ITEQ INC
10-Q, 2000-11-14
INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFING EQUIP
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                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-Q

|X|               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the Quarterly Period Ended September 30, 2000

                                      or

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

                        COMMISSION FILE NUMBER 0-27986

                                  ITEQ, INC.

            (Exact name of registrant as specified in its charter)


            DELAWARE                                        41-1667001
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                       Identification No.)


             2727 ALLEN PARKWAY, SUITE 760, HOUSTON, TEXAS 77019
             (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code 713-285-2700

      Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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[ ]

                    APPLICABLE ONLY TO CORPORATE ISSUERS:

      Indicate the number of shares of each of the issuer's classes of common
stock, as of the latest practicable date.

                                   28,265,744
           (Shares of common stock outstanding as of November 9, 2000)
<PAGE>
                                   ITEQ, INC.

                                    FORM 10-Q
                         FOR THE QUARTERLY PERIOD ENDED
                               SEPTEMBER 30, 2000


                                                                            PAGE
                                                                            ----
PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
         Consolidated Balance Sheets as of September 30, 2000 (unaudited)
            and December 31, 1999 ..........................................   3
         Consolidated Statements of Operations for the Three and Nine Months
            Ended September 30, 2000 (unaudited) and 1999 (unaudited) ......   4
         Consolidated Statements of Cash Flows for the Nine Months Ended
            September 30, 2000 (unaudited) and 1999 (unaudited) ............   5
         Notes to Consolidated Financial Statements (unaudited) ............   6

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS ................................  15

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........  22

ITEM 5  OTHER EVENTS .......................................................  23

ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K ...................................  23

                                       2
<PAGE>
                                   ITEQ, INC.
                           CONSOLIDATED BALANCE SHEETS
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30,    DECEMBER 31,
                                                                                     2000             1999
                                                                                 -------------    -------------
                                    ASSETS                                       (unaudited)
<S>                                                                              <C>              <C>
CURRENT ASSETS
Cash and cash equivalents ....................................................   $       3,057    $       5,287
Due on contracts and other receivables, net ..................................          10,962           13,044
Costs and estimated earnings in excess of billings on
     uncompleted contracts ...................................................           5,906            3,851
Inventories, net .............................................................           8,078            8,084
Prepaid expenses, deposits and other assets ..................................           1,337            2,477
Assets of businesses held for sale ...........................................          43,787          106,159
                                                                                 -------------    -------------
           Total Current Assets ..............................................          73,127          138,902
PROPERTY AND EQUIPMENT, NET ..................................................          10,969           11,321
OTHER ASSETS, NET ............................................................          28,312           28,377
                                                                                 -------------    -------------
     TOTAL ASSETS ............................................................   $     112,408    $     178,600
                                                                                 =============    =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Long-term obligations classified as current ..................................          54,271          102,687
Accounts payable .............................................................           8,296            6,641
Accrued liabilities:
    Job costs ................................................................           5,184            4,684
    Accrued compensation and benefits ........................................             792              952
    Accrued expenses .........................................................           3,878            5,368
Billings in excess of costs and estimated earnings on
    uncompleted contracts ....................................................             238            1,279
Liabilities of businesses held for sale ......................................          15,287           31,827
                                                                                 -------------    -------------
              Total Current Liabilities ......................................          87,946          153,438
                                                                                 -------------    -------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000 shares
     authorized; no shares issued or outstanding .............................            --               --
Common stock, $.001 par value; 40,000 shares authorized;
     28,405 and 28,350 shares issued at September 30, 2000 and December 31,
     1999, respectively ......................................................              28               28
Treasury stock, at cost, 139 shares ..........................................          (1,000)          (1,000)
Additional paid-in capital ...................................................         131,727          131,637
Retained earnings (deficit) ..................................................        (104,347)        (104,895)
Accumulated comprehensive loss ...............................................          (1,946)            (608)
                                                                                 -------------    -------------
             Total Stockholders' Equity ......................................          24,462           25,162
                                                                                 -------------    -------------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................   $     112,408    $     178,600
                                                                                 =============    =============
</TABLE>
                 See Notes to Consolidated Financial Statements

