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, 1999

     ( )  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 29, 2000 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.....................................   11

        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...............   40

Part III.

        Item 10.   Directors and Executive Officers of the Registrant.....   40

        Item 11.   Executive Compensation.................................   42

        Item 12.   Security Ownership of Certain Beneficial
                     Owners and Management................................   44

        Item 13.   Certain Relationships and Related Transactions.........   46

Part IV.

        Item 14.   Exhibits, Financial Statement Schedules
                     and Reports on Form 8-K..............................   46

Signatures................................................................   50

Exhibit Index.............................................................   52
</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.  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 2000.

Part I.

Item 1.  BUSINESS

General

      HydroChem Industrial Services, Inc. ("HydroChem"),  was formed in 1993 for
the  purpose  of  combining,   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 1995,
HydroChem   acquired  the  industrial   cleaning  business  of  the  Halliburton
Industrial Services division ("HIS") of Brown & Root Industrial  Services,  Inc.
HIS had been operating since 1962.

      Effective  January  1,  1999,  HydroChem  acquired  substantially  all  of
the  assets  and  assumed  certain  liabilities  of  Valley  Systems,  Inc.  and
Valley Systems of Ohio, Inc., (collectively "Valley"). Valley had been operating
since 1973.  On November  19,  1999,  HydroChem  acquired  all of the issued and
outstanding  shares of capital  stock of Landry  Service Co.,  Inc.  ("LANSCO").
LANSCO had been operating  since 1984. (See "Business  Strategy",  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations",  and
Note 15 of Notes to Consolidated Financial Statements).

      HydroChem  generally  conducts  business outside the United States through
its wholly owned subsidiary,  HydroChem International,  Inc.  ("International").
HydroChem and its subsidiaries,  including International and, since November 19,
1999,  LANSCO,  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 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, steel mills
and aluminum  plants.  Services  provided include  high-pressure  and ultra-high
pressure ("UHP") water cleaning ("hydroblasting"), chemical cleaning, industrial
vacuuming, tank cleaning,  mechanical, 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, 1999, the Company  provided  services to  approximately  1,200  customers at
approximately 2,000 customer sites from 85 operating  locations  (including both
branch  and  satellite  locations)  in  the  United  States,  and  international
locations in Puerto Rico and Singapore.

      In 1999,  55.1% of the  Company's  revenue was derived from its 20 largest
customers,  17  of   which  are  Fortune  500/Global  1000  companies  or  their
affiliates,  and 67.2% was derived from  its 40 largest customers,  28  of which
are Fortune 500/Global 1000 companies or their affiliates.


                                       3

<PAGE>

      The Company's  revenue by industry is set forth in the following table (in
thousands):
<TABLE>
<CAPTION>
                                           Year ended December 31,
                            --------------------------------------------------
                            1997        %       1998        %       1999    %
                            ----       ---      ----       ---      ----   ---
<S>                       <C>         <C>    <C>         <C>    <C>        <C>
Petrochemical.........    $ 77,659    48.4%  $ 84,600    50.1%  $ 97,834   51.0%
Oil Refining..........      32,501    20.2     34,245    20.3     32,987   17.2
Electrical utility.....     16,881    10.5     16,779     9.9     20,305   10.6
Pulp and paper.........     12,342     7.7     11,985     7.1     11,633    6.1
Other..................     21,221    13.2     21,161    12.6     29,177   15.1
                          --------   -----    -------    ----    -------   -----
          Total........   $160,604   100.0%  $168,770    100.0% $191,936  100.0%
                           =======   =====    =======    =====   =======   =====
</TABLE>

      The Company's revenue by service line is set forth in  the following table
(in thousands):
<TABLE>
<CAPTION>
                                           Year ended December 31,
                            --------------------------------------------------
                            1997        %       1998        %       1999    %
                            ----       ---      ----       ---      ----   ---
<S>                       <C>         <C>    <C>         <C>    <C>        <C>
Hydroblasting.........    $ 78,919    49.1%  $ 79,665    47.2%  $ 86,173   44.9%
Chemical cleaning.....      53,366    33.2     52,954    31.4     53,771   28.0
Industrial vacuuming..      17,534    10.9     24,500    14.5     36,184   18.9
Other.................      10,785     6.8     11,651     6.9     15,808    8.2
                           -------    -----   -------    ----    -------   -----
          Total.......    $160,604   100.0%  $168,770   100.0%  $191,936  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 tank cleaning,  mechanical,  waste  minimization  and
commissioning  services,  as described  below.  The  majority of these  services
involves  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  and UHP  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 UHP of up to 40,000 pounds per square
inch is 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 UHP  hydroblasting  services  has been  expanded.
Valley has designed and fabricated special UHP equipment that allows the Company
to enhance the  hydroblasting  services  provided to its  customers.  Management
believes the UHP  technology  acquired from Valley more  effectively  cleans the
most difficult to remove scale and deposits from accessible tubing and surfaces.


                                       4

<PAGE>

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 as 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  industrial 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, or to assist in other types of cleaning and maintenance services.

      The Company  provides  air-moving  services using  specialized  trucks and
trailer-mounted  equipment  to  collect  and  remove  a  variety  of  solid  and
semi-solid materials, including dust, powder, oil, resins, wood chips, steel and
plastic 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.

      From 1997 to 1999,  the Company  increased its fleet of vacuum trucks from
174 to 335 units. Over the same period,  industrial  vacuuming revenue increased
from $17.5  million  in 1997 to $36.2  million  in 1999,  or 106.4%.  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,  management
believes increased  depreciation and operating lease expense is more than offset
by   proportionately   lower  levels  of   incremental   selling,   general  and
administrative expense.


                                       5

<PAGE>

Other Services

      Tank  Cleaning.  With the  acquisition  of LANSCO,  the Company is able to
provide tank cleaning  services on a much larger scale.  These services  involve
the  removal  of  sludge,  typically  from an  above  ground  storage  tank,  by
transforming  the sludge to a pumpable  state,  pumping it out of the tank,  and
processing  it with a centrifuge or filter press in order to separate the liquid
and solid  components  for  disposal  and  possibly  return some  product to the
customer.  Management  believes a significant factor in LANSCO's position in the
tank  cleaning  market is its  technology,  including  robotic  devices  and its
process for GT Services(R) tank cleaning.

      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.

      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.

      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 may be attributed to
hydroblasting, chemical cleaning, industrial vacuuming or other services.

Competition and Market Factors

      The industrial cleaning service business is highly competitive. Management
believes  that the  principal  competitive  factors in this  business are price,
quality of service, safety record, reputation,  competence and 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  in daily or more
frequently recurring maintenance services than in 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,  the Company'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 many of the
Company's  smaller  competitors  do not offer as extensive a line of services as
the  Company,  future  expansion  by  these  companies  or  the  development  of
alternative cleaning methods represent potential competition for the Company.

      Management   believes  that  factors  such  as  maintenance  for  improved
efficiency,  a  trend  toward  outsourcing,  industry  consolidation  among  the
Company's  customers and environmental  regulations have effected the demand for
the Company's  industrial  cleaning services.  Management also believes that the
Company  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 Service Contracts."


                                       6

<PAGE>

Business Strategy

      The Company's business strategy is to expand services provided to existing
customers through cross selling,  establish  relationships with new customers in
existing geographic areas, expand geographically,  establish additional customer
alliances, pursue additional strategic acquisitions and cost control.

      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 was comprised of UHP and  industrial  vacuuming  services.  In
addition, as a result of this 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.")

      The   acquisition   of  LANSCO   enhances  the  Company's   tank  cleaning
capabilities  and broadens the range of services it can offer its customers.  In
addition,  by taking  advantage of cross selling  opportunities  provided by the
Company's single source and primary supplier contracts,  there are opportunities
for improved access to a larger potential customer base for LANSCO, specifically
the petrochemical  and oil refining  industries along the Gulf Coast, as well as
the  electric  utility and pulp and paper  industries.  Management  believes the
Company can benefit from LANSCO's strong relationships in plants where HydroChem
currently  does limited or no work, and from  providing  ancillary  services and
chemical  products  in support of LANSCO's  tank  cleaning  operations,  such as
industrial  vacuuming,   hydroblasting  and  degassing  chemistry  which  LANSCO
previously subcontracted or purchased from other companies.

      The  Company  has  successfully  grown its  business  in the past  through
strategic  acquisitions.  Management intends to continue to pursue opportunistic
acquisitions  that will add  additional  services  and products to market to the
Company's  existing  customer base, or to facilitate  expansion of the Company's
customer base or geographic coverage.

Field Organizational Structure

      The  Company's  field  organization  is  primarily  based on  geographical
divisions.  Divisions are generally  subdivided  into areas,  regions and branch
locations, some of which are on-site locations. Branch 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 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 centrally
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  shared  among
locations  as   workloads  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  which management believes results 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 the  Company's  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


                                       7

<PAGE>

(regional or national in scope) and (iv)  implementing  alliance  relationships.
These efforts are  supplemented  by  advertising  in industry  publications  and
participating in 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 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.  Alternatively,  the work may be spread  evenly
between the service providers 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 providers for
specific services (for example, plants may have hydroblasting contracts with one
or more service providers and separate  industrial  vacuuming contracts with one
or more  other  service  providers)  or may  have  contracts  covering  multiple
services provided by the same provider.

      Master  service   agreements   typically   establish   general  terms  and
conditions,  as well as time and material pricing for services.  These contracts
do not guarantee  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's  alliance,  or  managed  services,  process  is a 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 benchmarking 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.

      Management  estimates  that  approximately  two-thirds  of  the  Company's
revenue comes from services  performed  under its master service  agreements and
alliances,  or  separately  bid projects in plants  where it has master  service
agreements or alliances.  Management believes these agreements generally enhance
the consistency and stability of the Company's revenue stream.

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 field safety personnel,  providing
the proactive support of 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.

      Management believes the Company's 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'


                                       8

<PAGE>

compensation  claims experience  relative to the normally expected experience of
companies within a particular industry.

Major Customer

      In 1999, The Dow Chemical Company and its affiliates  represented 10.0% of
the Company's total revenue.

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  management  believes the
Company  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.  These  inspections seek to determine whether or not the
Company's  work  practices are in  substantial  compliance  with the Act.  While
management  believes the Company 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  locations and  transported  by the Company to its  customers'
plants,  no industrial  cleaning services are performed at the branch locations.
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 its  customers,  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,  management  does  not  believe  that  the
Company's  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  location,   at  a  customer  location,  or  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.  Management  believes  that the  Company  has
obtained the permits and licenses  material to its  business,  and 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 liabilities under these laws and regulations.


