry  experience  and long term  relationships  with quality
customers, a broad range of services and industry expertise, an excellent safety
record,  strategic  locations,   customer  contacts,   customer  alliances,  and
experienced management. See "Marketing, Sales and Services Contracts."

Business Strategy

      The Company's business strategy is to expand services provided to existing
customers,  establish  relationships  with new customers in existing  geographic
areas, expand geographically, establish additional customer alliances and pursue
additional  strategic  acquisitions.  In  1998,  the  Company's  revenue  growth
principally  resulted from  expanded  services to existing  customers  including
customer  alliances.  The Company intends to continue to focus on these elements
of its strategic growth.

      With the  acquisition  of the former  Valley  operations,  the Company has
expanded  both its service  offering and  geographic  coverage.  The majority of
Valley's  revenue is  comprised of UHP and  industrial  vacuuming  services.  In
addition,  as a result of the acquisition,  the Company has increased its number
of branch locations in the northern United States,  thereby improving  operating
efficiencies in that geographic region. See "Services - Hydroblasting Services,"
and "Field Organizational Structure."

Field Organizational Structure

      The  Company's  field  organization  is  primarily  based on  geographical
divisions.  Divisions are generally subdivided into areas, regions and branches.
Branches,  including  certain  on-site  locations,  are the primary  business or
operating units.

      The Company maintains  operating and sales personnel at each of its branch
locations and operates each location  under the direction of a branch manager in
accordance with policies, procedures and objectives established by the Company's
management.  Subject to these  guidelines,  branch  personnel  have  significant
autonomy in dealing with  customers,  employees and vendors in their  geographic
area.  Each branch  operates as a separate  profit center and is responsible for
billing and collecting accounts receivable, although cash receipts are collected
via lockbox.  Each branch is also  responsible  for initiating  vendor  purchase
orders and entering  payroll  hours,  although  vendor and payroll  payments are
processed  at the  Company's  headquarters  location.  Each  branch  location is
allotted  certain  equipment,  including  pumps,  vehicles and various  types of
specialized  equipment.  However,  equipment  and  personnel  are shifted  among
branches  as  work  loads  dictate,  enabling  the  Company  to  realize  better
utilization of its resources.

Marketing, Sales and Service Contracts

      The Company's sales and marketing is characterized  by long-term  customer
relationships resulting from the consistent delivery of high quality, dependable
service, advanced technical capabilities, a broad service offering,  competitive
pricing and a strong  customer  service  orientation  among its  employees.  The
Company's  services are marketed and sold through a tiered  approach,  targeting
both  maintenance  and  purchasing  personnel  at the  plant  level  as  well as
corporate purchasing managers.  Direct selling at the plant level is the primary
marketing  thrust.  The  Company's  sales people and account  managers  maintain
consistent  communications with plant contacts to position the Company better to
obtain upcoming work and to ensure that on-going work is being performed to meet
or exceed customer  expectations.  The Company's  national  marketing  effort is
focused on (i)  servicing  existing  accounts,  (ii)  establishing  new customer
accounts,  (iii) obtaining multi-plant contracts (regional or national in scope)
and (iv) implementing alliance relationships.  These efforts are supplemented by
advertising in industry  publications  and  participating  in selected  industry
trade shows.

     Most of the Company's customers, or prospective customers,  have procedures
by which they qualify  contractors to become  approved  vendors in their plants.
Customers  award master service  contracts or contracts for individual  projects
only to such approved  vendors.  Contractors  may be selected at the  individual
plant  level  or on a  regional  or  national  basis,  covering  multiple  plant
locations.  A  particular  plant  will  typically  have  two  or  more  approved
industrial  cleaning  providers.  One of these may be  designated as the primary
service provider and receive a majority of the work.

                                       7
 
<PAGE>


Alternatively,  the work may be spread  evenly  between the  contractors  by the
customer,  or market  share  within  the plant may be  determined  by the sales,
marketing and operating capabilities of the different service providers.  Plants
also may have approved  service  companies  for specific  services (for example,
they may have  hydroblasting  contracts  with one or more  vendors and  separate
industrial  vacuuming  contracts  with one or more  other  vendors)  or may have
contracts covering multiple services provided by the same vendor.

     Master service agreements typically establish general terms and conditions,
as well as time and  material  pricing  for  services.  These  contracts  do not
guarantee a particular  amount of work,  but they do allow Company  personnel to
enter the plants more easily,  fostering the development of  relationships  with
plant personnel and the marketing of the Company's  services.  Specific jobs may
be performed on a time and  materials  basis or granted as part of a competitive
bid process.  Daily or more frequently  recurring  maintenance  work tends to be
performed on a time and materials basis,  while larger,  less frequent  projects
tend to be bid.  The Company  estimates  that  approximately  two-thirds  of its
revenue comes from services  performed  under its master  service  agreements or
separately bid projects in plants where it has master service agreements.  These
agreements  generally  enhance the  consistency  and  stability of the Company's
revenue stream.

      The Company's alliance or managed services process is an additional, newer
method of  providing  services to its  customers.  In an  alliance,  the Company
provides a more  comprehensive  outsourcing  solution to the customer,  with the
Company more involved in scheduling,  managing and bench marking the delivery of
services in a manner that reduces  costs for the  customer and the Company,  and
provides for a continuous improvement process over time. Generally, the customer
will further benefit from additional savings resulting from reduced downtime for
maintenance and increased production.

Safety and Training

      Industrial cleaning involves exposure to potentially dangerous conditions.
For liability and other  reasons,  customers are very  concerned with the safety
records of contractors used to perform services at their plants. To minimize the
dangers  inherent in this type of work, the Company  conducts broad training and
educational  programs  and  has  developed  comprehensive  safety  policies  and
regulations. The main factors driving the Company's investment in these programs
and policies are: (i) achieving  employee and customer safety;  (ii) controlling
insurance  costs;  (iii)  satisfying  customers'  growing  safety  and  training
requirements;  (iv) meeting increasing governmental and regulatory requirements;
and (v) improving  the  Company's  overall  performance.  The  Company's  safety
program  includes  educating  Company  personnel,  implementing,  monitoring and
improving  Company safety  policies,  employing  safety  personnel at most field
locations,  providing  proactive  support  by senior  management,  working  with
insurance companies and safety  organizations to make use of their resources and
expertise,  using  process  improvement  teams and  undertaking  safety  audits,
providing  cash  incentive  programs  for  employees  and linking a component of
management  bonuses  to  safety,   requiring  substance  abuse  screening,   and
investigating   all  accidents,   and  distributing  on  a  company-wide   basis
information  regarding accidents that have occurred and how they could have been
avoided, without using names.

      The Company's management believes its safety indices are among the best in
the  industry.  As an  example,  HydroChem's  workers'  compensation  interstate
experience  modification  rate  ("EMR") is  substantially  below the average for
companies in its  industry.  The EMR,  calculated by a private  advisory  rating
organization  supporting  the  insurance  industry,  is one of the  most  widely
observed safety statistics. The EMR is a method of reflecting a company's actual
workers'  compensation  claims  experience  relative  to the  normally  expected
experience of companies within a particular industry.

Major Customer

       In 1997 and 1998, The Dow Chemical Company and its affiliates represented
11.9% and 10.7%, respectively, of the Company's total revenue.

                                       8

<PAGE>


Governmental Regulations

      The Company's  operations are subject to various federal,  state and local
regulations governing employee health and safety, protection of the environment,
protection  of the public,  and motor  carriers.  While the Company  believes it
operates  safely and prudently and is in substantial  compliance with these laws
and regulations, there can be no assurance that accidents will not occur or that
the Company  will not incur  penalties  or fines for  violations.  In  addition,
noncompliance  with  these  laws and  regulations  could  negatively  impact the
Company's  ability  to  secure  contracts  with  customers  or  obtain  adequate
insurance  at  reasonable  costs.  Any of these  factors  could  have a material
adverse effect on the Company's financial condition and results of operations.

      Occupational  Safety and Health Act.  The  operations  of the  Company are
subject  to the  requirements  of the  Occupational  Safety  and Health Act (the
"Act") and comparable state laws. Regulations  promulgated under the Act require
employers  in the  industries  that the  Company  serves to  implement  training
programs, work procedures, medical surveillance systems and personnel protection
programs,  in order to protect  employees from workplace hazards and exposure to
hazardous  chemicals.  The Company has  established  comprehensive  programs for
complying with these health and safety regulations.  The Company is also subject
to inspections by the Occupational Health and Safety Administration ("OSHA") and
comparable state regulatory agencies following accidents involving the Company's
employees,  as  well  as on a  random  basis  at  both  its  facilities  and its
customer's  facilities.  Such inspections  seek to determine  whether or not the
Company's work practices are in substantial  compliance  with the Act. While the
Company  believes it operates  safely and  prudently,  there can be no assurance
that  accidents  will not occur or that the  Company  will not incur  fines as a
result of OSHA inspections.

      Federal, State and Local Environmental  Regulations.  The Company performs
substantially  all of its  industrial  cleaning  services at industrial  process
facilities  owned by its  customers.  Although  chemicals  may be  stored at the
Company's  branch  offices  and  transported  by the  Company to its  customers'
plants,  no  industrial   cleaning  services  are  performed  at  the  branches.
Typically,  hazardous and non-hazardous waste handled by the Company is disposed
of by the customer using the customer's waste disposal facilities.  However, the
Company will  transport the  customer's  waste from one point in the  customer's
plant to another  point within the plant,  which may involve  travel on a public
road, or, on a very limited basis, to a commercial disposal facility.  As a part
of its  services to the  customer,  the Company may treat the  customer's  waste
collected  by the Company in the  cleaning  process to  neutralize,  minimize or
separate it into its components,  thus facilitating disposal or recycling by the
customer.  At all times,  the customer  retains title to and is deemed to be the
generator  of the  waste.  Therefore,  the  Company  does not  believe  that its
activities  subject it to the duties pertaining to generators of hazardous waste
or to owners and  operators of hazardous  waste  treatment,  storage or disposal
facilities.  However, the Company could be subject to liability under applicable
environmental  statutes  in the  event  of a  spill,  discharge  or  release  of
chemicals at a branch or at a customer  location or during  transportation  to a
customer location, or in event of a spill,  discharge or release of waste during
transportation.

      Department  of  Transportation.  Certain  of the  Company's  vehicles  are
subject to the regulations of the Department of  Transportation,  which address,
among other things, maintenance of the vehicles, driver qualification and record
keeping.  Failure to comply  with  these  regulations  could  result in fines or
modification of the Company's current procedures with respect to its vehicles.

      Certain of the laws and regulations applicable to the Company require that
it obtain  permits and licenses.  The Company  believes that it has obtained the
permits  and  licenses  material  to its  business  and  believes  that it is in
substantial  compliance  with all federal,  state and local laws and regulations
governing  it. To date,  the  Company  has not been  subject to any  significant
fines, penalties or other labilities under these laws and regulations.

Intellectual Property

      While the Company has numerous patents and proprietary  techniques related
to its products  and  services,  it does not believe the ongoing  success of its
operations is dependent on these patents or techniques, individually or taken as
a whole.  The  Company  historically  has not  allocated  significant  financial
resources to research and development.

                                       9


<PAGE>


Insurance

      In the normal  course of  business,  the  Company  is subject to  numerous
operating risks, including risks associated with the safety of its employees and
its customers' employees while providing industrial cleaning services, potential
damage to a customer's property or business in performing such services, and the
potential for an environmental accident.

      The Company  currently has in force insurance  policies  covering  general
liability,  workers'  compensation/employer's  liability,  automobile liability,
environmental liability and property damage, and excess liability.  All of these
policies  are in amounts the  Company  believes  are  consistent  with  industry
practices  and  provide  for the  Company to pay a  deductible  or self  insured
retention on each claim.  However,  no assurance can be given that the insurance
will  adequately  protect  the Company  and,  if the  Company is only  partially
insured or  completely  uninsured,  a related  claim could  result in a material
adverse effect on the Company's financial condition and results of operations.

Working Capital

      As a leading  industrial  service provider,  the Company's working capital
requirements  principally  include its labor,  equipment and debt service costs.
The Company believes it maintains  adequate working capital to meet its needs in
the current business environment.

Employees

      As of December 31, 1998, the Company had approximately 1,960 employees. As
of February 28,  1999,  following  the  acquisition  of Valley,  the Company had
approximately  2,260 employees.  None of the Company's  employees are covered by
collective bargaining agreements. Management believes that relations between the
Company and its employees are good.

Item 2.  PROPERTIES

      During  1998,  the  Company   consolidated   its  corporate,   laboratory,
manufacturing,  West Division,  health,  safety environmental and training,  and
commissioning  services  operations  into a new 132,000  square foot facility on
19.4 acres of land in the Houston,  Texas area. These operations  previously had
been at five separate locations in various parts of the Houston, Texas area. The
new consolidated  facility is in close proximity to many of the Company's branch
locations and customers in the Houston ship channel area.  The Company  obtained
interim  and  permanent  financing  from a  commercial  bank to finance the land
acquisition and  construction  costs for this new facility.  (See  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations-Liquidity  and Capital Resources" and Note 6 of Notes to Consolidated
Financial Statements.)

      As of February 28, 1999, the Company had 64 operating  branch locations in
the United  States,  and  international  locations in Puerto Rico and Singapore.
This includes 15 branches that were previously Valley  locations.  The Company's
current domestic branches are located in Texas, Louisiana,  Alabama, California,
Delaware, Florida, Georgia, Illinois, Kansas, Kentucky,  Michigan,  Mississippi,
Missouri,  New  York,  North  Carolina,  Ohio,  Pennsylvania,   Oklahoma,  South
Carolina,  Tennessee,  Utah,  Virginia and Washington.  The Company owns nine of
these branches. Generally, the remainder are leased. In certain instances, these
branch locations are on-site facilities provided by the Company's customers.