                                       3
<PAGE>
                                   ITEQ, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED          NINE MONTHS ENDED
                                                       SEPTEMBER 30,              SEPTEMBER 30,
                                                  ------------------------    ------------------------
                                                      2000          1999          2000          1999
                                                  ----------    ----------    ----------    ----------
<S>                                               <C>           <C>           <C>           <C>
Revenues ......................................   $   35,923    $   72,191    $  124,302    $  220,673

Costs and Operating Expenses:
   Cost of revenues ...........................       30,168        64,914       104,693       191,453
   Selling, general and administrative expenses        4,817         9,225        16,511        27,670
   Depreciation and amortization ..............          950         2,542         3,230         6,517
   Impairment of assets held for sale .........       10,381        11,986        10,381        11,986
   Merger, acquisition and strategic charges ..         --              75          --           2,813
   Gain on sales of assets ....................       (2,030)         --         (16,662)       (4,156)
                                                  ----------    ----------    ----------    ----------
        Total Costs and Operating Expenses ....       44,286        88,742       118,153       236,283

Income (Loss) from Operations .................       (8,363)      (16,551)        6,149       (15,610)

Interest expense, net .........................       (1,654)       (2,369)       (5,551)       (6,858)
Miscellaneous income (expense), net ...........          (35)         (175)          (50)           39
                                                  ----------    ----------    ----------    ----------
Earnings (loss) before income tax .............      (10,052)      (19,095)          548       (22,429)
Income tax provision (benefit) ................         --           2,308          --             600
                                                  ----------    ----------    ----------    ----------
Net earnings (loss) ...........................      (10,052)      (21,403)          548       (23,029)
                                                  ==========    ==========    ==========    ==========
Basic net earnings (loss) per common share ....   $     (.36)   $     (.76)   $      .02    $     (.82)
                                                  ==========    ==========    ==========    ==========
Weighted average common shares outstanding ....       28,266        28,196        28,257        28,189
                                                  ==========    ==========    ==========    ==========
Diluted net earnings (loss) per common share ..   $     (.36)   $     (.76)   $      .02    $     (.82)
                                                  ==========    ==========    ==========    ==========
Weighted average common and common
   equivalent shares outstanding ..............       28,266        28,196        28,257        28,189
                                                  ==========    ==========    ==========    ==========
</TABLE>
                 See Notes to Consolidated Financial Statements

                                       4
<PAGE>
                                   ITEQ, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                ------------------------
                                                                    2000          1999
                                                                ----------    ----------
<S>                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .........................................   $      548    $  (23,029)
Adjustments to reconcile net earnings to net cash
   provided (used) by operating activities:
   Depreciation and amortization ............................        3,230         6,517
   Provision (Benefit) for deferred income taxes ............         --            (440)
   Impairment of assets held for sale .......................       10,381          --
   Net gain on sales of assets ..............................      (16,662)       (4,156)
   Other ....................................................         (502)          837
   Changes in assets and liabilities, net of effects of
      dispositions:
    Due on contracts and other receivables, net .............        1,974        12,442
    Inventories, net ........................................         (421)       11,112
    Costs and estimated earnings in excess of billings on
      uncompleted contracts .................................       (2,700)        3,342
    Prepaid expenses, deposits and other assets .............        1,670           594
    Assets of businesses held for sale ......................        5,963         4,466
    Accounts payable and accrued liabilities ................        1,903       (16,323)
    Billings in excess of costs and estimated earnings on
      uncompleted contracts .................................         (892)         (590)
    Liabilities of businesses held for sale .................       (8,396)        8,558
                                                                ----------    ----------
    Net cash provided (used) by operating activities ........       (3,904)        3,330
                                                                ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment, net ...................         (436)       (2,477)
 Net proceeds from asset dispositions .......................       50,521        13,206
                                                                ----------    ----------
         Net cash provided by investing activities ..........       50,085        10,729
                                                                ----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net repayments under line of credit ........................      (48,416)      (13,278)
 Proceeds from exercise of stock options and warrants .......           90           160
                                                                ----------    ----------
         Net cash used in financing activities ..............      (48,326)      (13,118)
                                                                ----------    ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .....................          (85)          (60)
                                                                ----------    ----------
         Net increase (decrease) in cash and cash equivalents       (2,230)          881
 Cash and cash equivalents, beginning of period .............        5,287         5,784
                                                                ----------    ----------
 Cash and cash equivalents, end of period ...................   $    3,057    $    6,665
                                                                ==========    ==========
</TABLE>
                 See Notes to Consolidated Financial Statements