                                       9

<PAGE>

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.

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  these 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 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,  there can be no assurance 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 accounts receivable,  and labor, equipment
and debt  service  costs.  Management  believes the Company  maintains  adequate
working capital to meet its needs in the current business environment.

Employees

      As of  December  31,  1999,  the  Company  had  2,238  full and  part-time
employees. Fifteen of the Company's employees at one branch location are covered
by a collective bargaining agreement. Management believes that relations between
the Company and its employees are good.

Item 2.  PROPERTIES

      The Company's  corporate,  corporate  support and  commissioning  services
operations,  as well as its operating and west division headquarters are located
in a 132,000  square foot facility  constructed in 1998 on 19.4 acres of land in
the Houston,  Texas area.  This facility,  which is owned by the Company,  is in
close proximity to many of the Company's  branch  locations and customers in the
Houston ship channel area

      As of February  29, 2000,  the Company had 85  operating  locations in the
United States,  and  international  locations in Puerto Rico and Singapore.  The
Company's current domestic operating locations are located in Texas,  Louisiana,
Alabama,  California,  Delaware,  Florida, Georgia,  Illinois, Kansas, Kentucky,
Michigan,  New  York,  North  Carolina,  Ohio,  Pennsylvania,   Oklahoma,  South
Carolina, Tennessee, Utah, and Virginia. The Company owns 11 of these locations.
Generally,  the  remainder  are leased.  Of these  operating  locations,  46 are
on-site facilities provided by or leased from the Company's customers.


                                       10

<PAGE>

Item 3.  LEGAL PROCEEDINGS

      The Company has substantially completed the settlement of 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 arose from a chemical exposure incident at a
Georgia Gulf  facility in  Plaquemine,  Louisiana in September  1996.  The suits
covered  claims  by  approximately  640  non-Company  employees  present  at the
facility  (the "Worker  Plaintiffs")  and  approximately  1,400  persons who are
related  to or live with the Worker  Plaintiffs.  All of the  plaintiffs  sought
damages for alleged toxic exposure  resulting from this incident.  Pursuant to a
Memorandum of Understanding  between virtually all of the plaintiffs and each of
the defendants in the suits,  which was effective  April 15, 1999, the Company's
insurance  carriers deposited the Company's share of the settlement into escrow,
which is being disbursed as satisfactory  evidence of settlement with individual
plaintiffs is received. As of December 31, 1999, approximately 90% of the escrow
had been disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's  defense and indemnity against the claims of any plaintiff who did not
participate in the settlement, the claims of approximately twenty plaintiffs who
were not parties to the settlement,  certain  additional  claims which have been
filed against the Company since the date of the Memorandum of Understanding, and
future claims which may arise in connection with this incident.

      All payments by the Company under these arrangements have been made by the
Company's  insurance  carriers.  In addition,  because the settlement process is
sufficiently  completed,  management  believes this  litigation  will not have a
material  adverse  affect on the  Company's  financial  position  or  results of
operations.

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

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, 1999. These companies, all of which
were acquired 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,
                            -----------------------------------------------
                            1995      1996        1997        1998     1999
                            ----      ----        ----        ----     ----
                                         (dollars in thousands)
<S>                       <C>        <C>        <C>        <C>        <C>
Financial Data:
    Revenue.............. $156,484   $156,003   $160,604   $168,770   $191,936
    Gross profit.........   63,855     61,630     65,019     63.599     77,984
    Gross margin.........     39.5%      39.5%      40.5%      37.7%      40.6%

    EBITDA (1)........... $ 22,390   $ 19,527   $ 22,405   $ 19,354   $ 30,163
    EBITDA margin (2)....     14.3%      12.5%      14.0%      11.5%      15.7%

    Operating income..... $ 15,638   $ 11,762   $ 14,189   $ 10,276   $ 18,699
    Income (loss) before
       taxes and
       extraordinary
       loss..............    5,903      1,829      4,101     (3,191)     2,638
     Net income (loss)...    2,851        545       (523)    (3,191)     2,603

     Capital expenditures    8,493      6,829      9,557     19,149      6,282
</TABLE>
<TABLE>
<CAPTION>

                                                  As of December 31,
                                    ------------------------------------------
                                    1995     1996     1997      1998      1999
                                    ----     ----     ----      ----      ----
                                                  (in thousands)
<S>                              <C>       <C>      <C>       <C>       <C>
Balance Sheet Data:
  Cash and cash equivalents..... $  1,088  $   671  $ 33,862  $ 33,775  $  4,140
  Working capital...............   17,961   13,216    52,324    46,755    19,202
  Total assets..................  121,216  115,522   152,093   156,425   200,902
  Total long-term debt, including
     current maturities..........  76,894   68,325   110,000   116,117   150,879
  Dividends paid.................     -        -       8,540       -         -
  Stockholder's equity...........  25,225   25,770    16,707    13,516    16,119
</TABLE>

---------------------------
(1) EBITDA for any relevant period  presented above represents gross profit less
    selling,  general and administrative expense. 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,
                                             --------------------------------
                                             1997          1998          1999
                                             ----          ----          ----
        <S>                                 <C>           <C>           <C>
        Revenue.........................    100.0%        100.0%        100.0%
        Cost of revenue.................     59.5          62.3          59.4
                                             ----          ----          ----
          Gross profit..................     40.5          37.7          40.6
        SG&A expense....................     26.5          26.2          24.9
        Depreciation....................      5.2           5.4           6.0
                                             ----         -----         -----
          Operating income..............      8.8           6.1           9.7
        Other (income) expense:
          Interest expense, net.........      5.3           6.2           6.8
          Special charges...............        -           0.5             -
          Restructuring charge..........        -           0.4             -
          Other (income) expense, net...        -             -             -
          Amortization of intangibles...      1.0           0.9           1.5
                                             ----          ----         -----
        Income (loss) before taxes and
          extraordinary loss............      2.5          (1.9)          1.4

          Income tax provision..........      1.4             -             -
                                             ----          ----         -----
        Income (loss) before extraordinary
           loss.........................      1.1          (1.9)          1.4
          Extraordinary loss on early
           extinguishment of debt,
           net of taxes.................      1.4             -             -
                                             ----          ----         -----
                Net income (loss).......     (0.3)%        (1.9)%         1.4%
                                             ====          ====         =====
        EBITDA..........................     14.0 %        11.5 %        15.7%
                                             ====          ====          ====
</TABLE>

Comparison of 1999 results to 1998

      Revenue.  Revenue increased $23.2 million, or 13.7%, to $191.9 million for
the year ended  December  31,  1999 from $168.8  million in the prior year.  The
increase in revenue, which applied to all service lines, resulted from increases
in industrial  vacuuming revenue of $11.7 million,  or 47.7%, from $24.5 million
to $36.2  million;  hydroblasting  revenue of $6.5  million,  or 8.2% from $79.7
million to $86.2 million; other services revenue of $4.2 million, or 35.7%, from
$11.6 million to $15.8 million;  and chemical  cleaning revenue of $817,000,  or
1.5%, from $53.0 million to $53.8 million.  The increase in industrial vacuuming
revenue resulted from additional  vacuum trucks placed in service by the Company
in 1998 and  1999,  and the  acquisition  of the  Valley  assets.  Hydroblasting
revenue increased primarily as a result of the acquisition of the Valley assets,
partially  offset  by a reduced  volume  of  projects  in other  locations.  The
increase in other services revenue principally resulted from an increased volume
of  commissioning  services  projects,  mechanical  services  projects which the
Company began  performing in August 1998, and tank cleaning  services  resulting
from the  acquisition  of LANSCO in  November  1999.  The  increase  in chemical
cleaning revenue principally resulted from an increased volume of projects.


                                       13

<PAGE>

      Gross profit.  Gross profit  increased  $14.4 million,  or 22.6%, to $78.0
million  in 1999 from $63.6  million in the prior  year.  Gross  profit  margins
increased from 37.7% to 40.6%. Cost of revenue increased $8.8 million,  or 8.3%,
to $114.0 million in 1999 from $105.2 million in the prior year primarily due to
the revenue increases described above, partially offset by the results of a cost
reduction program implemented in late 1998, which included,  among other things,
a reduction in work force.

      SG&A  expense.  SG&A expense  increased  $3.6  million,  or 8.1%, to $47.8
million in 1999 from $44.2 million in the prior year.  This  increase  primarily
resulted from the Valley and LANSCO acquisitions and was partially offset by the
cost reduction  program described above. SG&A expense as a percentage of revenue
decreased to 24.9% in 1999 from 26.2% in the prior year.

      EBITDA.  Increased  gross  profit,  partially  offset  by  increased  SG&A
expense,  resulted  in a $10.8  million,  or 55.8%,  increase in EBITDA to $30.2
million  in 1999 from  $19.4  million  in the prior  year.  As a  percentage  of
revenue, EBITDA increased to 15.7% in 1999 from 11.5% in the prior year.

      Depreciation.  Depreciation  expense increased $2.4 million,  or 26.3%, to
$11.5 million in 1999 from $9.1 million in the prior year, and was 6.0% and 5.4%
of revenue,  respectively.  The  increase in  depreciation  expense  principally
resulted from the Valley and LANSCO acquisitions,  and from capital expenditures
in 1998 and 1999.

      Operating  income.  Increased gross profit,  partially offset by increased
SG&A and  depreciation  expense,  resulted in an increase in operating income of
$8.4 million, or 82.0%, to $18.7 million in 1999 from $10.3 million in the prior
year. As a percentage  of revenue,  operating  income  increased to 9.7% in 1999
from 6.1% in the prior year.

      Interest expense,  net. Interest expense,  net increased $2.7 million,  or
25.4%, to $13.1 million in 1999 from $10.5 million in the prior year.  Increased
interest  expense,  net resulted from (i) beginning in July 1998, an increase in
debt due to borrowings  related to the Company's new  headquarters and operating
facility,   (ii)  additional   borrowings  to  finance  the  Valley  and  LANSCO
acquisitions, and (iii) a decrease in interest income due to lower 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 7 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 7 of Notes to Consolidated Financial Statements.)

      Amortization.  Amortization  expense increased $1.3 million,  or 88.8%, to
$2.8 million in 1999 from $1.5 million in the prior year. Increased amortization
expense resulted from goodwill incurred in connection with the Valley and LANSCO
acquisitions.