Item 3.  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

                                       10

<PAGE>


the  plaintiffs  seek damages for alleged  toxic  exposure  resulting  from this
incident.  All but a few of these  suits has been  removed to the United  States
District Court for the Middle District of Louisiana. A date for trial in Federal
Court has not yet been set. The Company is being  defended in these suits by one
of its liability insurance carriers.

      Recently,  the Company has been informed  that Georgia Gulf,  which is the
primary  defendant  in these  actions,  has settled  claims with  certain of the
plaintiffs  and that it will  attempt  to settle  with as many of the  remaining
plaintiffs  as  possible.  The  Occupational  Safety and  Health  Administration
investigated  this incident and issued  citations to Georgia Gulf and not to the
Company or any other defendant. Nevertheless, because it is always possible that
a jury would assess some percentage of liability to the Company  resulting in an
adverse jury verdict,  the Company  believes it would be prudent to settle these
suits if  possible,  especially  in view of the recent  settlement  activity  by
Georgia Gulf.  Consequently,  the Company has initiated  preliminary  settlement
negotiations  with each of Georgia Gulf and a group of attorneys  representing a
majority  of the  plaintiffs.  The  Company  may also  pursue  other  settlement
strategies.

      Based  on  the  current  circumstances,  and  although  there  can  be  no
assurance,  the Company believes it can settle all or substantially all of these
lawsuits,  and that the aggregate  amount of any such settlements will be within
the limits of its applicable insurance coverage.

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

      None.

Part II.

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

      Not applicable.

                                       11

<PAGE>


Item 6.   SELECTED FINANCIAL DATA

      The selected  financial  data below includes the accounts of all companies
acquired by the Company through December 31, 1998. These companies, all of which
were  acquired  during  the past five  years in  transactions  accounted  for as
purchases, are included from their respective dates of acquisition. The selected
financial  data should be read in  conjunction  with the Company's  Consolidated
Financial  Statements and the Notes thereto,  and  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>

                                        Year ended December 31,
                                        ------------------------
                            1994      1995        1996        1997     1998
                            ----      ----        ----        ----     ----
                                         (dollars in thousands)
<S>                       <C>        <C>        <C>        <C>        <C> 
Financial Data:                                                                  
    Revenue.............. $101,103   $156,484   $156,003   $160,604   $168,770
    Gross profit.........   36,521     61,855     61,630     65,019     63,599
    Gross margin.........     36.1%      39.5%      39.5%      40.5%      37.7%

    EBITDA (1)........... $ 16,017   $ 22,390   $ 19,527   $ 22,405   $ 19,354
    EBITDA margin (2)....     15.8%      14.3%      12.5%      14.0%      11.5%

    Operating income..... $ 12,087   $ 15,638   $ 11,762   $ 14,189   $ 10,276
    Income (loss) before taxes
       and extraordinary
       loss......            5,409      5,903      1,829      4,101     (3,191)
     Net income (loss)...    2,950      2,851        545       (523)    (3,191)

     Capital expenditures    5,576      8,493      6,829      9,557     19,149
</TABLE>
<TABLE>
<CAPTION>

                                                  As of December 31,
                                                  ------------------
                                    1994     1995     1996      1997      1998
                                    ----     ----     ----      ----      ----
                                                            (in thousands)
<S>                               <C>      <C>      <C>       <C>       <C>
Balance Sheet Data:                                                             
   Cash and cash equivalents..... $ 2,529  $ 1,088  $    671  $ 33,862  $ 33,775
   Working capital...............  10,170   17,961    13,216    52,324    46,755
   Total assets..................  87,146  121,216   115,522   152,093   156,711
   Total long-term debt, including
      current maturities.......... 52,739   76,894    68,325   110,000   116,117
   Dividends paid................     -        -         -       8,540       -
   Stockholder's equity..........  17,687   25,225    25,770    16,707    13,516
</TABLE>
-------------------------

(1) EBITDA for any relevant  period  presented  above  represents  income (loss)
    before extraordinary loss plus interest expense, income taxes, depreciation,
    amortization,  and other income and expenses  (including a special charge of
    $511,000 in 1996, and special charges of $815,000 and a restructuring charge
    of $740,000 in 1998)  reflected in the  determination  of net income (loss).
    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.

(2) EBITDA margin for any relevant  period  presented  above  represents  EBITDA
divided by revenue.


                                       12

<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  Selected
Financial Data, the Company's  Consolidated  Financial  Statements and the Notes
thereto, and the other financial and operating information included elsewhere in
this Form 10-K. This Form 10-K contains, in addition to historical  information,
forward-looking  statements that include risks and uncertainties.  The Company's
actual results may differ  materially from the results discussed in the forward-
looking  statements.  Factors that might cause such a difference  include  those
discussed  below,  as well as those  discussed  elsewhere in this Form 10-K. The
Company undertakes no obligation to release publicly the result of 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.

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>
                                                      Year Ended December 31,
                                                      -----------------------
                                                     1996       1997      1998
                                                     ----       ----      ----
<S>                                                 <C>         <C>       <C>   
Revenue.........................................    100.0%      100.0%    100.0%
Cost of revenue.................................     60.5       59.5      62.3
                                                     ----       ----      ----
     Gross profit...............................     39.5       40.5      37.7
SG&A expense....................................     27.0       26.5      26.2
Depreciation....................................     5.0         5.2       5.4
                                                     ----        ----     ----
     Operating income...........................      7.5        8.8       6.1
Other (income) expense:
     Interest expense, net......................      5.0        5.3       6.2
     Special charges............................      0.3         -        0.5
     Restructuring charge.......................       -          -        0.4
     Other (income) expense, net................       -          -         -
     Amortization of intangibles................      1.0        1.0       0.9
                                                     ----        ----      ---
Income (loss) before taxes and extraordinary loss     1.2        2.5      (1.9)
     Income tax provision.......................     0.9         1.4        -
                                                     ----       ----       --
Income (loss) before extraordinary loss.........      0.3        1.1      (1.9)
     Extraordinary loss on early extinguishment
          of debt, net of taxes.................      -          1.4        -
                                                     ---        ----       --
                    Net income (loss)...........     0.3%       (0.3)%    (1.9)%
                                                     ===        =====     =====

EBITDA..........................................     12.5%      14.0%     11.5%
                                                     ====       ====      ====
</TABLE>

Comparison of 1998 results to 1997

        Revenue.  Revenue increased $8.2 million, or 5.1%, to $168.8 million for
the year ended  December  31,  1998 from $160.6  million in the prior year.  The
increase  principally  resulted from an increase in industrial vacuuming revenue
of $7.0 million,  or 39.7%, from $17.5 million to $24.5 million;  an increase in
hydroblasting  revenue of $746,000, or 0.9%, from $78.9 million to $79.7 million
and an increase in revenue from all other  services of $866,000,  or 8.0%,  from
$10.8 million to $11.7  million.  These  increases  were  partially  offset by a
decrease in chemical  cleaning revenue of $412,000,  or 0.8%, from $53.4 million
to $53.0 million.  The increase in industrial  vacuuming  revenue  resulted from
additional  vacuum  trucks  placed in service  by the  Company in 1997 and 1998.
Hydroblasting  revenue  increased  primarily due to the  implementation  of sole
source provider  arrangements with certain existing  customers.  The decrease in
chemical  cleaning revenue primarily was caused by a small number of projects in
the prior year which

                                       13

<PAGE>


did not recur,  while the increase in other services revenue primarily  resulted
from mechanical  service  projects,  which the Company began performing in April
1998, offset by decreased pipeline cleaning.

        Gross profit.  Gross profit  decreased  $1.4 million,  or 2.2%, to $63.6
million  in 1998 from $65.0  million  in the prior  year.  Gross  profit  margin
decreased  from 40.5% in 1997 to 37.7% in 1998.  Cost of revenue  increased $9.6
million,  or 10.0%,  to $105.2  million for 1998 from $95.6 million in the prior
year,  primarily  due to the revenue  increases  described  above and  increased
direct  compensation  costs. Late in 1998, the Company began to implement a cost
reduction program which included, among other things, a reduction in work force.
(See Note 8 of Notes to Consolidated Financial Statements.)

        SG&A expense.  SG&A expense  increased  $1.6 million,  or 3.8%, to $44.2
million in 1998 from $42.6 million in the prior year.  This  increase  primarily
resulted from increases in compensation  expense which were partially  offset by
decreased  insurance expense.  SG&A expense as a percentage of revenue decreased
to  26.2%  in 1998  from  26.5%  in the  prior  year.  (See  Note 8 of  Notes to
Consolidated Financial Statements.)

        EBITDA.  Decreased gross profit and increased SG&A expense resulted in a
$3.1  million,  or 13.6%  decrease in EBITDA to $19.4 million in 1998 from $22.4
million in the prior year. As a percentage of revenue, EBITDA decreased to 11.5%
in 1998, compared to 14.0% in the prior year.

        Depreciation. Depreciation expense increased $862,000, or 10.5%, to $9.1
million  in 1998 from $8.2  million  in the prior  year and was 5.4% and 5.2% of
revenue, respectively. The increase in depreciation expense principally resulted
from  increased  capital  expenditures  for vacuum  trucks  and other  operating
equipment.

        Operating  income.  Decreased  gross  profit,  and  increased  SG&A  and
depreciation expense resulted in a decrease in operating income of $3.9 million,
or 27.6%,  to $10.3  million in 1998 from $14.2  million in the prior year. As a
percentage of revenue,  operating income decreased to 6.1% in 1998,  compared to
8.8% in the prior year.

        Interest expense,  net. Net interest expense increased $2.0 million,  or
22.9%,  to $10.5 million in 1998 from $8.5 million in the prior year.  Increased
interest  expense  principally  resulted  from an  increase  in debt  due to the
issuance  in  August  1997 of  $110.0  million  of  HydroChem's  10 3/8%  Senior
Subordinated  Notes due 2007, which was partially  offset by increased  interest
income earned on higher invested cash balances.

        Special  charges.  In 1998,  the Company  incurred  $325,000 in expenses
related to negotiation  and due diligence  efforts  associated with a terminated
acquisition,  $290,000 related to the consolidation of corporate  facilities and
certain other  operations into the Company's new  headquarters,  and $200,000 in
non-capitalizable  costs  incurred in connection  with the  Company's  Year 2000
compliance program. (See Note 8 of Notes to Consolidated Financial Statements.)

        Restructuring  charge.  The  Company  incurred  $740,000  in  severance,
facilities and other costs in connection with a cost reduction program initiated
in late 1998. (See Note 8 of Notes to Consolidated Financial Statements.)

      Amortization.  Amortization expense of $1.5 million in 1998 was relatively
unchanged from the prior year.

        Income  (loss)  before  taxes and  extraordinary  loss.  For the reasons
described above, the Company incurred a loss before taxes and extraordinary loss
of $3.2 million in 1998 as compared to income of $4.1 million in the prior year.
This represented a decrease of $7.3 million. As a percentage of revenue,  income
(loss) before taxes and extraordinary loss was (1.9)% in 1998,  compared to 2.5%
in the prior year.

        Income tax provision.  There was no provision for income tax recorded in
1998  because  of a change in the  Company's  valuation  allowance  for  certain
deferred tax assets.  The effective tax rate was 55.6% of income before taxes in
the prior year period.

        Extraordinary  loss.  In 1997,  as a result  of the early  repayment  of
HydroChem's  debt, an  extraordinary  loss was  recognized in the amount of $2.3
million (net of the related tax benefit of $1.4 million). The extraordinary loss

                                       14

<PAGE>


consisted of the write-off of associated  deferred financing costs in the amount
of $3.2 million before related tax benefit,  as well as a prepayment premium and
other related fees and expenses.

        Net income (loss).  For the reasons  described above, net loss increased
$2.7  million,  or  510.1%  to a loss of  $3.2  million  in 1998  from a loss of
$523,000 in the prior year.

Comparison of 1997 results to 1996

      Revenue.  Revenue  increased $4.6 million,  or 2.9%, to $160.6 million for
the year ended  December  31,  1997 from $156.0  million in the prior year.  The
increase  principally  resulted  from  increased  hydroblasting  revenue of $9.4
million, or 13.5%, and increased  industrial  vacuuming revenue of $6.1 million,
or 52.7%,  all of which was  partially  offset by  decreased  chemical  cleaning
revenue of $9.3 million, or 14.8%, and decreased revenue from all other services
of $1.6 million, or 12.7%.  Hydroblasting revenue increased primarily due to the
implementation  of sole  source  provider  arrangements  with  certain  existing
customers  and a small  number  of large  projects  with  other  customers.  The
increase in industrial  vacuuming revenue resulted from additional vacuum trucks
placed in service by the  Company in 1996 and 1997.  The  decrease  in  chemical
cleaning  revenue was primarily  caused by a decrease in electric utility boiler
cleaning and certain other  projects.  The decrease in other  services  resulted
from reduced activity with one customer.

      Gross  profit.  Gross profit  increased  $3.4  million,  or 5.5%, to $65.0
million in 1997 from $61.6  million in the prior year,  and gross profit  margin
for the year  increased  from  39.5% to 40.5%.  Cost of revenue  increased  $1.2
million,  or 1.3%, to $95.6 million in 1997 from $94.4 million in the prior year
due to the revenue  increases  described  above. The improvement in gross profit
was primarily  attributable to a higher concentration of services being provided
to the Company's largest customers.

      SG&A expense.  SG&A expense as a percentage of revenue  decreased to 26.5%
in 1997 from 27.0% in 1996, while SG&A expense increased  $511,000,  or 1.2%, to
$42.6  million  in 1997 from  $42.1  million in the prior  year.  This  increase
primarily  resulted  from  increases  in  field  compensation  expense  and  the
Company's  allowance for doubtful accounts,  partially offset by lower insurance
costs.

      EBITDA.  Increased  gross  profit,  partially  offset  by  increased  SG&A
expense,  resulted in an increase in EBITDA of $2.9 million,  or 14.7%, to $22.4
million  in 1997 from  $19.5  million  in the prior  year.  As a  percentage  of
revenue, EBITDA increased to 14.0% in 1997, compared to 12.5% in the prior year.

      Depreciation.  Depreciation  expense increased $451,000,  or 5.8%, to $8.2
million  in 1997 from $7.8  million  in the prior  year and was 5.2% and 5.0% of
revenue, respectively.

      Operating  income.  Increased gross profit,  partially offset by increased
SG&A  expense and  depreciation  expense,  resulted in an increase in  operating
income of $2.4 million, or 20.6%, to $14.2 million in 1997 from $11.8 million in
the prior year. As a percentage of revenue,  operating  income increased to 8.8%
in 1997, compared to 7.5% in the prior year.

      Interest expense.  Interest expense increased  $598,000,  or 7.6%, to $8.5
million in 1997 from $7.9 million in the prior year.  Increased interest expense
resulted  from an increase in debt due to the  issuance in August 1997 of $110.0
million of HydroChem's  10 3/8% Senior  Subordinated  Notes due 2007,  partially
offset by lower revolving and term loan balances prior to the  extinguishment of
that  debt,  and  increased  interest  income  earned  on higher  invested  cash
balances.

      Special charges. In 1996, the Company incurred  approximately  $511,000 in
expenses related to merger  negotiations  and due diligence  efforts between the
Company  and  a  publicly-traded   company,   which  were  terminated  prior  to
consummating the merger.

      Amortization.  Amortization expense of $1.5 million in 1997 was relatively
unchanged from the prior year.

                                       15

<PAGE>


      Income  (loss)  before  taxes  and  extraordinary  loss.  For the  reasons
described  above,  income before taxes and  extraordinary  loss  increased  $2.3
million, or 124.2%, to $4.1 million in 1997 from $1.8 million in the prior year.
As a percentage of revenue,  income before taxes and extraordinary loss was 2.6%
in 1997, compared to 1.2% in the prior year.

      Income tax provision.  The effective tax rate decreased to 55.6% of income
before taxes and  extraordinary  loss in 1997 from 70.2% in the prior year. This
decrease principally resulted from proportionately lower nondeductible permanent
differences in 1997 than in the prior year.

      Income (loss) before  extraordinary loss. For the reasons described above,
income before  extraordinary  loss  increased $1.3 million,  or 233.8%,  to $1.8
million in 1997 from  $545,000 in the prior year.  As a  percentage  of revenue,
income before  extraordinary  loss  increased to 1.1% in 1997,  from 0.3% in the
prior year.

      Extraordinary  loss. In 1997, as a result of the early  extinguishment  of
HydroChem's  debt, an  extraordinary  loss was  recognized in the amount of $2.3
million (net of a related tax benefit of $1.4 million).  The extraordinary  loss
consisted of the write-off of associated  deferred financing costs in the amount
of $3.2 million before related tax benefit,  as well as a prepayment premium and
other related fees and expenses.

      Net income (loss). For the reasons described above, the Company incurred a
net loss of  $523,000  in 1997  compared  to net income of $545,000 in the prior
year.

                                              16

<PAGE>


Quarterly Financial Data

      The following table sets forth certain unaudited consolidated statement of
operations and other  supplemental data of the Company for the quarterly periods
shown. The unaudited  quarterly  information has been prepared on the same basis
as the Company's  annual  financial  information  and, in management's  opinion,
includes all adjustments,  consisting of normal recurring accruals, necessary to
present fairly the information for the quarters presented. The operating results
for any quarter are not  necessarily  indicative  of results for the year or for
any future period.  The  extraordinary  loss  recognized in the third quarter of
1997 was related to early  extinguishment  of debt. The special charges incurred
in the  second  and  fourth  quarters  of  1998  were  a  result  of  terminated
acquisition  negotiations and other  non-recurring  expenses.  The restructuring
charge  included  severance,  facility  closure  and  other  costs  incurred  in
connection with a cost reduction  program.  (See Note 8 of Notes to Consolidated
Financial Statements.)
<TABLE>
<CAPTION>
                                                                                         Three months ended
                              1997                          1998
                 ---------------------------------------------------------------
                 Mar.31  June 30 Sept.30  Dec.31  Mar.31 June 30 Sept.30  Dec.31
                 ------  ------- -------  ------  ------ ------- -------  ------
                                          (in thousands)
<S>             <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>    
Revenue........ $38,388 $42,326 $40,030 $39,860 $40,888 $45,067 $40,509 $42,306
Cost of revenue  22,919  24,871  23,687  24,108  24,885  28,185  25,632  26,469
                 ------  ------  ------  ------  ------  ------  ------  ------
  Gross profit.  15,469  17,455  16,343  15,752  16,003  16,882  14,877  15,837
SG&A expense...  10,298  10,863  11,128  10,325  10,787  10,961  11,799  10,698
Depreciation...   1,911   1,978   2,094   2,233   2,193   2,239   2,296   2,350
                 ------  ------  ------  ------  ------  ------  ------  ------
    Operating 
     income....   3,260   4,614   3,121   3,194   3,023   3,682     782   2,789
Other (income) expense:
 Interest
 expense,net...   1,862   1,925   2,374   2,357   2,517   2,599   2,626   2,728
 Special charges     -       -       -       -       -      300      -      515
 Restructuring 
   charge......      -       -       -       -       -       -       -      740
 Other (income)
   expense, net       4      19     (17)     33       3      13    (142)     67
 Amortization of 
   intangibles..    388     391     376     376     376     374     375     376
                 ------  ------  ------- ------  ------  ------  ------  ------
Income (loss) before
   taxes and
   extraordinary
   loss........   1,006   2,279     388     428     127     396  (2,077) (1,637)
 Income tax provision
     (benefit).     447   1,091     347     397      75     237    (356)     44
                 ------  ------  ------- ------  ------  ------  ------  ------
Income (loss) before         
     extraordinary
     loss......     559   1,188      41      31      52     159  (1,721) (1,681)
 Extraordinary
     loss......      -       -    2,342      -       -       -       -      -
                 ------  ------  ------- ------  ------  ------  ------  ------
Net income
    (loss)..... $   559 $ 1,188 $(2,301)$     3 $    52 $   159 $(1,721)$(1,681)
                 ======   =====  ======  ======  ======  ======  ======  ======


EBITDA......... $ 5,171 $ 6,592 $ 5,215 $ 5,427 $ 5,216 $ 5,921 $ 3,078 $ 5,139
                 ======  ======  ======  ======  ======  ======  ======  ======
</TABLE>


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.  In August 1997,  HydroChem
issued  $110.0  million of its 10 3/8% Senior  Subordinated  Notes due 2007 (the
"Series  A  Notes")  in a  private  offering  pursuant  to Rule  144A  under the
Securities Act of 1933. HydroChem registered a substantially identical series of
notes (the "Series B Notes") with the Securities and Exchange  Commission and on
November 7, 1997,  completed  an exchange of the Series B Notes for the Series A
Notes.  The Series B 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,  commencing on February 1, 1998. The Series B 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
Series B 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. International is a guarantor of the Series B Notes. A portion of
the  net  proceeds  from  the  sale of the  Series  A Notes  was  used to  repay
indebtedness, accrued interest and fees under the Company's then existing senior
debt ($45.7 million) and subordinated  debt ($18.7 million).  In addition,  $8.5
million was used to fund a dividend to Holding  which  Holding used to discharge
accrued  interest on its  indebtedness  and 

                                       17

<PAGE>


accrued  dividends on its preferred stock. The remaining  proceeds were invested
in  commercial  paper  and  other  interest  bearing  deposits  with  short-term
maturities and later used for general corporate  purposes and the acquisition of
Valley.

      On December  31,  1997,  HydroChem  entered  into a  participating  credit
agreement  with a  financial  institution  for a credit  facility  (the  "Credit
Facility") which provides for unsecured borrowings of up to $25 million, subject
to borrowing base  limitations.  The term of the Credit Facility is three years,
and any  borrowings  thereunder  bear  interest  at  rates  adjusted  quarterly.
Interest  rates are based on (i) a range  from  LIBOR  plus  1.75% to LIBOR plus
3.00%, or, at the discretion of HydroChem, (ii) the higher of (a) the prime rate
and (b) the Federal Funds Rate plus 0.50%,  plus an  applicable  margin of up to
1.00%.  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 on 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.
Effective  September  30, 1998 and December 31, 1998,  the credit  agreement was
amended to modify, among other things, certain of these ratios and covenants. As
of December 31, 1998,  HydroChem's  borrowing base under the Credit Facility was
$22.8  million,  of which  $3.2  million  had been  drawn in the form of standby
letters of credit  principally  issued in connection with the Company's property
and  casualty  insurance  program.  At December  31,  1998,  there were no other
borrowings  under the  Credit  Facility,  and  HydroChem  had  available  unused
borrowings of $19.6 million and $33.8 million in cash and cash equivalents.

      In connection with the Company's new headquarters and operating facilities
in the  Houston,  Texas area,  HydroChem  entered into a loan  agreement  with a
financial  institution (the "Construction Loan Agreement") on July 17, 1998. The
Construction Loan Agreement provides for an interim financing  construction loan
of up to $7.5 million which, under certain conditions and at the sole discretion
of HydroChem,  is convertible to a term loan. As management plans to convert the
construction  loan to the term  loan  prior to July 16,  1999,  the  outstanding
borrowings at December 31, 1998 have been  presented as long-term  debt with the
related scheduled maturities expected under the term loan have been presented as
current  portion  of  long-term  debt.  The  loans are  collateralized  by first
priority  liens on the land and  improvements.  The  construction  loan requires
quarterly payments of interest,  and matures on the earlier of July 16, 1999 or,
when converted,on the date of conversion to the term loan. Interest rates on the
construction  loan are at the  lender's  commercial  loan rate less 0.50%.  When
converted,  the  resulting  term loan will mature on September 30, 2006 and will
require quarterly payments of principal and interest. Interest rates on the term
loan will be at LIBOR plus 1.75% adjusted quarterly. On July 17, 1998, HydroChem
also entered into an interest rate protection  agreement with the same financial
institution  (the  "Interest  Rate  Swap").  Under the Interest  Rate Swap,  the
Company's  effective fixed  borrowing  rate for the term loan will be 7.82%.  It
is  anticipated  that the  Interest  Rate Swap will be  utilized at the time the
construction loan is converted to the term loan. 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.  At December 31, 1998,  the Company had borrowed  $6.1 million under the
Construction Loan Agreement. Effective September 30, 1998, the construction loan
agreement was amended to modify, among other things, certain of these ratios and
covenants.  In addition, the Company obtained a waiver with respect to one ratio
for  non-compliance  resulting  from the  Company's  special  and  restructuring
charges recorded during the quarter ended December 31, 1998.  Management expects
that  HydroChem  will remain in  compliance  with the terms of the amended  loan
agreement in future periods.

      For the year ended  December 31,  1998,  the Company used net cash of $5.9
million for operating and investing  activities which consisted of $13.0 million
provided by operating activities and $18.8 million used in investing activities.
For the year ended  December 31, 1997,  $3.5 million of net cash was provided by
operating and investing  activities which consisted of $12.7 million provided by
operating activities and $9.2 million used in investing activities. For the year
ended December 31, 1996,  $8.2 million of net cash was provided by operating and
investing  activities  which  consisted of $14.9  million  provided by operating
activities  and $6.7  million  used in  investing  activities.  For all  periods
presented, investing activities consisted primarily of expenditures for property
and equipment. In 1998, these expenditures included the purchase of land and the
construction of the Company's new  headquarters  facility for $9.1 million,  and
the  implementation  of  certain  field  and  corporate  software  and  hardware
information systems for $1.6 million.

      Management  believes that cash and cash  equivalents  at December 31, 1998
and net cash expected to be provided by operating activities and borrowings,  if
necessary,  under the Company's existing credit facilities will be sufficient to

                                       18
<PAGE>


meet its cash  requirements  for  operations and  expenditures  for property and
equipment for the next twelve months and the foreseeable  future  thereafter and
to fund the acquisition  described  below.  (See Note 6 of Notes to Consolidated
Financial Statements.)

Acquisition

      On January 5, 1999, HydroChem acquired substantially all of the assets and
assumed certain liabilities of Valley. The acquisition,  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,  including customer agreements, customer lists
and facility leases, and (iv) other operating assets. The purchase price for the
acquired  assets,  which is subject to certain  post  closing  adjustments,  was
approximately  $29.8  million in cash of which $4  million  was  deposited  into
escrow. In addition,  the Company assumed  approximately $2.5 million in capital
lease  obligations  and paid $5.3 million in cash at closing to retire  Valley's
bank debt.

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.  The  Company  has
assessed the Year 2000 issue with regard to its internal financial and operating
systems as well as certain  third  parties  with which the Company has  material
relationships.

      With regard to the Company's  internal  financial  and operating  systems,
HydroChem has acquired new software and hardware systems which it believes to be
Year 2000 compliant.  These systems recently have been implemented.  The Company
intends to test the new systems for  compliance  by the end of the second fiscal
quarter of 1999.  Although  the  Company has not yet  developed a  comprehensive
contingency plan to address  situations that may result if the Company is unable
to achieve Year 2000 readiness,  the Company's 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 of
December  31, 1998,  $1.2  million had been  expended for these new software and
hardware   systems,   and  the  Company   estimates  it  will  ultimately  incur
approximately $2.2 million in connection with these systems.