      Income  (loss)  before  taxes  and  extraordinary  loss.  For the  reasons
described  above,  income before taxes and  extraordinary  loss  increased  $5.8
million to $2.6 million in 1999 from a loss before taxes and extraordinary  loss
of $3.2 million in the prior year.  As a percentage  of revenue,  income  before
taxes and  extraordinary  loss was 1.4% in 1999  compared to a loss before taxes
and extraordinary loss of 1.9% in the prior year.

      Income tax  provision.  The effective  income tax rate remained at zero in
1999 consistent with the prior year, principally as a result from changes in the
valuation allowance of deferred tax assets.

      Extraordinary  loss.  In  1999,  as a result  of the  early  repayment  of
HydroChem's  prior credit facility an  extraordinary  loss was recognized in the
amount of $35,000.

      Net income  (loss).  For the reasons  described  above,  the Company's net
income  increased  $5.8  million to $2.6 million in 1999 from a net loss of $3.2
million in the prior year.  As a percentage  of revenue,  net income was 1.4% in
1999 compared to a net loss of 1.9% in the prior year.


                                       14

<PAGE>

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;  and an increase
in revenue from other services of $866,000, or 8.0%, from $10.8 million to $11.7
million;  and an increase in  hydroblasting  revenue of $746,000,  or 0.9%, from
$78.9 million to $79.7  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. The
increase in other services revenue  primarily  resulted from mechanical  service
projects, which the Company began performing in August 1998, partially offset by
decreased pipeline cleaning.  Hydroblasting  revenue increased  primarily due to
the  implementation  of sole source provider  arrangements with certain existing
customers.  The decrease in chemical cleaning revenue primarily  resulted from a
small number of projects in the prior year which did not recur.

      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 7 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 7 of Notes to Consolidated Financial Statements.)

      EBITDA.  Decreased  gross profit and increased SG&A expense  resulted in a
$3.0  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 7 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 7 of Notes to Consolidated Financial Statements.)

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


                                       15

<PAGE>

      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  before  taxes and  extraordinary
loss of $4.1  million in the prior  year.  This  represented  a decrease of $7.3
million.  As a percentage  of revenue,  the loss before taxes and  extraordinary
loss was 1.9% in 1998, compared to income before taxes and extraordinary loss of
2.5% in the prior year.

      Income tax  provision.  There was no provision  for income tax recorded in
1998 primarily as a result 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 and extraordinary loss in the prior year period.

      Extraordinary loss. In 1997, as a result of the early repayment of certain
HydroChem  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,  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.


                                       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 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 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 7 of
Notes to Consolidated Financial Statements.)
<TABLE>
<CAPTION>
                                           Three months ended
                              -------------------------------------------
                                                 1998
                              -------------------------------------------
                              Mar. 31    June 30     Sept. 30     Dec. 31
                              -------    -------     --------     -------
                                            (in thousands)
<S>                           <C>        <C>        <C>         <C>
Revenue...................    $ 40,888   $ 45,067   $ 40,509    $ 42,306
Cost of revenue...........      24,885     28,185     25,632      26,469
                                ------    -------     ------     -------
   Gross profit...........      16,003     16,882     14,877      15,837
SG&A expense..............      10,787     10,961     11,799      10,698
Depreciation..............       2,193      2,239      2,296       2,350
                                ------    -------     ------     -------
   Operating income.......       3,023      3,682        782       2,789
Other (income) expense:
  Interest expense, net...       2,517      2,599      2,626       2,728
  Special charges.........           -        300          -         515
  Restructuring charge....           -          -          -         740
  Other  (income)  expense,
    net...................           3         13       (142)         67

  Amortization of
   intangibles............         376        374        375         376
                                ------    -------     ------     -------
Income (loss) before taxes
   and extraordinary loss.         127        396     (2,077)     (1,637)
  Income tax provision
   (benefit)..............          75        237       (356)         44
                                ------    -------     ------     -------
Income (loss) before
   extraordinary loss.....          52        159     (1,721)     (1,681)
  Extraordinary loss......           -          -          -           -
                                ------    -------     ------     -------
Net income (loss).........    $     52   $    159   $ (1,721)   $ (1,681)
                               =======    =======    =======     =======

EBITDA....................    $  5,216   $  5,921   $  3,078    $  5,139
                               =======    =======    =======     =======
<CAPTION>
                                           Three months ended
                              -------------------------------------------
        1998                                     1999
                              -------------------------------------------
                              Mar. 31    June 30     Sept. 30     Dec. 31
                              -------    -------     --------     -------
                                            (in thousands)

Revenue...................    $ 50,905   $ 52,194   $ 43,010    $ 45,827
Cost of revenue...........      30,263     30,437     25,709      27,543
                               -------    -------     ------     -------
   Gross profit...........      20,642     21,757     17,301      18,284
SG&A expense..............      12,500     12,874     11,144      11,303
Depreciation..............       2,913      2,839      2,836       2,876
                               -------    -------     ------     -------
   Operating income.......       5,229      6,044      3,321       4,105
Other (income) expense:
  Interest expense, net...       3,268      3,228      3,229       3,404
  Special charges.........           -          -          -           -
  Restructuring charge....           -          -          -           -
  Other  (income)  expense,
    net...................         (42)       (26)       105          61
  Amortization of
    intangibles...........         634        633        634         933
                               -------    -------     ------     -------
Income (loss) before taxes
   and extraordinary loss.       1,369      2,209       (647)       (293)
  Income tax provision
   (benefit)..............           -          -          -           -
                               -------    -------     ------     -------
Income (loss) before
   extraordinary loss.....       1,369      2,209       (647)       (293)
  Extraordinary loss......           -          -          -          35
                               -------    -------     ------     -------
Net income (loss).........    $  1,369   $  2,209   $   (647)   $   (328)
                               =======    =======    =======     =======

EBITDA....................    $  8,142   $  8,883   $  6,157    $  6,981
                               =======    =======    =======     =======
</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. 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. All HydroChem
subsidiaries, including International, are guarantors 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 HydroChem's then existing
senior debt  ($45.7 million)  and  subordinated  debt ($18.7 million).

                                       17
<PAGE>

In addition, $8.3 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 $2.3 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.

      On December  31,  1997,  HydroChem  entered  into a  participating  credit
agreement with a financial  institution for a credit facility which provided for
unsecured  borrowings  of  up  to  $25.0  million,  subject  to  borrowing  base
limitations. The term of this credit facility was three years and any borrowings
thereunder bore interest at rates adjusted quarterly.  Interest rates were based
on, at the  discretion of HydroChem,  (i) a range from LIBOR plus 1.75% to LIBOR
plus 3.00%,  or (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  was  payable  quarterly  on any
unborrowed  portion.  The  specific  rate  within each range  depended  upon the
Company's  operating  performance.  The  Company was  required  to meet  certain
customary  financial  ratios and covenants,  and generally was  restricted  from
pledging its assets.

      On November 19, 1999, in conjunction with the LANSCO  acquisition,  and to
replace the credit  facility  described  above,  the Company  entered into a new
credit agreement with six financial  institutions  (the "New Credit  Facility").
The New Credit Facility provides for secured  borrowings of up to $60.0 million,
and consists of a $30.0  million term loan (the "Term  Loan")  commitment  and a
$30.0 million  revolving loan (the "Revolver")  commitment,  which is subject to
borrowing  base  limitations.  The New Credit  Facility  expires on December 31,
2004.  The New Credit  Facility  requires  HydroChem to meet  certain  customary
financial  ratios and  covenants  and  restricts  the  Company  from any further
pledging of its assets.  The New Credit Facility is secured by substantially all
of the assets of the Company and Holding.  HydroChem, at its discretion, can pay
interest on a Base Rate or Eurodollar  ("LIBOR") basis, plus applicable margins.
Base Rate margins range from 0.00% to 1.75% depending on the type of advance and
the Company's leverage ratio as determined quarterly.  LIBOR based margins range
from 1.75% to 3.00%,  depending on the  Company's  leverage  ratio as determined
quarterly.  The length of the LIBOR based  interest  periods is generally one to
six months in duration,  however  interest  payments are required at least every
three months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending
on the Company's leverage ratio as determined quarterly, is payable quarterly on
the unborrowed portion of the Revolver.  As a result of the early extinguishment
of the previous credit facility, an extraordinary loss was recognized in 1999 in
the amount of $35,000.  The  extraordinary  loss  consisted of the  write-off of
associated deferred financing costs.

      As of December  31, 1999,  $30.0  million was  outstanding  under the Term
Loan. The Term Loan requires scheduled quarterly principal payments beginning on
September 30, 2000. In addition,  the Company may be required to make  mandatory
additional  principal  payments,  based on the  Company's  excess  cash flow and
certain other events, as defined in the New Credit Facility.  As of December 31,
1999,  the Company's  borrowing  base under the Revolver was $25.1  million,  of
which $2.3  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,  1999,  there  were no  other  borrowings
outstanding under the Revolver,  and the Company had available unused borrowings
of $22.9 million.

      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  on July 17,  1998.  The loan  agreement  provided for an
interim financing  construction loan of up to $7.5 million,  which was converted
to a term loan (the "Mortgage  Loan") in the amount of $7.5 million on March 31,
1999.  The Mortgage Loan is  collateralized  by first priority liens on the land
and improvements. The construction loan required quarterly payments of interest.
The Mortgage Loan matures on September 30, 2006 and requires  quarterly payments
of interest and principal. Interest rates on the Mortgage Loan are 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 Mortgage Loan is 7.82%. The 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.  Effective September 30, 1998, the 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.  The Company has remained in compliance  with the terms
of the  amended  loan  agreement  since  that  time and  expects  to  remain  in
compliance in future periods. At December 31, 1999, the Company had $7.4 million
outstanding under the Mortgage Loan.


                                       18
<PAGE>

      In  connection  with  the  LANSCO  acquisition,  the  Company  issued  two
promissory notes (the "Seller Notes") to the principal  selling  shareholders of
LANSCO in the aggregate principal amount of $3.5 million.  The Seller Notes bear
interest at 8% per annum,  mature on November 19, 2001, and require  semi-annual
interest payments and annual principal payments. The first principal payments on
the Seller Notes in the amount of $1.5  million are due  November 19, 2000.  The
final principal payments on the Seller Notes, in the amount of $2.0 million, are
due November 19, 2001. The Seller Notes are unsecured,  and are  subordinated to
all Senior Debt (as defined in the Seller Notes) of the Company,  and contain no
financial  ratios  are  covenants  that  must be met.  (See  Note 15 of Notes to
Consolidated Financing Statements.)