      As part of its Year 2000  compliance  program,  the Company has identified
certain  third parties with which it has material  relationships.  These parties
are primarily large  financial,  telecommunication  and  information  processing
entities, vendors, other third party suppliers, and customers.  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.  The  Company  intends to continue to monitor the
progress of these third parties and will develop  contingency  plans during 1999
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.
Although  there can be no  assurance,  the Company has no reason to believe that
any Year 2000 issues it may  experience  with third parties will have a material
impact on the Company's operations.

      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 the Company's  newly acquired  software and hardware
fail the testing phase, or any software application or embedded  microprocessors
central  to  the  Company's  operations  are  overlooked  in the  assessment  or
implementation  phases,  significant  problems could occur  including  delays in
accounting  and financial  reporting.  It is also  possible,  given the numerous
other  uncertainties  that  could  occur,  the  Company's  business,   financial
condition and results of operations could be adversely affected.  The Company is
unable to assess the likelihood of such events  occurring or the extent of their
effect.

                                       19

<PAGE>


      The foregoing Year 2000 discussion contains "forward-looking  statements".
Such statements, including without limitation anticipated costs and the dates by
which the Company 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.

Inflation

      Certain of the  Company's  expenses,  such as  compensation  and benefits,
chemicals and supplies,  and equipment  repair and  replacement,  are subject to
normal  inflationary  pressures.  Although  the Company to date has been able to
offset inflationary cost increases through increased operating  efficiencies and
modest price increases,  there can be no assurance that the Company will be able
to offset any future inflationary cost increases through these or similar means.

Item 7A.  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 presented do not consider the effects
that such  adverse  changes may have on overall  economic  activity  nor do they
consider  additional  actions  management  may take to  mitigate  the  Company's
exposure to such  changes.   The  Notes to   Consolidated  Financial  Statements
provide a description of the Company's accounting policies and other information
related  to  these  financial  instruments.  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 expected to be
used during 1999 in connection with its 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. The Company
believes its  portfolio of accounts  receivable  is well  diversified  and, as a
result, its credit risks are minimal. The Company evaluates the creditworthiness
of its 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 managements  expectations.  Timely collection of
trade receivables minimizes associated credit risk.

      The Company places its short-term investments, which generally have a term
of less than 90 days,  with high  quality  financial  institutions,  limits  the
amount of credit exposure to any one institution,  and has investment guidelines
relative to  diversification  and  maturities  designed  to maintain  safety and
liquidity.  As of December  31,  1998,  the Company had  short-term  investments
totaling $35.6 million.  Due to the short-term nature of these instruments,  the
carrying  value  approximated  market  value.  The  Company  does not  expect to
continue to make  significant  investments in short-term  financial  instruments
during 1999 and, as a result, a decrease of 1.0% over 1998  average  rates would
have a nominal effect on interest income.

                                       20


<PAGE>

     As of December 31, 1998, the Company's outstanding long-term debt consisted
of senior  subordinated notes and a construction  loan. The senior  subordinated
notes totaled $110.0  million,  are due in the year 2007, and bear interest at a
fixed rate of 10 3/8%. As of December 31, 19998,  their fair value was estimated
to be $104.5  million.  At the same date,  the  construction  loan  totaled $6.1
million and  approximated  its fair value.  The  construction  loan, which bears
interest at the  lender's  commercial  loan rate less  0.50%,  is expected to be
converted  to a term loan in 1999 and will bear  interest  at LIBOR  rates  plus
1.75%  adjusted  quarterly.  To  protect  the term loan  against  interest  rate
fluctuations, the Company will utilize the Interest Rate Swap which will fix the
interest  rate at 7.82%.  The 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 to not be material to the Company during 1999.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Reference is made to the Index to  Consolidated  Financial  Statements  on
page 22 for the Company's  Consolidated  Financial Statements and Notes thereto.
Quarterly financial data for the Company is presented on page 17.  Supplementary
schedules  for the Company have been  omitted as not required or not  applicable
because the  information  required to be presented is included in the  Company's
Consolidated Financial Statements and Notes thereto.



                                              21

<PAGE>
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


Consolidated Financial Statements                                         Page
  <S>                                                                       <C>
  Report of Independent Auditors............................................23

  Consolidated Balance Sheets as of December 31, 1997 and 1998..............24

  Consolidated Statements of Operations for each of the years ended
     December 31, 1996, 1997 and 1998.......................................25

  Consolidated Statements of Stockholder's Equity for each of the years ended
     December 31, 1996, 1997 and 1998.......................................26

  Consolidated Statements of Cash Flows for each of the years ended
     December 31, 1996, 1997 and 1998.......................................27

  Notes to Consolidated Financial Statements................................28
</TABLE>


                                      22

<PAGE>


                        REPORT OF INDEPENDENT AUDITORS





Board of Directors
HydroChem Industrial Services, Inc.


     We have audited the accompanying  consolidated  balance sheets of HydroChem
Industrial Services, Inc. and Subsidiary (the "Company") as of December 31, 1997
and 1998, and the related consolidated  statements of operations,  stockholder's
equity and cash flows for each of the three years in the period  ended  December
31, 1998.  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  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  consolidated  financial  position of HydroChem
Industrial Services,  Inc. and Subsidiary at December 31, 1997 and 1998, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted accounting principles.



                                                ERNST & YOUNG LLP



Houston, Texas
February 12, 1999


                                      23

<PAGE>


                     HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARY

                         CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                  December 31, 
                                                       1997          1998      
                                                   -----------   -------------
                                    ASSETS
   <S>                                                <C>         <C>
   Current assets:
      Cash and cash equivalents.................     $ 33,862    $ 33,775
      Restricted cash (Note 3)..................        2,858          -
      Receivables, less allowance of $1,280 and
        $536, respectively                             24,341      23,941
      Inventories...............................        3,863       3,902
      Prepaid expenses and other current assets.        1,791       1,714
      Income taxes receivable...................          407         243
      Deferred income taxes (Note 9)............        1,835       1,467
                                  -                     -----       -----
         Total current assets...................       68,957      65,042

   Property and equipment, at cost (Note 5).....       63,210      81,459
      Accumulated depreciation..................      (24,872)    (33,322)
                                                      -------     -------
                                                       38,338      48,137

   Intangible assets, net (Note 2)..............       44,798      43,246
                                                      --------    -------

         Total assets...........................     $152,093    $156,425
                                                      =======     =======

                     LIABILITIES AND STOCKHOLDER'S EQUITY
 Current liabilities:
      Accounts payable..........................     $  4,823      $4,973
      Income taxes payable......................           40          -
      Accrued liabilities.......................       11,770      13,193
      Current portion of long-term debt (Note 6)           -          121
                                                      -------     -------
         Total current liabilities..............       16,633      18,287

   Long-term debt (Note 6)......................      110,000     115,996
   Deferred income taxes (Note 9 )..............        8,753       8,626
   Commitments and contingencies (Note 10)

   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 earnings (deficit)...............          148      (3,043)
                                                      -------     --------
      Total stockholder's equity................       16,707      13,516
                                                      -------     --------

         Total liabilities and stockholder's equity  $152,093    $156,425
                                                     ========    ========

</TABLE>




                           See accompanying notes.

                                      24

<PAGE>



                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                  Year ended December 31,            
                                               1996         1997        1998    
                                            ----------   ----------  -----------
<S>                                          <C>           <C>         <C>    
Revenue................................      $156,003      $160,604    $168,770
Cost of revenue........................        94,373        95,585     105,171
                                              -------       --------    --------
   Gross profit........................        61,630        65,019      63,599

Selling, general and administrative expense    42,103        42,614      44,245
Depreciation...........................         7,765         8,216       9,078
                                              -------       --------    --------
   Operating income....................        11,762        14,189      10,276

Other (income) expense:
   Interest expense, net...............         7,920         8,518      10,470
   Special charges (Note 8)............           511            -          815
   Restructuring charge (Note 8).......            -             -          740
   Other (income) expense, net.........           (21)           39         (59)
   Amortization of intangibles.........         1,523         1,531       1,501
                                              -------       --------    --------

Income (loss) before taxes and
   extraordinary loss..................         1,829         4,101      (3,191)

   Income tax provision (Note 9).......         1,284         2,282          -
                                              -------       --------    --------

Income (loss) before extraordinary loss           545         1,819      (3,191)

   Extraordinary loss on early extinguishment
      of debt, net of taxes (Note 6)...            -          2,342          -
                                              -------       --------    --------

Net income (loss)......................      $    545      $   (523)    $(3,191)
                                              =======       ========    ========


</TABLE>















                             See accompanying notes.

                                       25

<PAGE>



                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                 (in thousands)


<TABLE>
<CAPTION>
                                            Additional    Retained
                                    Common    Paid-in     Earnings
                                     Stock    Capital     (Deficit)    Total   
                                     -----    -------     ---------    -----   
<S>                                 <C>         <C>        <C>       <C>    
Balance at December 31, 1995.....   $      1    $19,670    $5,554    $25,225
   Net income....................          -         -        545        545
                                     -------     -------    ------    -------
Balance at December 31, 1996.....          1     19,670      6,099    25,770
   Dividend to parent (Note 6)...          -     (3,112)    (5,428)   (8,540)
   Net loss......................          -         -        (523)     (523)
                                     -------     -------    -------   -------
Balance at December 31, 1997.....          1     16,558        148    16,707
   Net loss......................           -        -      (3,191)   (3,191)
                                    ---------    -------    -------   -------
Balance at December 31, 1998.....   $       1   $16,558    $(3,043)  $13,516
                                     ========    =======    =======   =======


</TABLE>






























                             See accompanying notes.



                                       26

<PAGE>



                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                     Year ended December 31,            
                                                     -----------------------            
                                                   1996        1997      1998  
                                                  ------      ------    ------
<S>                                              <C>         <C>       <C> 
Operating activities:
   Net income (loss).....................        $   545    $   (523)  $ (3,191)
Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
      Depreciation.......................          7,765       8,216      9,078
      Amortization.......................          1,523       1,531      1,501
      Amortization of deferred financing costs       584         480        392
      Write-off of deferred financing costs           -        3,178         -
      Deferred income tax provision......            755         969        241
   Loss (gain) on sale of property and equipment       9          79        (36)
   Changes in operating assets and liabilities:
      Restricted cash....................             -       (2,858)     2,858
      Receivables, net...................          3,192          16        400
      Inventories........................           (430)       (294)       (39)
      Prepaid expenses and other current assets       70        (651)        77 
      Income taxes receivable............             -         (407)       164
      Accounts payable...................            777        (881)       150
      Income taxes payable...............           (373)         28        (40)
      Accrued liabilities................            444       3,799      1,423
                                                  -------     -------   --------
        Net cash provided by operating
          activities.....................         14,861      12,682     12,978
                                                 --------     -------   --------

Investing activities:
   Expenditures for property and equipment        (6,829)     (9,557)   (19,149)
   Purchase of assets, net of cash acquired         (256)         -          -
   Proceeds from sale of property and equipment      376         336        308
                                                     ---         ---        ---
        Net cash used in investing activities     (6,709)     (9,221)   (18,841)
                                                 --------     -------   --------

Financing activities:
   Proceeds from issuance of senior
    subordinated notes...................             -      110,000         -
   Proceeds from (repayments of)
    long-term debt, net                           (8,569)    (68,325)     6,117
   Debt financing costs..................             -       (3,405)      (341)
   Dividend to parent....................             -       (8,540)        -
                                                 --------     -------   --------
        Net cash provided by (used in) financing
           activities....................         (8,569)     29,730      5,776
                                                 --------     -------   --------

Net increase (decrease) in cash and 
 cash equivalents........................           (417)     33,191        (87)
Cash and cash equivalents at
 beginning of period.....................          1,088         671     33,862
                                                 --------     -------   --------
Cash and cash equivalents at
 end of period...........................       $    671    $ 33,862   $ 33,775
                                                 ========     =======    =======

Supplemental disclosure:
   Cash paid during the year for interest       $  7,409     $5,869    $ 11,290
   Cash paid (refunded) during the year
      for income taxes, net of refunds...            902        255        (355)

</TABLE>

                             See accompanying notes.

                                       27

<PAGE>

                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                  AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998


1.   Organization, Formation and Basis of Presentation

     The  consolidated  financial  statements  include the accounts of HydroChem
Industrial  Services,  Inc.  ("HydroChem")  and  its  wholly  owned  subsidiary,
HydroChem International,  Inc.  ("International").  HydroChem generally conducts
business  outside  the  United  States  through  International.  (HydroChem  and
International  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, rubber plants,
and aluminum  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,  mechanical
services, waste minimization, and commissioning and other specialized services.

2.   Significant Accounting Policies

Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
HydroChem  and  International.   All  significant   intercompany   accounts  and
transactions have been eliminated in consolidation.

Cash and Cash Equivalents

     All debt  instruments  and  investments  that  are  readily  convertible to
known amounts of cash are considered to be cash equivalents.

Inventories

     Inventories  are  stated  at the lower of cost  (weighted-average  cost) or
market.

Property and Equipment

     Property and equipment are recorded at cost. Costs assigned to property and
equipment of acquired  businesses  are based on estimated fair value at the date
of acquisition. Depreciation is provided for using the straight-line method over
estimated useful lives ranging from 3 to 39 years.

     When  property is retired or  otherwise  disposed  of, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.

Intangible Assets

     Intangible  assets,  which relate  primarily to costs in excess of the fair
value of net assets  acquired,  are primarily being amortized over 40 years on a
straight-line  basis.  Intangible  assets also include costs  allocated to other
specifically  identifiable  assets arising from business  acquisitions which are
being  amortized on a  straight-line  basis over their  estimated  useful lives,
which range from 3 to 40 years. These intangible assets totaled  $41,534,000 and
$40,032,000,  net of accumulated  amortization of $5,647,000 and $7,148,000,  at
December 31, 1997 and 1998, respectively. The Company

                                       28

<PAGE>



continually  evaluates  whether  events  or  circumstances  have  occurred  that
indicate  the  remaining  estimated  useful lives of the  intangible  assets may
warrant revision or that the remaining  balances may not be recoverable.  Should
factors  indicate  that the  intangible  assets should be evaluated for possible
impairment,  the  Company  would  use an  estimate  of the  acquired  business's
undiscounted  future cash flows  compared to the carrying value of the assets to
determine whether the assets are deemed impaired. Management believes there have
been no events or  circumstances  which warrant revision to the remaining useful
lives or which affect the recoverability of the Company's intangible assets.

     Other  intangibles  include  deferred  financing  costs of  $3,264,000  and
$3,214,000,  net of  accumulated  amortization  of $945,000 and  $1,337,000,  at
December 31, 1997 and 1998,  respectively.  Deferred  financing  costs are being
amortized  over three to ten year  financing  terms and are recorded as interest
expense.

Revenues

     Revenues are recognized when services are provided.

Income Taxes

     Income taxes are provided for based on the liability  method of accounting.
Deferred  income  taxes  are  recorded  to  reflect  the  tax   consequences  of
differences  between the financial  statement  basis and the tax basis of assets
and liabilities.

Stock-Based Compensation

     Holding grants stock options to employees of the Company for a fixed number
of shares  with an  exercise  price no less than the fair value of the shares at
the date of  grant.  The  Company  accounts  for such  stock  option  grants  in
accordance with FASB 123, which permits the measurement of compensation  expense
in accordance with Accounting  Principles  Board Opinion No. 25,  Accounting for
Stock Issued to Employees  ("APB 25"), and the Company has elected to follow APB
25.

Reclassifications

     Certain 1996 and 1997 amounts  have been  reclassified  to conform with the
1998 presentation.

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  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

Concentration of Credit Risk

     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. The Company
believes its  portfolio of accounts  receivable  is well  diversified  and, as a
result, its credit risks are minimal. The Company evaluates the creditworthiness
of its customers and monitors  accounts on a periodic basis,  but typically does
not require collateral.
Credit losses have been within management's expectations.

3.   Restricted Cash

     At December 31, 1997,  restricted cash represented  security for letters of
credit which were principally incurred in connection with the Company's property
and casualty  insurance  program.  At December 31, 1998, these letters of credit
were secured by the Company's Credit Facility (see Note 6).


                                       29

<PAGE>



4.   Receivables

     Receivables  primarily  include trade  accounts and accrued  receivables of
$24,341,000  and  $23,941,000,   net  of  allowance  for  doubtful  accounts  of
$1,280,000  and $536,000,  at December 31, 1997 and 1998,  respectively.  During
1997 and 1998,  the Company  recorded  bad debt expense of $539,000 and $13,000,
respectively.  In addition,  during 1997 and 1998,  the Company  recorded  other
adjustments to the allowance for doubtful accounts in the amount of $119,000 and
$72,000,  respectively.  Also in 1998, the Company  wrote-off  receivables which
were uncollectible in the amount of $685,000, of which $527,000 was due from one
customer.

5.   Property and Equipment

     Property  and  equipment  at December  31, 1997 and 1998  consisted  of the
following (in thousands):
<TABLE>
<CAPTION>

                                                             1997        1998 
                                                             ----        ---- 
      <S>                                                  <C>        <C>    
      Land..............................................   $    617   $  1,747
      Office facilities, furniture, fixtures
        and computer equipment..........................      6,074     16,223
      Machinery and equipment (including vacuum trucks).     53,845     61,200
      Vehicles..........................................      2,150      1,906
      Construction in progress..........................        524        383
                                                                ---        ---
                                                           $ 63,210   $ 81,459
                                                           ========   ========
</TABLE>
6.   Long-term Debt

     Long-term debt at December 31, 1997 and 1998 consisted of the following (in
     thousands):
<TABLE>
<CAPTION>
                                                             1997        1998 
                                                             ----        ---- 
      <S>                                                  <C>        <C>
      Senior subordinated notes..........................  $110,000   $110,000
      Construction loan..................................        -       6,117
                                                             ------     ------
      Total long-term debt...............................   110,000    116,117
         Less current portion of long-term debt..........        -        (121)
                                                             ------      ------ 
                                                           $110,000   $115,996
                                                           ========   ========
</TABLE>

     In  August  1997,  HydroChem  issued  $110,000,000  of its 10  3/8%  Senior
Subordinated  Notes due 2007  (the  "Series  A  Notes")  in a  private  offering
pursuant to Rule 144A under the Securities Act of 1933.  HydroChem  registered a
substantially  identical  series  of  notes  (the  "Series  B  Notes")  with the
Securities and Exchange Commission and on November 7, 1997 completed an exchange
of the  Series B Notes  for the  Series A Notes.  The  Series B 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,  commencing on
February 1, 1998.  The Series B 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  Series  B  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.
International is a guarantor of the Series B Notes.

     A portion of the net proceeds  from the sale of the Series A Notes was used
to repay  indebtedness,  accrued  interest  and fees  under the  Company's  then
existing senior debt ($45.7 million) and subordinated  debt ($18.7 million).  In
addition, $8.5 million was used to fund a dividend to Holding which Holding used
to discharge  accrued interest on its indebtedness and accrued  dividends on its
preferred  stock. As a result of the early repayment of HydroChem's  prior debt,
an  extraordinary  loss was  recognized  in the amount of  $2,342,000  (net of a
related tax benefit of  $1,435,000).  The  extraordinary  loss  consisted of the
write-off  of  associated  deferred financing  costs in the amount of $3,178,000
before  related tax benefit,  as well as a prepayment  premium and other related
fees and expenses.

     On  December  31,  1997,  HydroChem  entered  into a  participating  credit
agreement  with a  financial  institution  for a credit  facility  (the  "Credit
Facility") which provides for unsecured borrowings of up to $25,000,000, subject
to borrowing base  limitations.  The term of the Credit  Facility is three years
and any  borrowings  thereunder  bear  interest  at  rates  adjusted  quarterly.
Interest  rates are based on (i) a range  from  LIBOR  plus  1.75% to LIBOR plus
3.00%, or, at the discretion of HydroChem, (ii) the higher of (a) the prime rate
and (b) the Federal Funds Rate plus 0.50%, plus an applicable margin of

                                       30
<PAGE>

up to  1.00%.  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.
Effective  September  30, 1998 and December 31, 1998,  the credit  agreement was
amended to modify, among other things, certain of these ratios and covenants. As
of December 31, 1998,  HydroChem's  borrowing base under the Credit Facility was
$22,839,000,  of which  $3,192,000 had been drawn in the form of standby letters
of credit,  principally  issued in connection  with the  Company's  property and
casualty insurance program. At December 31, 1998, there were no other borrowings
under the Credit  Facility,  and HydroChem had  available  unused  borrowings of
$19,647,000.

     In connection with the Company's new headquarters and operating  facilities
in the  Houston,  Texas area,  HydroChem  entered into a loan  agreement  with a
financial  institution (the "Construction Loan Agreement") on July 17, 1998. The
Construction Loan Agreement provides for an interim financing  construction loan
of up to $7,500,000 which,  under certain  conditions and at the sole discretion
of HydroChem,  is convertible to a term loan. As management plans to convert the
construction  loan to the term  loan  prior to July 16,  1999,  the  outstanding
borrowings at December 31, 1998 have been  presented as long-term  debt with the
related scheduled maturities expected under the term loan have been presented as
current  portion  of  long-term  debt.  The  loans are  collateralized  by first
priority liens on the land and  improvements.  The construction  loan matures on
the earlier of July 16, 1999 or,when converted, on the date of conversion to the
term loan and requires  quarterly  payments of interest.  Interest  rates on the
construction  loan are at the  lender's  commercial  loan rate less 0.50%.  When
converted,  the  resulting  term loan will mature on September 30, 2006 and will
require quarterly payments of principal and interest. Interest rates on the term
loan will be at LIBOR plus 1.75% adjusted quarterly. On July 17, 1998, HydroChem
also entered into an interest rate protection  agreement with the same financial
institution   (the  "Interest  Rate  Swap").   Under  the  Interest  Rate  Swap,
HydroChem's  effective  fixed  borrowing  rate  for the term loan will be 7.82%.
It is  anticipated  that the Interest Rate Swap will be utilized at the time the
construction loan is converted to the term loan.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.  At December  31, 1998,  HydroChem  had  borrowed  $6,117,000  under the
Construction Loan Agreement. Effective September 30, 1998, the construction loan
agreement was amended to modify, among other things, certain of these ratios and
covenants.  In addition, the Company obtained a waiver with respect to one ratio
for  non-compliance  resulting  from the  Company's  special  and  restructuring
charges  recorded during the fiscal quarter ended December 31, 1998. The Company
expects to remain in compliance  with the terms of the amended loan agreement in
future periods.

     Maturities  of  long-term  debt for the years  ended  December  31,  are as
follows (in thousands):
<TABLE>
<CAPTION>
            <S>                                     <C>
            1999................................    $    121
            2000................................         170
            2001................................         186
            2002................................         202
            2003................................         218
            Thereafter..........................     115,220
                                                     -------
                                                    $116,117
                                                    ========
</TABLE>

7.   Stockholder's Equity

     A warrant has been issued by Holding on behalf of  HydroChem  to provide an
option to purchase up to 496,623 shares of Holding's  Class A Common Stock at an
exercise price of $.01 per share. This warrant currently expires on July 1, 2004
and has not been  exercised as of December 31, 1998. An  additional  warrant has
been  issued  which  provides  an option to  purchase  up to  310,390  shares of
Holding's  Class C Common  Stock at an  exercise  price of $.01 per share.  This
warrant  expires on January 10, 2005 and has not been  exercised  as of December
31, 1998.  The value of these  warrants is associated  with  deferred  financing
costs of extinguished debt (see Note 6).


                                       31
<PAGE>

8.   Special and Restructuring Charges

     In April 1996, HydroChem signed a letter of intent to merge with a publicly
traded  company.  Upon  subsequent   negotiations  and  the  completion  of  due
diligence,  it was  determined  that the merger would not be  beneficial to both
parties  and it was  agreed to  terminate  negotiations.  The  Company  incurred
$511,000 of expenses relating to legal, accounting and other services which were
provided in connection  with the negotiation  and due diligence  efforts.  These
expenses were recorded as a special charge in 1996.

     In March  1998,  HydroChem  signed a letter of intent to acquire all of the
outstanding  capital stock of an industrial  cleaning company.  The parties were
unable  to agree on the  terms  of a  definitive  agreement  and,  as a  result,
terminated negotiations.  The Company incurred $325,000 of expenses, principally
consisting  of legal,  accounting  and other  services  which were  provided  in
connection  with  negotiation  and due diligence  efforts.  These  expenses were
recorded as a special charge in 1998.

     During 1998,  HydroChem incurred other  non-recurring  expenses of $290,000
related  to  its  consolidation  of  corporate   facilities  and  certain  other
operations into the Company's new headquarters.  In addition, HydroChem incurred
$200,000 of  non-capitalizable  costs incurred in connection  with its Year 2000
compliance  program (see Note 16).  These expenses were also recorded as special
charges in 1998.

     In  late  1998,  HydroChem  implemented  a  cost  reduction  program  which
included,  among other things,  a reduction in work force. The reduction in work
force  affected  approximately  92  field  and  office  personnel.  The  Company
recognized $740,000 of severance, facility closure and other costs in connection
with this program which were recorded as a restructuring charge in 1998.

9.   Income Taxes

     The  Company  files a  consolidated  tax return with  Holding.  Current and
deferred taxes are allocated on a separate company basis. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1997 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
   
                                                         1997        1998
                                                         ----        ----
     <S>                                               <C>          <C>
       Deferred tax liabilities:
        Property and equipment.....................    $ 4,370      $ 5,700
        Intangibles................................      5,528        5,736
                                                        ------       ------
        Total deferred tax liabilities.............      9,898       11,436
     Deferred tax assets:
        Net operating loss.........................      1,497        3,847
        Alternative minimum tax....................      1,338        1,338
        Foreign tax credit.........................        422          366
        Accrued liabilities........................        708        1,059
        Receivables................................        486          179
        Other......................................         26          (20)
        Valuation allowance........................     (1,497)      (2,492)
                                                        ------       ------
     Total deferred tax assets.....................      2,980        4,277
                                                        ------       ------
     Net deferred tax liability....................    $ 6,918      $ 7,159
                                                        ======       ======
</TABLE>

     The provision  (benefit) for income taxes for the years ended  December 31,
1996, 1997 and 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                                    1996      1997        1998  
                                                  --------  --------    --------
<S>                                             <C>         <C>        <C>   
     Current................................    $  529      $1,313     $(241)
     Deferred...............................       755         969       241
                                                 -----       -----      ------
                                                $1,284      $2,282     $  -   
                                                 =====       =====      ======
</TABLE>



                                       32

<PAGE>



     The  differences  between  income taxes  computed at the federal  statutory
income tax rate and the provision for income taxes for the years ended  December
31, 1996, 1997 and 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                    1996      1997        1998  
                                                  --------  --------    --------
<S>                                                  <C>     <C>        <C>     
     Income taxes computed at federal income
      tax rate..............................        $  622   $1,396     $(1,085)
     State income taxes, net of federal tax benefit    222      339         (64)
     Nondeductible permanent differences....           730      718         538
     Change in valuation allowance..........             -        -         995
     Other, net.............................          (290)    (171)       (384)
                                                     ------    -----      ------
     Provision for income taxes.............        $1,284   $2,282     $     -  
                                                     =====    =====       ======
</TABLE>

     At  December  31,  1998,  the Company  had  alternative  minimum tax credit
carryforwards of approximately  $1,338,000,  foreign tax credit carryforwards of
approximately  $366,000 and a net operating loss  carryforward of  approximately
$10,125,000.  The  alternative  minimum tax credit  carryforwards  are available
indefinitely,  the foreign tax credit  carryforwards begin to expire in 1999 and
the net operating loss carryforward begins to expire in 2009.