      For the year ended  December 31, 1999,  the Company used net cash of $52.5
million for operating and investing  activities which consisted of $16.8 million
provided by operating activities and $69.3 million used in investing activities.
For the year  ended  December  31,  1998,  $5.9  million of net cash was used in
operating and investing  activities which consisted of $12.9 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.  Except for the Valley
and LANSCO  acquisitions  in the current  period,  investing  activities for all
periods primarily consisted of expenditures for property and equipment.

      Expenditures  for property and equipment  for the year ended  December 31,
1999 were $6.3 million.  Of this amount,  $4.2 million  principally  was used to
purchase operating  equipment,  $1.2 million to purchase and implement new field
and corporate computer software and hardware systems, and $956,000 in connection
with the construction of the Company's  headquarters and operating facility.  In
1998,  $19.1 million of  expenditures  for property and equipment  included $9.1
million  for  the  purchase  of  land  and  the  construction  of the  Company's
headquarters and operating  facility,  $8.4 million principally for the purchase
of operating equipment, and $1.6 million for the implementation of new field and
corporate computer software and hardware systems.

      Effective  January 1, 1999,  HydroChem  acquired  substantially all of the
assets and assumed certain  liabilities of Valley.  The adjusted  purchase price
for the  acquired  assets was $30.1  million in cash,  of which $4.0 million was
deposited  into escrow.  In addition,  the Company  assumed  approximately  $2.5
million in capital  lease  obligations,  which were  subsequently  replaced with
operating  leases,  and paid $5.6 million in cash at closing to retire  Valley's
bank debt. The source of funds for the acquisition was a combination of existing
available cash and bank borrowings.

      On November 19, 1999, HydroChem acquired all of the issued and outstanding
shares of capital stock (the "Shares") of LANSCO. The Company paid $35.5 million
for the  Shares,  consisting  of $32.0  million in cash paid at closing and $3.5
million in Seller Notes payable in installments with interest over the two years
following the date of acquisition to the two principal  stockholders  of LANSCO.
Further,  the Company has agreed to pay one of these  principal  stockholders an
additional  $1.25  million over two years as  additional  consideration  for his
Shares and for consulting services.  The source of funds for the acquisition was
a  combination  of existing  available  cash,  the Seller  Notes,  and bank debt
pursuant to the New Credit Facility.

      Management  believes that cash and cash  equivalents at December 31, 1999,
net cash  expected to be provided by operating  activities  and  borrowings,  if
necessary,  under the Company's  New Credit  Facility will be sufficient to meet
the Company's cash requirements for operations and expenditures for property and
equipment for the next twelve months and the foreseeable future thereafter. From
time to time, the Company reviews  acquisition  opportunities as they arise, and
may require additional financing if it decides to make additional  acquisitions.
There can be no assurance, however, that any such acquisition opportunities will
arise,  that any such  acquisitions  will be  consummated,  or that any  related
financing will be available when required on terms satisfactory to the Company.
(See Note 5 of Notes to Consolidated Financial Statements.)


                                       19
<PAGE>

Impact of Year 2000

      In prior  periods,  the  Company  discussed  the  nature of the issues and
progress  of its plans to become  Year 2000  ready.  In late 1999,  the  Company
completed its remediation and testing of systems.  As a result of those planning
and implementation  efforts, the Company experienced no significant  disruptions
in  mission  critical  information  technology  and  non-information  technology
systems and management believes those systems successfully responded to the Year
2000 date change.  In the aggregate,  the Company  incurred  approximately  $2.4
million in 1998 and 1999 in connection with remediating its systems. The Company
is not aware of any material  problems  resulting from Year 2000 issues,  either
with its products,  its internal systems,  or the products and services of third
parties.  To management's  knowledge,  none of the Company's  material suppliers
experienced  material Year 2000  problems.  The Company will continue to monitor
its mission  critical  computer  applications  and those of its  suppliers  on a
limited  basis  throughout  the year 2000 to ensure  that any  latent  Year 2000
matters that may arise are addressed promptly.

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 was put is place during 1999
in connection with the Company's Mortgage 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,  steel  mills,  and aluminum
plants.  Management  believes the Company's  portfolio of accounts receivable is
well  diversified  and, as a result,  its credit risks are  minimal.  Management
evaluates the  creditworthiness of the Company's customers and monitors accounts
on a periodic basis,  but typically does not require  collateral.  The Company's
trade  receivables are primarily  denominated in U.S.  dollars and are generally
due within 30 days.  In general,  trade  receivables  are  collected in a timely
manner,  and  historically bad debts have not been material and have been within
management's  expectations.  Management  believes  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,  1999,  the Company had  short-term  investments
totaling $4.4 million. Due to the short-term nature of these instruments,  their
carrying value  approximated  market value.  Management  does not believe that a
decrease  of 1.0% from 1999  average  investment  rates would be material to the
Company during 2000.

      As  of  December  31,  1999,  the  Company's  outstanding  long-term  debt
consisted  of the Series B Notes,  the Term Loan,  the  Mortgage  Loan,  and the
Seller Notes . The Series B 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, 1999,
their fair value was estimated to be $94.3  million.  At the same date, the Term

                                       20
<PAGE>

Loan, the Mortgage Loan and the Seller Notes totaled $30.0 million, $7.4 million
and $3.5 million, respectively, and approximated their fair value. The Term Loan
is a component of the New Credit  Facility  which  expires on December 31, 2004.
The  interest  rates  for the New  Credit  Facility,  at the  discretion  of the
Company, are at Base Rate or LIBOR, plus applicable margins.  Margins range from
0.00% to 3.00%  depending  upon which  interest rate option is in effect and the
Company's  leverage  ratio as  determined  quarterly.  The Company  periodically
reviews  various  alternatives to protect  long-term debt against  interest rate
fluctuations.  The  Mortgage  Loan  bears  interest  at LIBOR  rates  plus 1.75%
adjusted  quarterly.   To  protect  the  Mortgage  Loan  against  interest  rate
fluctuations,  the  Company  utilizes  the  Interest  Rate Swap which  fixes the
interest rate at 7.82% per annum.  The Seller Notes are due in two  installments
with the final installment due on November 19, 2001, and bear interest at 8% per
annum. The market risk, estimated as a potential increase in fair value of these
debt instruments  resulting from a hypothetical 1.0% decrease in interest rates,
is estimated to not be material to the Company during 2000.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Reference is made to the Index to  Consolidated  Financial  Statements  on
page 22 of 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




Consolidated Financial Statements                                           Page

  Report of Independent Auditors.............................................23

  Consolidated Balance Sheets as of December 31, 1998 and 1999...............24

  Consolidated Statements of Operations for each of the years ended
      December 31, 1997, 1998 and 1999.......................................25

  Consolidated Statements of Stockholder's Equity for each of the
      years ended December 31, 1997, 1998 and 1999...........................26

  Consolidated Statements of Cash Flows for each of the years ended
      December 31, 1997, 1998 and 1999.......................................27

  Notes to Consolidated Financial Statements.................................28




                                       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 Subsidiaries  (the "Company") as of December 31,
1998  and  1999,  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, 1999. 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 auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position of HydroChem
Industrial  Services,  Inc. and  Subsidiaries at December 31, 1998 and 1999, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1999,  in  conformity  with
accounting principles generally accepted in the United States.

                                                          ERNST & YOUNG LLP



Houston, Texas
February 25, 2000





                                       23
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                December 31,
                                                          ---------------------
                                                           1998          1999
                                                           ----          ----
                                     ASSETS
  <S>                                                   <C>          <C>
  Current assets:
     Cash and cash equivalents ......................   $  33,775    $   4,140
     Receivables,less allowance of $536 and $671,
      respectively ..................................      23,941       33,488
     Inventories ....................................       3,902        4,721
     Prepaid expenses and other current assets ......       1,714        1,993
     Income taxes receivable ........................         243          504
     Deferred income taxes (Note 8) .................       1,467        1,725
                                                        ---------    ---------
           Total current assets .....................      65,042       46,571

     Property and equipment, at cost (Note 4) .......      81,459       96,672
        Accumulated depreciation ....................     (33,322)     (43,756)
                                                        ---------    ---------
                                                           48,137       52,916

     Intangible assets, net (Note 2) ................      43,246      101,415
                                                        ---------    ---------

           Total assets .............................   $ 156,425    $ 200,902
                                                        =========    =========


                      LIABILITIES AND STOCKHOLDER'S EQUITY

  Current liabilities:
     Accounts payable................................   $   4,973    $   6,829
     Accrued liabilities.............................      13,193       17,870
     Current portion of long-term debt (Note 5)......         121        2,670
                                                          -------      -------
           Total current liabilities.................      18,287       27,369

  Long-term debt (Note 5)............................     115,996      148,209
  Deferred income taxes (Note 8).....................       8,626        9,205
  Commitments and contingencies (Note 9)

  Stockholder's equity:
     Common stock, $.01 par value:
       1,000 shares authorized, 100 shares outstanding          1            1
     Additional paid-in-capital......................      16,558       16,558
     Retained deficit................................      (3,043)        (440)
                                                          -------      -------

           Total stockholder's equity................      13,516       16,119
                                                          -------      -------

           Total liabilities and stockholder's equity   $ 156,425    $ 200,902
                                                          =======      =======
</TABLE>


                             See accompanying notes.


                                       24
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                             ----------------------------------
                                               1997          1998        1999
                                               ----          ----        ----
<S>                                           <C>          <C>         <C>
Revenue ..................................    $160,604     $168,770    $191,936
Cost of revenue ..........................      95,585      105,171     113,952
                                               -------      -------     -------
    Gross profit .........................      65,019       63,599      77,984

Selling, general and administrative
    expense ..............................      42,614       44,245      47,821
Depreciation .............................       8,216        9,078      11,464
                                               -------      -------     -------
    Operating income .....................      14,189       10,276      18,699

Other (income) expense:
    Interest expense, net ................       8,518       10,470      13,129
    Special charges (Note 7) .............         -            815         -
    Restructuring charge (Note 7) ........         -            740         -
    Other (income) expense, net ..........          39          (59)         98
    Amortization of intangibles ..........       1,531        1,501       2,834
                                               -------      -------     -------

Income (loss) before taxes and
    extraordinary loss ...................       4,101       (3,191)      2,638

    Income tax provision (Note 8) ........       2,282          -           -
                                               -------      -------     -------
Income (loss) before extraordinary loss ..       1,819       (3,191)      2,638

    Extraordinary loss on early
      extinguishment of debt,
       net of taxes (Note 5) .............       2,342          -            35
                                               -------      -------     -------

Net income (loss) ........................    $   (523)    $ (3,191)   $  2,603
                                               =======      =======     =======
</TABLE>
















                             See accompanying notes.