10.  Commitments and Contingencies

     The  Company  leases  most  of its  locations,  and  certain  vehicles  and
equipment under operating  leases.  The leases contain various renewal  options,
rent  escalation  provisions and insurance  requirements.  Lease expense for the
years ended  December 31, 1996,  1997 and 1998 was  $6,191,000,  $7,544,000  and
$8,470,000, respectively.

     Future minimum rental commitments under operating leases with initial terms
of one year or more at December 31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
     <S>                                                <C>
     1999............................................   $  6,807
     2000............................................      5,043
     2001............................................      3,212
     2002............................................      2,271
     2003............................................      1,501
     Thereafter......................................      1,310
                                                         -------
     Total...........................................    $20,144
                                                          ======
</TABLE>

     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 adequate provision has been made
for  such  claims  and the  final  outcome  of such  litigation  will not have a
material effect on the Company's consolidated financial position.

     The Company is also 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.  All but a few of these suits has been
removed  to the  United  States  District  Court  for  the  Middle  District  of
Louisiana.  A date for trial in Federal  Court has not yet been set. The Company
is being defended in these suits by one of its liability insurance carriers.

     Recently,  the Company has been informed  that Georgia  Gulf,  which is the
primary  defendant  in these  actions,  has settled  claims with  certain of the
plaintiffs  and that it will  attempt  to settle  with as many of the  remaining
plaintiffs  as  possible.  The  Occupational  Safety and  Health  Administration
investigated  this incident and issued  citations to Georgia Gulf and not to the
Company or any other defendant. Nevertheless, because it is always possible that
a jury would assess some percentage of liability to the Company  resulting in an
adverse jury verdict,  the Company  believes it would be prudent to settle these
suits if  possible,  especially  in view of the recent  settlement  activity  by
Georgia Gulf.  Consequently, the


                                       33
<PAGE>

Company has initiated preliminary  settlement  negotiations with each of Georgia
Gulf and a group of attorneys  representing  a majority of the  plaintiffs.  The
Company may also pursue other settlement strategies.

     Based on the current circumstances, and although there can be no assurance,
the Company believes it can settle all or  substantially  all of these lawsuits,
and that the aggregate  amount of any such settlements will be within the limits
of its applicable insurance coverage.

11.  401(k) and Profit Sharing Plan

     HydroChem maintains the HydroChem Industrial Services  Discretionary Profit
Sharing Plan and 401(k) Plan (the "Plan").  Profit sharing  contributions to the
Plan are at the  discretion of the Board of Directors of  HydroChem.  All profit
sharing  contributions are allocated to the accounts of individual  participants
based  upon a  formula.  Eligible  employees,  at their  option,  may also  make
contributions  to their separate  401(k)  accounts  within the Plan. In 1996 and
1997, HydroChem matched, on a 50% basis, all employee  contributions up to $500.
Effective  January  1,  1998,   HydroChem  matches  100%  of  the  first  3%  of
compensation  contributed  by  non-exempt  employees  and 50% of the first 3% of
compensation  contributed  by  exempt  employees,  up to a  maximum  of $750 per
employee.  All profit sharing and 401(k)  contributions and any earnings thereon
are tax-deferred.

     For the years ended  December 31, 1996 and 1997,  HydroChem  recognized  as
expense  profit  sharing  contributions  to the Plan of $100,000  and  $500,000,
respectively.  There  was no  expense  recognized  in 1998  for  profit  sharing
contributions.   For  the  same  years,  there  were  employer  401(k)  matching
contributions to the Plan of $207,000, $196,000 and $502,000, respectively.

12.  Stock Option Plan

     In 1994, the Board of Directors of Holding (the "Board")  adopted,  and the
stockholders  approved,  the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Option  Plan"),  pursuant to which  options to purchase up to an  aggregate  of
620,779 shares of Holding's Class A Common Stock may be granted. The Option Plan
is administered by a committee of not fewer than two directors  appointed by the
Board.  Among other things,  the committee  decides which employees will receive
options,  the number of shares  covered by any option  granted and the  exercise
price and other terms and  conditions of each such option.  The  committee  also
decides if each option granted shall be an incentive  stock option under Section
422 of the Internal Revenue Code of 1986 (the "Code") or an option that does not
qualify under that section of the Code ("Non-Qualified Stock Option"). The Board
may at any time  suspend or  terminate  the Option Plan or revise or amend it in
any respect.

     All options granted under the Option Plan are nontransferable except by the
laws of descent and  distribution.  All options  also expire ten years after the
date of grant or upon earlier  termination  of  employment  unless due to death,
disability or retirement,  in which case the option remains  exercisable  for an
additional  three months in the case of  retirement  and one year in the case of
death or disability, but, in all cases, only to the extent it was exercisable at
the time of such death, disability or retirement.  All options granted since the
inception  of the Option Plan have been  NonQualified  Stock  Options and become
exercisable  in  installments  over three to four year periods after the date of
grant. The weighted-average remaining contractual life of outstanding options at
December 31, 1998 was 7.3 years.

                                       34

<PAGE>



     A summary of the Option Plan as of  December  31,  1996,  1997 and 1998 and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>


                                                        Number of   Weighted- 
                                                          Shares     Average 
                                                        Covered by  Exercise 
                                                         Options      Price 
                                                         -------      ----- 
<S>                                                       <C>          <C>  
Outstanding at January 1, 1996.....................       579,890      $1.00
    Granted........................................        57,500       1.00
    Exercised......................................             -          -
    Canceled.......................................        17,500       1.00
                                                        ---------
Outstanding at December 31, 1996...................       619,890       1.00
    Granted........................................        27,000       1.00
    Exercised......................................         2,000       1.00
    Canceled.......................................        26,500       1.00
                                                         --------
Outstanding at December 31, 1997...................       618,390       1.00
    Granted........................................             -          -
    Exercised......................................       308,101       1.00
    Canceled.......................................        28,500       1.00
                                                         --------
Outstanding at December 31, 1998 ..................       281,789       1.00
                                                          =======
Exercisable at:
    December 31, 1996..............................       314,937      $1.00
    December 31, 1997..............................       409,101      $1.00
    December 31, 1998..............................       197,789      $1.00
</TABLE>

     The Company has  elected to follow APB 25 and  related  interpretations  in
accounting for employee stock options.  Accordingly, no compensation expense has
been recognized for these stock options.   Pro forma  information  regarding net
income and  earnings  per share is required by  Financial  Accounting  Standards
Board Statement No. 123,  Accounting for Stock-Based  Compensation  ("FAS 123"),
which also  requires  that the  information  be determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value  method of FAS 123.  The fair value for these  options  was
estimated at the date of grant using a minimum value option pricing  model.  The
minimum  value  method  calculated a fair value that is  materially  the same as
recorded by the Company according to APB 25; therefore,  pro forma  presentation
has not been included.

13.  Fair Value of Financial Instruments

     The  Company  does not  hold or issue  financial  instruments  for  trading
purposes.

     The  following  estimated  fair value  amounts have been  determined  using
available  market  information  and  appropriate   valuation   methodologies  as
described below. However,  considerable judgment is required to interpret market
data and to develop the  estimates  of fair value.  Accordingly,  the  estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange.

     The following  methods and assumptions were used to estimate the fair value
of each class of financial  instruments  for which it is practicable to estimate
that value.  Potential  income tax  ramifications  related to the realization of
unrealized  gains  and  losses  that  would be  incurred  in an  actual  sale or
settlement have not been taken into consideration.

     The  carrying  amounts  for  cash and cash  equivalents,  restricted  cash,
accounts receivable,  and current liabilities are a reasonable estimate of their
fair values,  principally due to the short-term maturities of these instruments.
The estimated fair value of long-term debt is based on the most recent available
traded prices.



                                       35

<PAGE>



     The  estimated  fair  values of  financial  instruments  are as follows (in
thousands):
<TABLE>
<CAPTION>

                                                As of December 31,          
                                                ------------------          
                                          1997                       1998               
                                    ------------------      --------------------
                                    Carrying    Fair        Carrying     Fair
                                    Amounts     Value       Amounts      Value 
                                    -------     -----       -------      ----- 
      <S>                          <C>        <C>          <C>         <C>    
      Financial assets:
         Cash and cash equivalents $ 33,862   $ 33,862     $ 33,775    $ 33,775
         Restricted cash........      2,858      2,858         -           -
         Accounts receivable, net    24,341     24,341       23,941      23,941
      Financial liabilities:
         Current liabilities....     16,633     16,633       18,573      18,573
      Long-term debt - principal:
         Senior subordinated notes  110,000    110,000      110,000     104,500
         Construction loan......       -          -           5,996       5,996
</TABLE>

14.   Summary Financial Information

      Summary  financial  information for  International  as  consolidated  with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
                                                              As of December 31,     
                                                              ------------------     
                                                             1997          1998 
                                                           --------      -------
      <S>                                                   <C>          <C>
      Current assets...............................         $1,623       $1,377
      Noncurrent assets............................            127          103
      Current liabilities..........................            131           68
      Noncurrent liabilities.......................             -            -
</TABLE>
<TABLE>
<CAPTION>
                                                        Year Ended December 31,      
                                                        -----------------------      
                                                      1996       1997      1998 
                                                    --------   --------  -------
      <S>                                             <C>       <C>      <C>
      Revenue...................................      $5,088    $3,576   $3,771
      Gross profit..............................       2,257     1,497    1,246
      Net income (loss).........................         100        73     (207)
</TABLE>

15.  Major Customer

     In 1997 and 1998,  one customer and its  affiliates  represented  11.9% and
10.7%,  respectively,  of  the  Company's  total  revenue.  No  single  customer
represented 10.0% or more of the Company's revenue in 1996.

16.  Impact of Year 2000 (unaudited)

     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.  The  Company  has
assessed the Year 2000 issue with regard to its internal financial and operating
systems as well as certain  third  parties  with which the Company has  material
relationships.

     With regard to the Company's  internal  financial  and  operating  systems,
HydroChem has acquired new software and hardware systems which it believes to be
Year 2000 compliant.  These systems recently have been implemented.  The Company
intends to test the new systems for  compliance  by the end of the second fiscal
quarter of 1999.  Although  the  Company has not yet  developed a  comprehensive
contingency plan to address  situations that may result if the Company is unable
to achieve Year 2000 readiness,  the Company's 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.


                                       36
<PAGE>

As of December 31, 1998, $1,224,000 had been expended for these new software and
hardware   systems,   and  the  Company   estimates  it  will  ultimately  incur
approximately $2,200,000 in connection with these systems.

     As part of its Year 2000  compliance  program,  the Company has  identified
certain  third parties with which it has material  relationships.  These parties
are primarily large  financial,  telecommunication  and  information  processing
entities,  vendors, other third party suppliers and customers.  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.  The  Company  intends to continue to monitor the
progress of these third parties and will develop  contingency  plans during 1999
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.
Although  there can be no  assurance,  the Company has no reason to believe that
any Year 2000 issues it may  experience  with third parties will have a material
impact on the Company's operations.

     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 the Company's  newly acquired  software and hardware
fail the testing phase, or any software application or embedded  microprocessors
central  to  the  Company's  operations  are  overlooked  in the  assessment  or
implementation  phases,  significant  problems could occur  including  delays in
accounting  and financial  reporting.  It is also  possible,  given the numerous
other  uncertainties  that  could  occur,  the  Company's  business,   financial
condition and results of operations could be adversely affected.  The Company is
unable to assess the likelihood of such events  occurring or the extent of their
effect.

     The foregoing Year 2000 discussion contains  "forward-looking  statements".
Such statements,  including  without limitation  anticipated costs and the dates
by  which  the  Company  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.

17.  Subsequent Event

     On January 5, 1999, HydroChem acquired  substantially all of the assets and
assumed certain liabilities of Valley Systems, Inc., and Valley Systems of Ohio,
Inc., (collectively "Valley"). The acquisition, 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,  including customer agreements, customer lists and facility leases,
and (iv) other  operating  assets.  The purchase price for the acquired  assets,
which  is  subject  to  certain  post  closing  adjustments,  was  approximately
$29,801,000 in cash of which $4,000,000 was deposited into escrow.  In addition,
HydroChem assumed approximately $2,493,000 in capital lease obligations and paid
$5,338,000 in cash at closing to retire Valley's bank debt.