                                       25
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                       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, 1996 ....  $ 1       $19,670       $ 6,099     $25,770
    Dividend to parent (Note 5)..    -        (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
    Net income ..................    -           -           2,603       2,603
                                   ---        ------        ------      ------
Balance at December 31, 1999 ....  $ 1       $16,558       $  (440)    $16,119
                                   ===        ======        ======      ======
</TABLE>





























                             See accompanying notes.


                                       26
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                               ---------------------------------
                                                  1997        1998        1999
                                                --------    --------    --------
<S>                                             <C>         <C>        <C>
Operating activities:
  Net income (loss) ..........................  $  (523)    $(3,191)   $  2,603
Adjustments to reconcile net income (loss)
  to net cash provided by operating activities:
    Depreciation .............................    8,216       9,078      11,464
    Amortization .............................    1,531       1,501       2,834
    Amortization of deferred financing costs .      480         392         504
    Write-off of deferred financing costs ....    3,178          -           35
    Deferred income tax provision ............      969         241         349
    Loss (gain) on sale of property and
      equipment ..............................       79         (36)         13
  Changes in operating assets and liabilities:
    Restricted cash ..........................   (2,858)      2,858          -
    Receivables, net .........................       16         400      (1,061)
    Inventories ..............................     (294)        (39)       (819)
    Prepaid expenses and other current assets.     (651)         77         256
    Income taxes receivable ..................     (407)        164        (106)
    Accounts payable .........................     (881)        150         292
    Income taxes payable .....................       28         (40)         -
    Accrued liabilities ......................    3,799       1,423         416
                                                 ------      ------     -------
     Net cash provided by operating activities   12,682      12,978      16,780
                                                 ------      ------     -------

Investing activities:
  Expenditures for property and equipment ....   (9,557)    (19,149)     (6,282)
  Acquisitions, net of cash acquired .........       -           -      (63,362)
  Proceeds from sale of property and equipment      336         308         307
                                                 ------      ------     -------
     Net cash used in investing activities ...   (9,221)    (18,841)    (69,337)
                                                 ------      ------     -------

Financing activities:
  Proceeds from (repayments of) long-term debt,
    net ......................................   41,675       6,117      24,590
  Debt financing costs .......................   (3,405)       (341)     (1,668)
  Dividend to parent .........................   (8,540)         -           -
                                                 ------      ------     -------
     Net cash provided by financing activities   29,730       5,776      22,922
                                                 ------      ------     -------

Net increase (decrease) in cash and cash
  equivalents ................................   33,191         (87)    (29,635)
Cash and cash equivalents at beginning of
  period .....................................      671      33,862      33,775
                                                 ------      ------     -------
Cash and cash equivalents at end of period .... $33,862     $33,775    $  4,140
                                                 ======      ======     =======

Supplemental disclosure:
  Cash paid during the year for interest .....  $ 5,869     $11,290    $ 12,738
  Cash paid (refunded) during the year for
    income taxes, net of refunds .............      255        (355)       (151)
</TABLE>



                             See accompanying notes.


                                       27
<PAGE>


                       HYDROCHEM INDUSTRIAL SERVICES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

1.    Organization, Formation and Basis of Presentation

      The  consolidated  financial  statements include the accounts of HydroChem
Industrial  Services,  Inc.  ("HydroChem")  and its wholly  owned  subsidiaries,
including HydroChem  International,  Inc.  ("International") and, since November
19, 1999,  Landry Service Co., Inc.  ("LANSCO").  HydroChem  generally  conducts
business  outside the United States  through  International.  (HydroChem and its
subsidiaries  are  hereinafter   sometimes  referred  to  either  separately  or
collectively  as the  "Company.")  HydroChem  is a wholly  owned  subsidiary  of
HydroChem Holding, Inc. ("Holding").

      The Company is engaged in the  business of providing  industrial  cleaning
services  to a wide  range of  processing  industries,  including  petrochemical
plants, oil refineries, electric utilities, pulp and paper mills, rubber plants,
steel mills, and aluminum plants.  Services  provided include  high-pressure and
ultra-high   pressure  water  cleaning   (hydroblasting),   chemical   cleaning,
industrial vacuuming,  tank cleaning,  mechanical services,  waste minimization,
and commissioning and other specialized services. The majority of these services
involves recurring  maintenance to improve or sustain the operating efficiencies
and extend the useful lives of process equipment and facilities.

2.    Significant Accounting Policies

Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
HydroChem  and its  subsidiaries.  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 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,  primarily are being amortized over 10 to 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  4 to  40  years.  These  intangible  assets  totaled
$40,032,000 and $96,874,000,  net of accumulated  amortization of $7,148,000 and
$9,985,000, at December 31, 1998 and 1999, respectively. The Company continually
evaluates  whether  events or  circumstances  have  occurred  that  indicate the


                                       28

<PAGE>

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 $3,214,000  and
$4,541,000,  net of accumulated  amortization of $1,337,000 and  $1,875,000,  at
December 31, 1998 and 1999,  respectively.  Deferred  financing  costs are being
amortized  over five 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  Financial  Accounting  Standards  Board  Statement No. 123,
Accounting  for  Stock-Based   Compensation   ("FAS  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 1997 and 1998 amounts have been  reclassified  to conform with the
1999 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,  steel  mills,  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.


                                       29

<PAGE>

3.    Receivables

      Receivables  primarily  include trade accounts and accrued  receivables of
$23,941,000 and $33,488,000,  net of allowance for doubtful accounts of $536,000
and $671,000, at December 31, 1998 and 1999, respectively. During 1998 and 1999,
the Company recorded bad debt expense of $13,000 and $85,000,  respectively.  In
addition,  during 1998 and 1999, the Company  recorded other  adjustments to the
allowance   for  doubtful   accounts  in  the  amount  of  $72,000  and  $9,000,
respectively.  During 1999, $59,000 of allowance for doubtful accounts was added
in  connection  with the  acquisition  of  LANSCO.  Also,  in 1998  the  Company
wrote-off  receivables  which were  uncollectible in the amount of $685,000.  Of
this  amount,  $527,000  was due  from  one  customer,  $190,000  of  which  was
subsequently collected in 1999.

4.    Property and Equipment

      Property  and  equipment  at December  31, 1998 and 1999  consisted of the
following (in thousands):
<TABLE>
<CAPTION>
                                                                 1998      1999
                                                                 ----      ----
<S>                                                            <C>       <C>
Land ........................................................  $ 1,747   $ 2,104
Office facilities, furniture, fixtures and computer equipment   16,223    21,005
Machinery and equipment (including vacuum trucks) ...........   61,200    69,212
Vehicles ....................................................    1,906     1,857
Construction in progress ....................................      383     2,494
                                                                ------    ------
    Total property and equipment ............................  $81,459   $96,672
                                                                ======    ======
</TABLE>

5.    Long-term Debt

      Long-term  debt at December 31, 1998 and 1999  consisted of the  following
(in thousands):
<TABLE>
<CAPTION>
                                                          1998         1999
                                                          ----         ----
<S>                                                    <C>          <C>
Series B Notes ...........................             $ 110,000    $ 110,000
Term Loan ................................                   -         30,000
Mortgage Loan ............................                 6,117        7,379
Seller Notes .............................                   -          3,500
                                                        --------     --------
    Total long-term debt .................               116,117      150,879
    Less current portion of long-term debt                  (121)      (2,670)
                                                        --------     --------
                                                       $ 115,996    $ 148,209
                                                        ========     ========
</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.  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.  All HydroChem  subsidiaries,
including International, are guarantors 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 HydroChem's then existing
senior debt  ($45,727,000)  and subordinated  debt  ($18,705,000).  In addition,
$8,340,000  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.


                                       30

<PAGE>

      On December  31,  1997,  HydroChem  entered  into a  participating  credit
agreement with a financial  institution for a credit facility which provided for
unsecured   borrowings  of  up  to   $25,000,000,   subject  to  borrowing  base
limitations. The term of this credit facility was three years and any borrowings
thereunder bore interest at rates adjusted quarterly.  Interest rates were based
on, at the  discretion of HydroChem,  (i) a range from LIBOR plus 1.75% to LIBOR
plus 3.00%,  or (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  was  payable  quarterly  on any
unborrowed  portion.  The  specific  rate  within each range  depended  upon the
Company's  operating  performance.  The  Company was  required  to meet  certain
customary  financial  ratios and covenants,  and generally was  restricted  from
pledging its assets. 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  outstanding under this credit facility,  and HydroChem
had available unused borrowings of $19,647,000.

      On November 19, 1999, in conjunction with the LANSCO  acquisition,  and to
replace the credit  facility  described  above,  the Company  entered into a new
credit agreement with six financial  institutions  (the "New Credit  Facility").
The New Credit  Facility  provides for secured  borrowings of up to $60,000,000,
and  consists of a  $30,000,000  term loan (the "Term  Loan")  commitment  and a
$30,000,000  revolving  loan (the  "Revolver")  commitment,  which is subject to
borrowing  base  limitations.  The New Credit  Facility  expires on December 31,
2004.  The New Credit  Facility  requires  HydroChem to meet  certain  customary
financial  ratios and  covenants  and  restricts  the  Company  from any further
pledging of its assets.  The New Credit  Facility is principally  secured by all
current and future assets of the Company.  HydroChem, at its discretion, can pay
interest on a Base Rate or Eurodollar  ("LIBOR") basis, plus applicable margins.
Base Rate margins range from 0.00% to 1.75% depending on the type of advance and
the Company's leverage ratio as determined quarterly.  LIBOR based margins range
from 1.75% to 3.00%,  depending on the  Company's  leverage  ratio as determined
quarterly.  The length of the LIBOR based  interest  periods is generally one to
six months in duration,  however  interest  payments are required at least every
three months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending
on the Company's leverage ratio as determined quarterly, is payable quarterly on
the unborrowed portion of the Revolver.  As a result of the early extinguishment
of the previous credit  facility,  an  extraordinary  loss was recognized in the
amount  of  $35,000.  The  extraordinary  loss  consisted  of the  write-off  of
associated deferred financing costs.

      As of December  31, 1999,  $30.0  million was  outstanding  under the Term
Loan. The Term Loan requires scheduled quarterly principal payments beginning on
September 30, 2000. In addition,  the Company may be required to make  mandatory
additional  principal  payments,  based on the  Company's  excess  cash flow and
certain other events, as defined in the New Credit Facility.  As of December 31,
1999, the Company's borrowing base under the Revolver was $25,181,000,  of which
$2,260,000 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,  1999,  there were no other  borrowings  outstanding  under the
Revolver, and the Company had available unused borrowings of $22,921,000.