                                       37

<PAGE>

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 directors and executive officers of HydroChem are as follows:
<TABLE>
<CAPTION>

      Names of Directors
      and Executive Officers    Age                   Position
      ----------------------    ---                   --------
     <S>                         <C>   <C> 
     B. Tom Carter, Jr........   54    Chairman of the Board and Chief
                                         Executive Officer
     Robert B. Crates.........   36    Director
     Thomas F. McWilliams.....   56    Director
     Gary D. Noto.............   44    President and Chief Operating Officer
     Selby F. Little, III.....   45    Executive Vice President and Chief
                                         Financial Officer
     J. Pat DeBusk............   58    Executive Vice President
     Donovan W. Boyd..........   45    Executive Vice President
     Pelham H. A. Smith.......   42    Vice President
     Michael P. Steindler.....   51    General Counsel and Secretary
</TABLE>

     Subject to the terms of a  stockholders  agreement  entered into by Holding
and  all of its  stockholders  (the  "Stockholders  Agreement"),  the  Board  of
Directors of HydroChem  currently  consists of three  directors  who hold office
until the next annual meeting of the  stockholders or until their successors are
duly elected and qualified. Pursuant to the terms of the Stockholders Agreement,
one director,  Mr. McWilliams,  has been designated by Citicorp Venture Capital,
Ltd. ("CVC") and one director,  Mr. Crates,  has been designated by LKCM Venture
Partners I Ltd. The  stockholders  also agreed to elect Mr. Carter as a director
so long as he serves as Chief  Executive  Officer.  The  Stockholders  Agreement
further provides that CVC has the right to designate an additional director, and
that the holders of a majority of the shares of Holding's capital stock owned by
such  stockholders  may  designate a director,  but neither CVC nor the majority
stockholders  have exercised these rights.  See Item 12. "Security  Ownership of
Certain Beneficial Owners and Management."

     The executive  officers are elected  annually by the Board of Directors and
serve at the discretion of the Board until their successors are duly elected and
qualified.

     B. Tom  Carter,  Jr.  has been  Chairman  of the Board and Chief  Executive
Officer of  HydroChem  or Hydro  Services  since 1990.  Mr.  Carter was also the
President until August 1998. As a private investor,  he assembled the investment
groups which acquired  Hydro  Services in 1990 and formed  HydroChem in 1993 for
the purposes of combining the businesses of Hydro Services and DIS.

     Robert B.  Crates  has been a  director  of  HydroChem  since  1993.  Since
December 1995, Mr. Crates has been a principal of Crates Thompson Capital, Inc.,
an investment  company  engaged in the management of private equity funds.  From
May 1988 to November  1995,  Mr.  Crates  served as the general  partner of LKCM
Venture  Partners I Ltd.,  a private  equity  fund  affiliated  with Luther King
Capital Management  ("LKCM"),  an investment advisory firm. From October 1994 to
January  1995,  Mr.  Crates  concurrently  served as interim  Chairman and Chief
Executive Officer of Eddie Haggar Limited,  Inc., a company in which LKCM had an
investment that subsequently filed for protection under federal bankruptcy laws.
Mr. Crates is also a director of HealthCor Holdings,  Inc. and various privately
held companies.

     Thomas F.  McWilliams  has been a director of  HydroChem  since  1993.  Mr.
McWilliams is a Managing Director of CVC, where Mr. McWilliams has been employed
since  1983.  He also  serves  as a  director  of Chase  Industries,  Inc.,  MMI
Products, Inc., Ergo Science Corporation,  Pen-Tab Industries,  Inc. and various
privately held companies.

                                       38

<PAGE>



     Gary D. Noto has been  President and Chief  Operating  Officer of HydroChem
since  August  1998.  Mr.  Noto had served as an  Executive  Vice  President  of
HydroChem  since  December  1996 and in various  executive,  management or other
positions with HydroChem and Hydro Services or the predecessor to its operations
since 1978.

     Selby F. Little,  III has been Executive Vice President and Chief Financial
Officer of HydroChem  since December 1996 and served as Vice President and Chief
Financial  Officer  of  HydroChem  from  June 1996  until  December  1996.  From
September 1992 to May 1996,  Mr. Little was Vice  President and Chief  Financial
Officer of Ross Systems, Inc., a publicly held computer software company.

     J. Pat DeBusk has been an  Executive  Vice  President  of  HydroChem  since
December  1993. Mr. DeBusk has also held various  executive or other  management
positions with Hydro Services or the predecessor to its operations since 1964.

     Donovan W. Boyd has been an Executive  Vice  President  of HydroChem  since
August 1998. Mr. Boyd had served as a Vice President of HydroChem since November
1997.  From April 1995 to October 1997,  Mr. Boyd was Senior Vice  President and
Chief Operating  Officer of North American  Technologies  Group, a publicly held
technology  development  company.  Prior thereto, Mr. Boyd was Vice President of
Rust Industrial Services, Inc. for more than two years.

     Pelham H. A. Smith has been a Vice  President of HydroChem  since  December
1993.  Prior  thereto,  Mr. Smith had been  assisting  Mr.  Carter since 1990 in
various private investment activities.

     Michael P.  Steindler has  functioned  as the General  Counsel of HydroChem
since April 1994 and has been the Secretary of HydroChem  since March 1995. From
August 1993 to February 1998,  Mr.  Steindler was also a partner in the law firm
of Cassell & Stone, L.L.P.

Directors and Officers of Holding and International

     The  directors  of  Holding  and  International  are the  same as  those of
HydroChem.  The  executive  officers  of Holding  and  International  are B. Tom
Carter, Jr. (Chairman and Chief Executive Officer),  Gary D. Noto (President and
Chief  Operating  Officer),  Selby F. Little,  III (Executive Vice President and
Chief  Financial  Officer),  Pelham H. A. Smith (Vice  President) and Michael P.
Steindler (General Counsel and Secretary).


                                       39

<PAGE>



Item 11.   EXECUTIVE COMPENSATION

     The following table provides certain  information  concerning  compensation
earned by the Chief  Executive  Officer and the Company's  next four most highly
compensated executive officers serving in such capacity at December 31, 1998 who
received compensation in excess of $100,000 (the "Named Executive Officers") for
the period indicated.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                        Long-Term Compensation
                                                        ----------------------
                                                       Number of
                                                         Shares
                               Annual Compensation     Underlying    All Other
Name and Principal Position   Year   Salary     Bonus   Options  Compensation(1)
---------------------------   ----   ------     -----   -------  ---------------
<S>                            <C>   <C>       <C>         <C>         <C> 
B. Tom Carter, Jr........      1998  $249,231  $    -        -         $ 750
  Chairman of the Board and    1997   239,077    100,000     -           250
  Chief Executive Officer      1996   239,231    100,000   25,000        250

Gary D. Noto.............      1998   159,684     85,000     -           750
  President and Chief          1997   122,551     66,000     -           250
  Operating Officer            1996   103,200     50,000     -           250

Selby F. Little, III.....      1998   163,664     54,000     -           750
  Executive Vice President     1997   125,936     74,000   11,500        250
  and Chief Financial Officer  1996    67,308     71,000   15,000         -

J. Pat DeBusk............      1998   156,741     45,000     -           750
  Executive Vice President     1997   146,628     43,000     -           250
                               1996   136,000     45,000     -           250

Donovan W. Boyd (2)......      1998   135,000     80,750     -            -
  Executive Vice President     1997    13,846     20,000     -            -
                               1996          -         -     -            -
</TABLE>

----------
(1)Consists of HydroChem's 401(k) matching contribution.
(2)Includes a bonus payment of $25,000 in 1998 which was guaranteed  pursuant to
   Mr. Boyd's  employment   agreement.   See "Employment  Agreements  and  Other
   Arrangements."

Director Compensation

     Directors  who are  employees  of the  Company  do not  receive  additional
compensation  for  serving  as  directors.  All  directors  of the  Company  are
reimbursed  for  out-of-pocket  expenses  incurred in attending  meetings of the
Board of  Directors  and for other  expenses  incurred  in their  capacities  as
directors of the Company.

Stock Option Information

     Holding has adopted the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Option  Plan").  The Option Plan is  administered  by a committee  of Holding's
Board of  Directors  (the  "Committee"),  which  currently  consists  of Messrs.
McWilliams  and  Crates.  The  purpose  of the  Option  Plan is to  advance  the
interests of Holding and its  subsidiaries by encouraging  certain  employees of
the Company to acquire a proprietary  interest in Holding  through  ownership of
Holding's Class A Common Stock ("Class A Common"). The total number of shares of
Class A Common that may be subject to options  under the Option Plan is 620,779.
As of December  31,  1998,  options  for  281,789  shares of Class A Common were
outstanding and options for 28,888 shares were available for grant. The duration
of each option and the exercise schedule therefor is determined by the Committee
at the time of grant, but in no event can an option intended to qualify as an

                                       40

<PAGE>

incentive stock option (an "ISO") under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"),  be exercisable  more than ten years after the
date of grant.  In the case of an  employee  who owns (or is  considered  to own
under Section 424(d) of the Code) stock  representing more than 10% of the total
combined  voting power of classes of stock of Holding and its  subsidiaries,  no
ISO shall be exercisable more than five years after the date of grant.

    The  following  table sets forth  certain  information  with  respect to the
exercise of stock options and unexercised options granted to the Named Executive
Officers.

                          Fiscal Year End Option Values
<TABLE>
<CAPTION>
                                   Number of Securities           Value of
                                      Underlying                 Unexercised
        Shares Acquired   Value   Unexercised Options     In-the-Money Options
 Name     on Exercise   Realized    at December 31,      at December 31, 1998(1)   
 ----     -----------   --------    ---------------      -----------------------       
                             Exercisable Unexercisable Exercisable Unexercisable
                             ----------- ------------- ----------- -------------
<S>           <C>       <C>      <C>          <C>          <C>          <C> 
B.Tom Carter. 285,601   $  0     43,539       6,250        $  0         $  0
Gary D. Noto..   -         -     17,500        -           $  0         $  0
Selby F. Little,
  III            -         -     10,375      16,125        $  0         $  0
J. Pat DeBusk.   -         -     20,000        -           $  0         $  0
Donovan W. Boyd  -         -       -           -           $  -         $  -
</TABLE>
----------
(1)There is no  established  trading  market  for the  Class A  Common,  but the
   Company  has  attempted  to  determine  its market  value based upon the same
   criteria  which were used to determine  the  exercise  prices of past options
   granted.  Based upon these  criteria,  at December  31,  1998,  there were no
   options which were in-the-money.

Employment Agreements and Other Arrangements

    Holding has an employment agreement with Mr. Carter under which he serves as
the  Chairman  of the Board and  Chief  Executive  Officer  of  Holding  and the
Company. Either Holding or Mr. Carter may terminate this agreement at anytime by
giving one year advance notice.  Mr. Carter's  current base  compensation  under
this  Agreement  is  $240,000  per year,  and is  subject  to review  and may be
increased  periodically  at the  discretion of the Board.  Under the  agreement,
bonuses  are payable to Mr.  Carter at the sole  discretion  of the Board.  Also
under the  agreement,  Holding  granted  Mr.  Carter in March  1995 an option to
purchase  310,390  shares  of Class A Common at an  exercise  price of $1.00 per
share under Holding's 1994 Stock Option Plan. See "Stock Option Information." If
Mr. Carter's employment is terminated without cause as defined in his agreement,
then he is entitled  to a lump sum  severance  payment  equal to one year of his
then current base  compensation.  Mr. Carter's agreement contains a covenant not
to compete and other  customary  restrictions.  The covenant not to compete does
not apply if there is a  termination  without  cause,  or a  resignation  by Mr.
Carter  after a  change  in  control  as  defined  in his  agreement  or after a
diminution in his duties. The Company has guaranteed Holding's obligations under
the employment agreement.

     In April 1998,  in  connection  with his exercise of Holding  stock options
covering  285,601 shares of Class A Common,  HydroChem loaned Mr. Carter the sum
of $285,601. Effective December 31, 1998, HydroChem assigned the loan to Holding
for face  value  plus  accrued  interest.  The loan is  evidenced  by a  secured
promissory  note  bearing  interest at the rate of 5.7% per annum.  Principal is
payable upon the earlier of April 8, 2004, or any  termination  of Mr.  Carter's
employment,  but not earlier than April 8, 2000.  Interest is payable  annually.
The note is secured by a pledge of the Class A Common shares  acquired  pursuant
to Mr. Carter's stock option exercise.

     HydroChem has employment  agreements  with Messrs.  Noto,  DeBusk and Boyd.
Each of these  agreements  renew  automatically on an annual basis unless either
HydroChem  or the  employee  gives 30 days notice to the  contrary.  The current
annual base  compensation  under these agreements for Messrs.  Noto,  DeBusk and
Boyd is $185,000, $150,000 and $150,000,  respectively. Such amounts are subject
to review and may be increased periodically at the discretion of HydroChem.  For
Messrs.  Noto and DeBusk,  bonuses are also  payable at the sole  discretion  of
HydroChem.  Mr.  Boyd's  agreement  provides for a signing  bonus of $20,000,  a
performance  bonus for 1998 and 1999 of up to 50% of his base  compensation  for
each such year with a minimum of $25,000 for 1998, and a deferred bonus for 1998
and 1999 equal to the amount of the  performance  bonus for each such year. Each
deferred  bonus  vests  in  equal  installments  over  three  years  subject  to
continuing employment.  If HydroChem terminates the employment of Messrs. DeBusk
or Boyd  without  causes  defined  in their  respective  agreements,  then  such
individual is entitled to a continuation  of his then current base  compensation
for six months. If HydroChem terminates the employment of Mr. Noto without cause

                                       41

<PAGE>

as defined in his agreement,  then he is entitled to a continuation  of his then
current base compensation for twelve months.  Each of the agreements for Messrs.
Noto,  DeBusk and Boyd  contain  covenants  not to compete  and other  customary
restrictions.

     HydroChem  and Mr. Little are parties to a letter  agreement  dated June 3,
1996,  relating to Mr.  Little's  initial  employment  by HydroChem  (the "Offer
Letter").  Among other  things,  the Offer  Letter  provides  that if  HydroChem
terminates Mr. Little's employment at any time without cause as therein defined,
it will pay him  severance  compensation  equal to 12 months of his then current
base  compensation.  The Offer Letter also provided for a bonus to Mr. Little of
$25,000 upon the  commencement of his employment,  performance  bonuses of up to
50% of his base  compensation  for 1996 and 1997,  with a minimum  guarantee  of
$31,250 for each year,  and the  reimbursement  in 1996 of  relocation  expenses
which amounted to $93,065.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     All  of  the  outstanding  capital  stock  of  International  is  owned  by
HydroChem.  All of the  outstanding  capital  stock  of  HydroChem  is  owned by
Holding.  The  authorized  capital  stock of Holding  consists of (i)  8,000,000
shares of Class A Common, par value $.00005 per share, of which 1,163,503 shares
are issued and  outstanding;  (ii) 5,000,000 shares of Class B Common Stock, par
value $.00005 per share ("Class B Common"), of which 3,926,598 shares are issued
and  outstanding;  (iii)  1,000,000  shares of Class C Common  Stock,  par value
$.00005  per  share  ("Class  C  Common"),  of which no shares  are  issued  and
outstanding;  and (iv)  5,000,000  shares of Series A 13%  Cumulative  Preferred
Stock,  par value  $.00005 per share  ("Series A  Preferred"),  all of which are
issued and outstanding.

     The  following  table sets forth certain  information  known to the Company
with respect to beneficial  ownership of Holding's equity securities (rounded to
the nearest  share) by (i) each  director;  (ii) each Named  Executive  Officer;
(iii) all executive  officers and directors of the Company as a group;  and (iv)
each  stockholder  known by the Company to be the beneficial  owner of more than
five percent of any class of voting  securities of Holding.  Such information is
presented as of February 28, 1999.


                                       42

<PAGE>

<TABLE>
<CAPTION>

                          Class A Common    Class B Common    Series A Preferred
                          No. of    % of    No. of    % of     No. of    % of
       Name               Shares    Class   Shares    Class    Shares    Class
       ----               ------    -----   ------    -----    ------    -----
Executive Officers and Directors:                                       
<S>                         <C>      <C>      <C>     <C>      <C>         <C>
B. Tom Carter, Jr. (1)...   431,790  32.7%      -       -      360,993     7.2%
   900 Georgia Avenue
   Deer Park, Texas  77536
Robert B. Crates.........      -       -        -       -         -         -
Thomas F. McWilliams (2)(3)  67,343   5.5%    67,343   1.7%     33,871      *
   7963 Grand Bay Dr.
   Naples, Florida 34108
Gary D. Noto (3)(4)......    36,079   3.1%       880    *       31,488      *
Selby F. Little, III (5).    10,375    *        -       -         -         -
J. Pat DeBusk (3)(6).....    56,727   4.8%     1,540    *       55,103     1.1%
Donovan W. Boyd..........      -       -        -       -         -         -
All directors and executive
 officers as a group
 (8 persons)(3)(7).......   632,314  47.5%    69,764   1.8%    481,454     9.6%

Other Principal Stockholders:                                                   
LKCM Venture Partners I Ltd 673,993  78.8%      -       -    2,100,628    42.0%
   301 Commerce Street,                                                       
   Suite 1600                                                                 
   Fort Worth, Texas 76102                                                    
Citicorp Venture Capital,
 Ltd. (3)................ 2,461,712  74.2% 2,461,712  62.7%  1,250,861    25.0%
   399 Park Avenue
   New York, New York 10043
BT Capital Partners,
 Inc.(3)................    705,154  45.2%   705,154  18.0%    793,959    15.9%
   280 Park Avenue (32W)
   New York, New York 10017
World Equity Partners,
 L.P.(8)................    496,623  36.7%      -       -         -         -
   399 Park Avenue
   New York, New York 10043
CCT Partners II,
 L.P. (3)(9).............   434,420  33.4%   434,420  11.1%    220,740     4.4%
   c/o Citicorp Venture Capital,                                              
   Ltd.                                                                       
   399 Park Avenue       
   New York, New York 10043
Heller Financial, Inc. (10) 310,390  26.6%      -       -         -         -
   500 West Monroe Street
   Chicago, Illinois 60661
HES Management, Inc......   102,650  12.0%      -       -      360,993     7.2%
   5956 Sherry Lane, Suite 930
   Dallas, Texas 75225
</TABLE>
----------
*     Less than one percent.


                                       43

<PAGE>


(1)  Includes  102,650  shares of Class A Common and 360,993  shares of Series A
     Preferred held in the name of HES Management, Inc., of which Mr. Carter, as
     a sole  stockholder,  may be deemed the beneficial owner, and 43,539 shares
     of Class A Common that Mr.  Carter may acquire upon the exercise of options
     within 60 days of February 28, 1999.

(2)  Represents  56,393  shares of Class B Common  held in the name of  Alchemy,
     L.P., of which Mr. McWilliams,  as the sole general partner,  may be deemed
     the beneficial owner, and 10,950 shares of Class B Common and 33,871 shares
     of Series A Preferred  held in the name of the Thomas F.  McWilliams  Flint
     Trust of which Mr.  McWilliams,  as the sole beneficiary of such trust, may
     be deemed the beneficial owner.

(3)  Includes a number of shares of  Class A  Common  that  the  stockholder may
     acquire upon the conversion of shares of Class B Common on a 1-for-1 basis.

(4)  Includes 17,500 shares of Class A Common that Mr. Noto may acquire upon the
     exercise of options within 60 days of February 28, 1999.

(5)  Represents 10,375 shares of Class A Common that Mr. Little may acquire upon
     the exercise of options within 60 days of February 28, 1999.

(6)  Includes 20,000 shares of Class  A  Common that Mr. DeBusk may acquire upon
     the exercise of options within 60 days of February 28, 1999.

(7)  Includes  98,914  shares of Class A Common  that may be  acquired  upon the
     exercise of options  within 60 days of February 28, 1999, and 69,763 shares
     of  Class A Common  that may be  acquired  upon the  conversion  of Class B
     Common.

(8)  Represents  496,623  shares of Class A Common that World  Equity  Partners,
     L.P. may purchase upon the exercise of a warrant within 60 days of February
     28, 1999.

(9)  William T. Comfort,  whose address is c/o Citicorp Venture  Capital,  Ltd.,
     399 Park Avenue, New York, New York, 10043, is the sole director, executive
     officer,  and  stockholder of the general partner of CCT Partners II, L.P.,
     and may be deemed the beneficial  owner of the securities  held in the name
     of CCT Partners II, L.P.

(10) Heller  Financial,  Inc. may acquire  310,390 shares of Class C Common upon
     the  exercise of a warrant  within 60 days of  February  28,  1999.  Heller
     Financial, Inc. may acquire 310,390 shares of Class A Common within 60 days
     of  February  28,  1999,  upon  exercise of its right to convert all of its
     shares of Class C Common into Class A Common on a 1-for-1 basis.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In April 1998,  in  connection  with his exercise of Holding  stock options
covering  285,601 shares of Class A Common,  HydroChem loaned Mr. Carter the sum
of $285,601. Effective December 31, 1998, HydroChem assigned the loan to Holding
for face  value  plus  accrued  interest.  The loan is  evidenced  by a  secured
promissory  note  bearing  interest at the rate of 5.7% per annum.  Principal is
payable upon the earlier of April 8, 2004, or any  termination  of Mr.  Carter's
employment,  but not earlier than April 8, 2000.   Interest is payable annually.
The note is secured by a pledge of the Class A Common shares  acquired  pursuant
to Mr. Carter's stock option exercise.

     Argent Capital Corporation, of which Mr. Carter is the sole stockholder, is
the tenant under a lease in Dallas, Texas, for office space used by the Company.
The Company pays the rent for this office directly to the landlord. Total rental
payments  for  1996,   1997  and  1998  were   $48,419,   $52,202  and  $50,000,
respectively.

     Mr. Steindler is not an employee of the Company. For 1998, the Company paid
Mr.  Steindler  $150,000  for  services  rendered  by him from  March 1, 1998 to
December 31, 1998.  Mr. Steindler also received bonus payments from the

                                       44

<PAGE>

Company of $30,000,  $35,000 and $60,000 for 1996, 1997 and 1998,  respectively.
Prior to  March 1, 1998,   payments for Mr. Steindler's  services (excluding any
bonus amounts) were made to a law firm in which he was then a shareholder.

        The Company leased its  manufacturing  facility in Missouri City, Texas,
from Gracey Corporation ("Gracey") until December 1998. The spouse of Mr. DeBusk
is the  beneficial  owner of 7 2/3% of the  outstanding  capital stock of Gracey
held in a trust.  Total rental payments  made by the Company to Gracey for 1996,
1997, and 1998 were $56,100 in each year.

Part IV.

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

  (a) 1. See the Index to Consolidated Financial Statements in "Item 8 - 
         Financial Statements and Supplementary Data."

      2.  Schedules  otherwise  required  by Item 8 or Item  14.2(d)  have  been
          omitted as not required or not applicable.

      3. 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.)

         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 103/8%  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.)


                                       45

<PAGE>



         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 9, 1998 from B. Tom
                      Carter, Jr. to HydroChem Industrial Services, Inc.(Exhibit
                      10.9  to the Company's Form 10-Q,  filed May 14, 1998,  is
                      hereby incorporated by reference.)

         10.5         Pledge  Agreement  dated April 9, 1998  between  HydroChem
                      Industrial Services,  Inc. and B. Tom Carter, Jr. (Exhibit
                      10.10 to the Company's  Form 10-Q,  filed May 14, 1998, is
                      hereby incorporated by reference.)

         10.6         Assignment of  Secured Promissory Note dated April 9, 1998
                      due  from  B.  Tom  Carter Jr.  by   HydroChem  Industrial
                      Services,  Inc.   to  HydroChem  Holding,  Inc.  effective
                      December 31, 1998. (Filed herewith.)

         10.7         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.)

         10.8         Amendment  dated  January 27, 1999 to Employment Agreement
                      dated   November  1,  1992  between  HydroChem  Industrial
                      Services, Inc. and Gary D. Noto. (Filed herewith.)

         10.9         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.)

         10.10        Employment  Agreement  dated  September 26, 1997   between
                      HydroChem Industrial Services, Inc.  and  Donovan W. Boyd.
                      (Filed herewith.)

         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        Lease Agreement  dated December 4, 1979 between  HydroChem
                      Industrial  Services,  Inc.  and  Gracey  Corporation,  as
                      amended  through  May  29,  1996.  (Exhibit  10.7  to  the
                      Company's Registration Statement on Form S-4, filed August
                      25, 1997, 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.)

                                       46

<PAGE>




         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.   (Filed
                      herewith.)

         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.)

         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.
                      (Filed herewith.)

         10.22        Extension  Agreement dated  as of February 2, 1999 between
                      HydroChem Industrial Services,  Inc. and  Bank One, Texas,
                      National Association. (Filed herewith.)

         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.

                                       47

<PAGE>



                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 29th day of
March, 1999.


                       HYDROCHEM INDUSTRIAL SERVICES, INC.


                       By:  /s/ Selby F. Little, III
                            -----------------------------
                            Selby F. Little, III, Executive Vice President
                            and Chief Financial 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 indicated on the 29th day of March, 1999.



         Name:                              Capacities:



/s/ B. Tom Carter, Jr.
----------------------
    B. Tom Carter, Jr.                 Chairman of the Board and
                                       Chief Executive Officer



/s/ Selby F. Little, III
------------------------
    Selby F. Little, III               Executive Vice President and
                                       Chief Financial Officer


/s/ Patricia K. Burns
---------------------
    Patricia K. Burns                  Corporate Controller



/s/ Robert B. Crates
--------------------
    Robert B. Crates                   Director



/s/ Thomas F. McWilliams
------------------------
    Thomas F. McWilliams               Director





                                       48

<PAGE>



                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 29th day of
March, 1999.


                          HYDROCHEM INTERNATIONAL, INC.


                          By:  /s/ Selby F. Little, III
                               -----------------------------
                               Selby F. Little, III, Executive Vice President
                               and Chief Financial 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 indicated on the 29th day of March, 1999.



          Name:                               Capacities:


/s/ B. Tom Carter, Jr.
----------------------
    B. Tom Carter, Jr.                  Chairman of the Board and
                                        Chief Executive Officer


/s/ Selby F. Little, III
------------------------
    Selby F. Little, III                Executive Vice President and
                                        Chief Financial Officer


/s/ Patricia K. Burns
---------------------
    Patricia K. Burns                   Corporate Controller



/s/ Robert B. Crates
--------------------
    Robert B. Crates                    Director



/s/ Thomas F. McWilliams
------------------------
    Thomas F. McWilliams                Director




                                       49

<PAGE>


                                          EXHIBIT INDEX


10.6    Assignment  of  Secured  Promissory Note dated April 9, 1998 due from B.
        Tom  Carter Jr.  by  HydroChem  Industrial  Services, Inc. to  HydroChem
        Holding, Inc. effective December 31, 1998. 

10.8    Amendment dated  January 27, 1999 to Employment Agreement dated November
        1, 1992 between HydroChem Industrial Services, Inc. and Gary D. Noto.

10.10    Employment  Agreement  dated   September  26,  1997  between  HydroChem
        Industrial Services, Inc. and Donovan Boyd.

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. 

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.

10.22   Extension Agreement dated  as  of  February  2, 1999  between  HydroChem
        Industrial Services, Inc. and Bank One, Texas, National Association.

27.1    Financial Data Schedule.





                                               50