      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  on July 17,  1998.  The loan  agreement  provided for an
interim financing construction loan of up to $7,500,000,  which was converted to
a term loan (the "Mortgage Loan") in the amount of $7,500,000 on March 31, 1999.
The Mortgage  Loan is  collateralized  by first  priority  liens on the land and
improvements. The construction loan required quarterly payments of interest. The
Mortgage Loan matures on September 30, 2006 and requires  quarterly  payments of
interest and  principal.  Interest  rates on the Mortgage Loan are 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 Mortgage Loan is 7.82%. The 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.  Effective September 30, 1998, the 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.  The Company has remained in compliance  with the terms
of the  amended  loan  agreement  since  that  time and  expects  to  remain  in
compliance in future  periods.  At December 31, 1999, the Company had $7,379,000
outstanding under the Mortgage Loan.


                                       31

<PAGE>

      In  connection  with  the  LANSCO  acquisition,  the  Company  issued  two
promissory notes (the "Seller Notes") to the principal  selling  shareholders of
LANSCO in the aggregate principal amount of $3.5 million.  The Seller Notes bear
interest at 8% per annum,  mature on November 19, 2001, and call for semi-annual
interest payments and annual principal payments. The first principal payments on
the Seller Notes in the amount of  $1,500,000  are due  November  19, 2000.  The
final principal  payments on the Seller Notes, in the amount of $2,000,000,  are
due November 19, 2001. The Seller Notes are unsecured,  and are  subordinated to
all Senior Debt (as defined in the Seller Notes) of the Company,  and contain no
financial ratios are covenants that must be met. (See Note 15.)

      Maturities  of  long-term  debt for the years  ended  December  31, are as
follows (in thousands):
<TABLE>
              <S>                                                <C>
              2000.........................................      $     2,670
              2001.........................................            7,186
              2002.........................................            7,202
              2003.........................................            8,218
              2004.........................................            9,235
              Thereafter...................................          116,368
                                                                     -------
                                                                 $   150,879
</TABLE>

6.    Stockholder's Equity

      In connection  with a previous  financing  involving the Company,  Holding
issued a warrant 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.  In a separate  previous  financing,  Holding also issued  another
warrant 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. Both
of these warrants remain outstanding as of December 31, 1999. The value of these
warrants is associated with deferred financing costs of extinguished debt.

(See Note 5.)

7.    Special and Restructuring Charges

      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.  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 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.


                                       32

<PAGE>

8.    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, 1998 and
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
                                              1998        1999
                                              -----       ----
     <S>                                    <C>         <C>
     Deferred tax liabilities:
           Property and equipment .......   $  5,700    $  5,586
           Intangibles ..................      5,736       6,409
                                            --------    --------
           Total deferred tax liabilities     11,436      11,995
     Deferred tax assets:
           Net operating loss ...........      3,847       4,011
           Alternative minimum tax ......      1,338       1,367
           Foreign tax credit ...........        366         366
           Accrued liabilities ..........      1,059         843
           Receivables ..................        179         197
           Other ........................        (20)         66
           Valuation allowance ..........     (2,492)     (2,335)
                                            --------    --------
     Total deferred tax assets ..........      4,277       4,515
                                            --------    --------
     Net deferred tax liability .........   $  7,159    $  7,480
                                            ========    ========
</TABLE>

      The provision  (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                      1997      1998      1999
                                      ----      ----      ----
     <S>                             <C>      <C>       <C>
     Current  ...................    $1,313   $ (241)   $ (349)
     Deferred ...................       969      241       349
                                     ------   ------    ------
                                     $2,282   $   -     $   -
                                     ======   ======    ======
</TABLE>

      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, 1997, 1998 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                                  1997       1998        1999
                                                  ----       ----        ----
     <S>                                        <C>        <C>         <C>
     Income taxes computed at federal income
       tax rate .............................   $ 1,396    $(1,085)    $   885
     State income taxes, net of federal tax
       benefit ..............................       339        (64)        305
     Nondeductible permanent differences ....       718        538         515
     Change in valuation allowance ..........      --          995      (1,040)
     Other, net .............................      (171)      (384)       (665)
                                                 ------     ------      ------
     Provision for income taxes .............   $ 2,282    $    -      $    -
                                                 ======     ======      ======
</TABLE>

      At December  31,  1999,  the Company  had  alternative  minimum tax credit
carryforwards of approximately  $1,367,000,  foreign tax credit carryforwards of
approximately  $366,000 and a net operating loss  carryforward of  approximately
$10,555,000.  The  alternative  minimum tax credit  carryforwards  are available
indefinitely,  the foreign tax credit  carryforwards began to expire in 1999 and
the net operating loss carryforward begins to expire in 2009.

9.    Commitments and Contingencies

      The Company leases most of its operating  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, 1997, 1998 and 1999 was $7,544,000,  $8,470,000
and $8,722,000, respectively.


                                       33

<PAGE>

      Future  minimum rental  commitments  under  operating  leases with initial
terms of one year or more at December 31, 1999 are as follows (in thousands):
<TABLE>

         <S>                                                    <C>
         2000...............................................    $   7,373
         2001...............................................        5,211
         2002...............................................        4,188
         2003...............................................        2,996
         2004...............................................        2,065
         Thereafter.........................................        1,855
         Total..............................................    $  23,688
                                                                 ========
</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 has substantially completed the settlement of 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 arose from a chemical exposure incident at a
Georgia Gulf  facility in  Plaquemine,  Louisiana in September  1996.  The suits
covered  claims  by  approximately  640  non-Company  employees  present  at the
facility  (the "Worker  Plaintiffs")  and  approximately  1,400  persons who are
related  to or live with the Worker  Plaintiffs.  All of the  plaintiffs  sought
damages for alleged toxic exposure  resulting from this incident.  Pursuant to a
Memorandum of Understanding  between virtually all of the plaintiffs and each of
the defendants in the suits,  which was effective  April 15, 1999, the Company's
insurance  carriers deposited the Company's share of the settlement into escrow,
which is being disbursed as satisfactory  evidence of settlement with individual
plaintiffs is received. As of December 31, 1999, approximately 90% of the escrow
had been disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's  defense and indemnity against the claims of any plaintiff who did not
participate in the settlement, the claims of approximately twenty plaintiffs who
were not parties to the settlement,  certain  additional  claims which have been
filed against the Company since the date of the Memorandum of Understanding, and
future claims which may arise in connection with this incident.

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

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

10.   Employee Benefit Plans

      Profit Sharing and 401(k) 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 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.


                                       34

<PAGE>

        For the years ended December 31, 1997, 1998 and 1999,  HydroChem accrued
profit sharing expense of $500,000, $0 and $500,000,  respectively. For the same
years,  HydroChem made employer  401(k)  matching  contributions  to the Plan of
$196,000, $502,000 and $522,000, respectively.

      Deferred Compensation Plan

      Effective  May 1, 1999,  the  Company  adopted a deferred  bonus plan (the
"Deferred  Plan").  Awards  under the  Deferred  Plan may be granted to a select
group of management  employees as determined by the Board of Directors.  Subject
to  continuing  employment,  each person who received an initial award under the
Deferred  Plan will  receive an  additional  award as of May 1, 2000 equal to at
least one half of that person's  discretionary cash bonus for 1999. Awards under
the  Deferred  Plan  vest  in  equal  annual  installments  on  the  first  four
anniversary  dates  of  the  award.  Awards  also  become  fully  vested  if the
participant dies,  becomes disabled,  or is terminated  without cause within one
year after a change of control (an "Acceleration Event").  Generally, the vested
portion of any award is payable with interest either four years from the date of
grant or, at the option of the  participant,  seven  years after the date of the
grant.  Awards are also payable upon the occurrence of an Acceleration Event. In
most cases,  the  interest on any award is at one of two  specified  rates.  The
lower of the two rates  applies if the  payment is made  after four  years.  The
higher rate applies if the participant elects to defer payment until seven years
after  the  date of grant or if there  is an  Acceleration  Event.  The  Company
accrued  $275,000 of Deferred  Compensation  expense for the year ended December
31, 1999.

11.   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  Non-Qualified  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, 1999 was 6.5 years.


                                       35

<PAGE>


      A summary of the Option Plan as of December  31,  1997,  1998 and 1999 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, 1997 .....      618,890      $1.00
       Granted ........................       27,000       1.00
       Exercised ......................        2,000       1.00
       Canceled .......................       25,500       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
       Granted ........................       38,300       1.00
       Exercised ......................       54,539       1.00
       Canceled .......................       19,500       1.00
                                             -------      -----
   Outstanding at December 31, 1999....      246,050      $1.00
   Exercisable at:
       December 31, 1997 ..............      409,101   $   1.00
       December 31, 1998 ..............      197,789   $   1.00
       December 31, 1999 ..............      186,000   $   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 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.

12.   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,  accounts  receivable,
and  current  liabilities  are  reasonable   estimates  of  their  fair  values,
principally due to the short-term maturities of these instruments. The estimated
fair value of the Series B Notes is based on the most recently available trading
prices.  The carrying amounts for the Term Loan,  Mortgage Loan and Seller Notes
are  reasonable  estimates  of  their  fair  values,  principally  due to  their
relatively short term maturities and the lack of markets for these instruments.


                                       36

<PAGE>

      The  estimated  fair values of  financial  instruments  are as follows (in
thousands):
<TABLE>
<CAPTION>
                                                 As of December 31,
                                     ------------------------------------------
                                             1998                 1999
                                             ----                 ----
                                      Carrying    Fair      Carrying     Fair
                                      Amounts     Value     Amounts      Value
                                      -------     -----     -------      -----
    <S>                               <C>        <C>        <C>        <C>
    Financial assets:
        Cash and cash equivalents..   $ 33,775   $ 33,775   $  4,148   $  4,148
        Accounts receivable, net ..     23,941     23,941     33,488     33,488
    Financial liabilities:
        Current liabilities .....       18,287     18,287     27,219     27,219
    Long-term debt - principal:
        Series B Notes ..........      110,000    104,500    110,000     94,325
        Term Loan ...............          -          -       29,000     29,000
        Mortgage Loan ...........        5,996      5,996      7,209      7,209
        Seller Notes ............          -          -        2,000      2,000
</TABLE>

13.     Summary Financial Information

        Summary  financial  information for  International as consolidated  with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
                                        As  of  December 31,
                                        --------------------
                                          1998        1999
                                          ----        ----
        <S>                              <C>         <C>
        Current assets ...............   $1,377      $2,727
        Noncurrent assets ............      103          92
        Current liabilities ..........       68         496
        Noncurrent liabilities........        -          -
</TABLE>
<TABLE>
<CAPTION>
                                        Year   Ended   December 31,
                                        ---------------------------
                                         1997      1998       1999
                                         ----      ----       ----
        <S>                            <C>       <C>        <C>
        Revenue .................      $ 3,576   $ 3,771    $ 7,155
        Gross profit ............        1,497     1,246      2,692
        Net income (loss)........           73      (207)       910
</TABLE>

14.   Major Customer

      In 1997, 1998 and 1999, one customer and its affiliates represented 11.9%,
10.7% and 10.0%, respectively, of the Company's total revenue.

15.   Acquisitions

      Effective  January 1, 1999, the Company acquired  substantially all of the
assets and  assumed  certain  liabilities  of Valley  Systems,  Inc.  and Valley
Systems of Ohio, Inc.  (collectively  "Valley"),  a regional industrial services
provider.  The assets acquired consisted  primarily of (i) accounts  receivable,
(ii) property, plant and equipment, (iii) intangibles,  and (iv) other operating
assets.  The adjusted  purchase price for the acquired assets was $30,857,000 in
cash, of which $4,000,000 was deposited into escrow. As part of the transaction,
the Company also assumed  $2,493,000 in capital lease obligations and $5,594,000
in bank debt. The Company has replaced the capital leases with operating  leases
and  retired  the bank  debt.  The  source of funds for the  purchase  price and
retirement  of  Valley's  bank  debt  was a  combination  of cash  on  hand  and
borrowings under a previous credit facility.


                                       37
<PAGE>

      The  acquisition  has been  accounted  for  using the  purchase  method of
accounting.  The  excess of the  purchase  price  over the fair value of the net
assets  acquired is being amortized over periods ranging from 10 to 25 years and
is estimated as follows (in thousands):
<TABLE>

           <S>                                           <C>
           Purchase price (as adjusted)..............    $ 30,857
           Transaction and acquisition costs.........       1,950
                                                          -------
                                                           32,807

           Fair value of net assets acquired.........       5,857
                                                          -------
           Excess of purchase price over fair value..    $ 26,950
                                                           ======
</TABLE>

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

      On  November  19,  1999,  the  Company  acquired  all  of the  issued  and
outstanding capital stock (the "Shares") of LANSCO.  LANSCO is primarily engaged
in the  business  of tank  cleaning,  oil  reclamation  and  liquid-solid  waste
separation for the oil refining  industry.  The Company paid $35,500,000 for the
Shares,  consisting  of  $32,000,000  in cash paid at closing and  $3,500,000 in
Seller Notes payable in installments  with interest over the two years following
the date of acquisition to the two principal  stockholders  of LANSCO.  Further,
the Company has agreed to pay one of these principal  stockholders an additional
$1,250,000  over two years as  additional  consideration  for his Shares and for
consulting  services.  The source of funds for the acquisition was a combination
of existing available cash, the Seller Notes, and the Term Loan. (See Note 5.)

      The  acquisition  of the Shares has been  accounted for using the purchase
method of accounting.  The Company's financial  statements reflect a preliminary
allocation of the purchase price based upon the Company's initial valuation. The
excess of the purchase  price over the fair value of the net assets  acquired is
being  amortized  over  periods  ranging from 10 to 25 years and is estimated as
follows (in thousands):
<TABLE>

               <S>                                          <C>
               Cash payment                                 $  32,000
               Seller Notes                                     3,500
               Additional purchase price accrual                1,050
               Estimated transaction and acquisition costs      1,150
                                                             --------
                                                               37,700
               Fair value of net assets acquired                4,975
                                                              -------
               Excess of purchase price over fair value     $  32,725
                                                               ======
</TABLE>

      The book value of net assets  acquired was determined to approximate  fair
value  at the  date  of  acquisition.  The  additional  purchase  price  accrual
represents  amounts payable over two years to a former principal  stockholder of
LANSCO.  Transaction costs primarily  consist of fees to accountants,  attorneys
and other outside service  providers.  Acquisition  costs  primarily  consist of
consulting  fees payable  over two years to a former  principal  stockholder  of
LANSCO and costs directly  associated with the integration of LANSCO  operations
and  facilities.  The results of  operations  derived from the Valley and LANSCO
acquisitions  are  included  in the  Company's  financial  statements  from  the
effective date of each acquisition.  Unaudited pro forma consolidated results of
operations have been prepared as if the acquisition of the Valley assets and the
Shares had occurred on January 1, 1998 and 1999 and include (in thousands):
<TABLE>
<CAPTION>
                                      Year ended December 31,
                                      -----------------------
                                        1998            1999
                                        ----            ----
        <S>                          <C>             <C>
        Revenue ..................   $ 218,519       $ 210,292
        Net income (loss).........      (2,314)            227
</TABLE>


                                       38
<PAGE>

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

16.   Impact of Year 2000 (unaudited)

      In prior  periods,  the  Company  discussed  the  nature of the issues and
progress  of its plans to become  Year 2000  ready.  In late 1999,  the  Company
completed its remediation and testing of systems.  As a result of those planning
and implementation  efforts, the Company experienced no significant  disruptions
in  mission  critical  information  technology  and  non-information  technology
systems and management believes those systems successfully responded to the Year
2000  date  change.  In  the  aggregate,   the  Company  incurred  approximately
$2,409,000  in 1998 and 1999 in connection  with  remediating  its systems.  The
Company is not aware of any material  problems  resulting from Year 2000 issues,
either with its products,  its internal systems, or the products and services of
third  parties.  To  management's  knowledge,  none  of the  Company's  material
suppliers experienced material Year 2000 problems.  The Company will continue to
monitor its mission critical computer applications and those of its suppliers on
a limited  basis  throughout  the year 2000 to ensure  that any latent Year 2000
matters that may arise are addressed promptly.


                                       39
<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 ..     55   Chairman of the Board and Chief Executive
                                        Officer
        Robert B. Crates ...     37   Director
        Thomas F. McWilliams     57   Director
        Gary D. Noto .......     45   President and Chief Operating Officer
        Selby F. Little, III     46   Executive Vice President and Chief
                                        Financial Officer
        J. Pat DeBusk ......     59   Executive Vice President
        Donovan W. Boyd ....     46   Executive Vice President
        Pelham H. A. Smith .     43   Vice President
        R. Dwane Ruiz ......     45   Vice President
</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 Chief  Executive  Officer of Hydro  Services since 1990.
Mr. Carter was also the President until August 1998. As a private investor,  Mr.
Carter 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.

      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 Airxcel, Inc.,  Chase


                                       40
<PAGE>

Industries,   Inc.,  Ergo  Science  Corporation,  MMI  Products,  Inc.,  Pen-Tab
Industries,   Inc.,   ROYSTER-CLARK  GROUP,  INC.  and  various  privately  held
companies.

      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, or 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 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 a 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.

      R. Dwane Ruiz  has been a Vice President of HydroChem  since  August 1998.
Prior thereto,  Mr. Ruiz held various management positions with HydroChem or HIS
since 1977.

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).


                                       41
<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 capacities at December 31, 1999
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
                               Annual Compensation     Shares
                                                     Underlying     All Other
Name and Principal Position   Year   Salary   Bonus    Options   Compensation(1)
---------------------------   ----   ------   -----    -------   ---------------
<S>                           <C>   <C>       <C>        <C>       <C>
B. Tom Carter, Jr ........... 1999  $240,406  $150,000      -      $  750
  Chairman of the Board and . 1998   249,231       -        -         750
  Chief Executive Officer ... 1997   239,077   100,000   25,000       250

Gary D. Noto ................ 1999   186,028    97,000    4,000       750
  President and Chief ....... 1998   159,684    85,000      -         750
  Operating Officer ......... 1997   122,551    66,000      -         250

Selby F. Little, III ........ 1999   173,591    73,500      -         750
  Executive Vice President .. 1998   163,664    52,500      -         750
  and Chief Financial Officer 1997   125,936    74,000   11,500       250

J. Pat Debusk ............... 1999   151,342    50,000      -         750
  Executive Vice President .. 1998   156,741    50,000      -         750
                              1997   146,628    43,000      -         250

Donovan W. Boyd (2) ......... 1999   150,155    75,000   20,000       750
  Executive Vice President .. 1998   135,000    80,750      -          -
                              1997    13,846    20,000      -          -
</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,  1999,  options  for  246,050  shares of Class A Common were
outstanding and options for 10,089 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


                                       42
<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
                                                     Underlying
                  Shares Acquired   Value         Unexercised Options
 Name               on Exercise   Realized          at December 31,
 ----               -----------   --------          ---------------
                                              Exercisable  Unexercisable
                                              -----------  -------------
<S>                   <C>         <C>         <C>           <C>
B.Tom Carter.....     329,140     $  0           -           6,250
Gary D. Noto.....         -          -        17,500         4,000
Selby F. Little, III      -          -        17,000         9,500
J. Pat DeBusk....         -          -        20,000           -
Donovan W. Boyd..         -          -           -          20,000
<CAPTION>
                                 Value of
                               Unexercised
                           In-the-Money Options
    Name                   at December 31, 1998(1)
    ----                  -----------------------
                          Exercisable   Unexercisable
                          -----------   -------------
<S>                       <C>           <C>
B.Tom Carter.....         $  0          $  0
Gary D. Noto.....            0             0
Selby F. Little,III          0             0
J. Pat DeBusk....            0             0
Donovan W. Boyd..            0             0
</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,  1999,  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 this  agreement,
bonuses  are payable to Mr.  Carter at the sole  discretion  of the Board.  Also
under this  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  connection  with the exercise of certain stock options and the payment
of accrued  interest  on a prior  loan,  Holding  has  loaned to Mr.  Carter the
principal sum of $346,356.  The loan is evidenced by a secured  promissory  note
bearing  interest at the rate of 5.28% per annum.  Principal is payable upon the
earlier of April 30, 2005, or any  termination of Mr. Carter's  employment,  but
not  earlier  than April 30,  2001.  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 exercises.

      HydroChem has employment  agreements with Messrs.  Noto,  DeBusk and Boyd.
Each of these  agreements  renews 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,  and 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.  Mr.  Boyd's  agreement  also
provides  for an award  under  HydroChem's  Deferred  Plan as  defined  below of
$80,000  in 1999 and an  amount  in 2000  equal to at least  100% of Mr.  Boyd's
performance  bonus for 1999. If HydroChem  terminates  the employment of Messrs.
DeBusk or Boyd without  cause as defined in their  respective  agreements,  then


                                       43
<PAGE>

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 as defined in his agreement, then he is entitled to a continuation
of his then current base compensation for 12 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.

Deferred Bonus Plan

      Effective  May 1, 1999,  the  Company  adopted a deferred  bonus plan (the
"Deferred  Plan").  Awards  under the  Deferred  Plan may be granted to a select
group of management  employees as determined by the Board of Directors.  Subject
to  continuing  employment,  each person who received an initial award under the
Deferred  Plan will  receive an  additional  award as of May 1, 2000 equal to at
least one half of that person's  discretionary cash bonus for 1999. Awards under
the  Deferred  Plan  vest  in  equal  annual  installments  on  the  first  four
anniversary  dates  of  the  award.  Awards  also  become  fully  vested  if the
participant dies,  becomes disabled,  or is terminated  without cause within one
year after a change of control (an "Acceleration Event").  Generally, the vested
portion of any award is payable with interest either four years from the date of
grant or, at the option of the  participant,  seven  years after the date of the
grant.  Awards are also payable upon the occurrence of an Acceleration Event. In
most cases,  the  interest on any award is at one of two  specified  rates.  The
lower of the two rates applies if the payment is made after four years after the
date of grant.  The  higher  rate  applies  if the  participant  elects to defer
payment until seven years after the date of grant or if there is an Acceleration
Event.

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 1,218,042 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 29, 2000.


                                       44
<PAGE>


<TABLE>
<CAPTION>
                                      Class A Common         Class B Common
                                    --------------------   --------------------
                                     No. of       % of      No. of       % of
              Name                   Shares      Class      Shares      Class
---------------------------------   ----------   -------   ----------   -------
Executive Officers and
Directors:
<S>                                   <C>          <C>         <C>        <C>
B. Tom Carter, Jr. (1) ........       438,040      35.8%          -         -
   900 Georgia Avenue
   Deer Park, Texas 77536
Robert B. Crates ..............           -          -            -         -
Thomas F. McWilliams (2) (3)  .        67,343       5.2%       67,343      1.7%
   7963 Grand Bay Dr.
   Naples, Florida 34108
Gary D. Noto (3) (4) ..........        36,079       2.9%          880       *
Selby F. Little, III (5) ......        17,000       1.4%          -         -
J. Pat DeBusk (3) (6) .........        56,727       4.6%        1,540       *
Donovan W. Boyd ...............           -          -            -         -
All directors and executive
officers as a group
 (10 persons) (3) (7)..........       646,689      50.5%       69,763      1.8%

Other Principal Stockholders:
LKCM Venture Partners I Ltd. ..       673,993      55.3%          -         -
   301 Commerce Street,
   Suite 1600
   Fort Worth, Texas 76102
Citicorp Venture Capital, Ltd.(3)   2,461,712      66.9%    2,461,712     62.7%
   399 Park Avenue
   New York, New York 10043
BT Capital Partners, Inc. (3) .       705,154      36.7%      705,154     18.0%
   280 Park Avenue (32W)
   New York, New York 10017
World Equity Partners, L.P. (8)       496,623      29.0%          -         -
   399 Park Avenue
   New York, New York 10043
CCT Partners II, L.P. (3) (9) .       434,420      26.3%      434,420     11.1%
   c/o Citicorp Venture Capital, Ltd.
   399 Park Avenue
   New York, New York 10043
Heller Financial, Inc. ........       310,390      20.3%          -         -
   500 West Monroe Street
   Chicago, Illinois 60661
HES Management, Inc. ..........       102,650       8.4%          -         -
   5956 Sherry Lane, Suite 930
   Dallas, Texas 75225
<CAPTION>
                                          Series A Preferred
                                         --------------------
                                           No. of       % of
              Name                         Shares       Class
---------------------------------        ----------    -------
Executive Officers and
Directors:
<S>                                      <C>            <C>
B. Tom Carter, Jr. (1) ........            360,993       7.2%
   900 Georgia Avenue
   Deer Park, Texas 77536
Robert B. Crates ..............                -          -
Thomas F. McWilliams (2) (3)  .             33,871        *
   7963 Grand Bay Dr.
   Naples, Florida 34108
Gary D. Noto (3) (4) ..........             31,488        *
Selby F. Little, III (5) ......                -          -
J. Pat DeBusk (3) (6) .........             55,103       1.1%
Donovan W. Boyd ...............                -          -
All directors and executive
officers as a group
 (10 persons) (3)(7)...........            481,455       9.6%

Other Principal Stockholders:
LKCM Venture Partners I Ltd. ..          2,100,628      42.0%
   301 Commerce Street,
   Suite 1600
   Fort Worth, Texas 76102
Citicorp Venture Capital, Ltd.(3)        1,250,861      25.0%
   399 Park Avenue
   New York, New York 10043
BT Capital Partners, Inc. (3) .            793,959      15.9%
   280 Park Avenue (32W)
   New York, New York 10017
World Equity Partners, L.P. (8)                -          -
   399 Park Avenue
   New York, New York 10043
CCT Partners II, L.P. (3) (9) .            220,740       4.4%
   c/o Citicorp Venture Capital, Ltd.
   399 Park Avenue
   New York, New York 10043
Heller Finanical, Inc. ........                -          -
   500 West Monroe Street
   Chicago, Illinois 60661
HES Management, Inc. ..........            360,993       7.2%
   5956 Sherry Lane, Suite 930
   Dallas, Texas 75225
</TABLE>
-------
*       Less than one percent.

(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 6,250
      shares of Class A Common that Mr.  Carter may acquire upon the exercise of
      stock options within 60 days of February 29, 2000.

(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.


                                       45
<PAGE>


(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 stock options within 60 days of February 29, 2000.

(5)   Represents  17,000  shares of Class A Common  that Mr.  Little may acquire
      upon the exercise of stock options within 60 days of February 29, 2000.

(6)   Includes  20,000 shares of Class A Common that Mr. DeBusk may acquire upon
      the exercise of stock options within 60 days of February 29, 2000.

(7)   Includes  62,250  shares of Class A Common that may be  acquired  upon the
      exercise of stock options  within 60 days of February 29, 2000, 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 29, 2000.

(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)  Represents  310,390 shares of Class C Common that Heller  Financial,  Inc.
      may purchase upon the exercise of a warrant within 60 days of February 29,
      2000. Heller Financial,  Inc. may acquire 310,390 shares of Class A Common
      within 60 days of February 29, 2000, 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  connection  with the exercise of certain stock options and the payment
of accrued  interest  on a prior  loan,  Holding  has  loaned to Mr.  Carter the
principal sum of $346,356.  The loan is evidenced by a secured  promissory  note
bearing  interest at the rate of 5.28% per annum.  Principal is payable upon the
earlier of April 30, 2005, or any  termination of Mr. Carter's  employment,  but
not  earlier  than April 30,  2001.  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 exercises.

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.


                                       46
<PAGE>


      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 10 3/8% Series A Senior  Subordinated  Notes due 2007.
                      (Exhibit 4.1 to the  Company's  Registration  Statement on
                      Form S-4, filed August 25, 1997, is hereby incorporated by
                      reference.)

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

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

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

         10.2         Deferred  Bonus  Plan of  HydroChem  Industrial  Services,
                      Inc.   effective  May  1,  1999.  (Exhibit  10.10  to  the
                      Company's  Form 10-Q  filed  August 10,  1999,  is  hereby
                      incorporated by reference.)

         10.3         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.)

         10.4         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.)


                                       47
<PAGE>

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

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

         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.  (Exhibit  10.8 to the
                      Company's  Form 10-K,  filed  March 29,  1999,  is  hereby
                      incorporated by reference.)

         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.
                      (Exhibit  10.10 to the Company's Form 10-K filed March 29,
                      1999,  is hereby  incorporated  by reference.)

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

         10.12        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.)

         10.13        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.)

         10.14        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.)

         10.15        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.)

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

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

         10.18        International  Swap  Dealers   Association,  Inc.   Master
                      Agreement and Schedule dated July 17, 1998  between  Hydro
                      Chem  Industrial  Services,  Inc.  and  Bank  One,  Texas,


                                       48
<PAGE>

                      National Association. (Exhibit 10.16 to the Company's Form
                      10-Q, filed  August 14, 1998,  is  hereby  incorporated by
                      reference.)

         10.19        Credit  Agreement  dated  November 19,1999 among HydroChem
                      Holding,  Inc.,   HydroChem  Industrial  Services,   Inc.,
                      various  lenders   and   Bank   of   America,   N.A.,   as
                      administrative  agent.  (Exhibit 2.1 to the Company's Form
                      8-K  filed  December 3, 1999,  is  hereby  incorporated by
                      reference.)

         10.20        First Amendment  dated  as of December 17, 1999 to Credit
                      Agreement dated November 19, 1999 among HydroChem Holding,
                      Inc.,  various  lenders  and  Bank  of  America,  N.A., as
                      administrative agent.  (Filed herewith.)

         10.21        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.)

         10.22        Stock  Purchase  Agreement dated  November 19, 1999 by and
                      among  HydroChem   Industrial   Services,  Inc.  and  each
                      stockholder of Landry Service Co., Inc. including  Kenneth
                      C. Landry and Charles A. Landry,  Jr.  (Exhibit 2.2 to the
                      Company's Form 8-K  filed  December  3,  1999,  is  hereby
                      incorporated by reference.)

         27.1         Financial Data Schedule.  (Filed herewith.)

  (b) Reports on Form 8-K.

      During the quarter ended December 31, 1999, the Registrant  filed a report
      on Form 8-K dated December 3, 1999  pertaining to "Item 2 - Acquisition or
      Disposition of Assets".


                                       49
<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 24th day of
March, 2000.


                       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 24th day of March, 2000.



         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
                                   (Principal Financial and Accounting Officer)


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



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





                                       50

<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 24th day of
March, 2000.


                          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 24h day of March, 2000.



          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
                                   (Principal Financial and Accounting Officer)

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



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




                                       51

<PAGE>


                                  EXHIBIT INDEX


10.20   First Amendment dated as of December 17,  1999 to Credit Agreement dated
        November 19,  1999  among  HydroChem Holding, Inc., HydroChem Industrial
        Services,   Inc.,  various  lenders  and  Bank  of  America,  N.A.,  as
        administrative agent.

27.1    Financial Data Schedule.