                                       5
<PAGE>
                                   ITEQ, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)

NOTE 1 - RECENT EVENTS

      ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures, and
services process and storage equipment and components. The Company's products
and services are utilized by customers in manufacturing processes requiring the
process, treatment, storage, or movement of gases and liquids. Management of the
Company believes that it is the leading domestic manufacturer and servicer of
shell and tube heat exchangers, principally for petrochemical and refining
applications. The Company is also a leading provider of maintenance services for
above-ground storage tanks ("AST") and related products primarily for oil
production and storage, petrochemical, refining, water storage, and agriculture
industries. The Company operates internationally, with its equipment, systems
and services sold or utilized in countries worldwide.

      Volatility in oil prices and the oversupply of certain commodity chemicals
during 1998 and 1999 adversely effected many of the Company's customers in the
refining and petrochemical industries. Beginning in 1998 and continuing through
2000, certain of these customers deferred equipment purchases related to major
projects, resulting in reduced demand for the Company's products and services.
These factors have also increased pricing pressure on new equipment resulting in
a decline in the Company's gross margins and operating profits.

      As a result, in late 1999 and continuing through April 3, 2000, the
Company failed to meet certain financial requirements of its credit facility.
Consequently, in the fourth quarter of 1999, the Company adopted a debt
reduction initiative and planned to dispose of several businesses and assets. At
the end of the first quarter of 2000, substantially all such planned
transactions had been completed. During the period from September 30, 1999
through September 30, 2000, the Company reduced its outstanding debt from
$106,325 to $54,271.

      As of April 3, 2000 and subsequently on July 7, 2000, the Company and its
lenders entered into Limited Waivers and amended the credit facility whereby
compliance with certain financial covenants was waived through December 29,
2000. In connection with these waivers and amendments, the Company retained an
investment banking firm to assist it in reviewing and implementing restructuring
alternatives.

      On June 27, 2000, management adopted a restructuring plan to reduce the
Company's bank debt by selling its operating units in the storage tank and
filtration business segments. As such, for balance sheet presentation purposes,
the assets and liabilities of the operating units in these segments have been
reclassified as "held for sale" as of September 30, 2000 and December 31, 1999.
As the restructuring plan has progressed, management's expectations of the level
of proceeds from the sales of these business units are lower than originally
estimated. Consequently, the Company may seek an equity infusion to further
reduce its bank debt and to facilitate obtaining a new, long-term credit
facility with more favorable terms. An equity infusion would likely have a
substantially dilutive impact on existing shareholders. It is uncertain whether
those efforts to sell the storage tank and filtration business units and to find
new equity and debt financing will be successful. In the event that the Limited
Waiver and Ninth Amendment executed on July 7, 2000 expires before the Company
is able to complete its restructuring plan, or unless additional waivers are
obtained, the ability of the Company to continue as a going concern may be
jeopardized.

                                       6
<PAGE>
                                  ITEQ, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)

NOTE 2 - BASIS OF PRESENTATION

      The accompanying unaudited consolidated financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.

      In the opinion of management, the unaudited consolidated financial
statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position as of September
30, 2000, the results of operations for the three and nine months ended
September 30, 2000 and 1999, and the cash flows for the nine months ended
September 30, 2000 and 1999.

      The unaudited consolidated financial statements include the accounts of
ITEQ, Inc. and its wholly-owned subsidiaries ("ITEQ" or the "Company").
Significant intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to the prior period's consolidated financial
statements to conform with the current period presentation.

      Basic earnings or loss per share is computed by dividing net income or
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted earnings or loss per share is computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding including the dilutive effect of common stock equivalents. The only
reconciling difference between the numerator and denominator for basic and
diluted earnings or loss per share is the impact of common stock options and
warrants outstanding calculated using the treasury stock method. However, for
all periods presented except the nine months ended September 30, 2000, common
stock equivalents were not used in the calculation of diluted loss per share, as
their effect was antidilutive.

The Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
                                              THREE MONTHS             NINE MONTHS
                                            ENDED SEPTEMBER 30,     ENDED SEPTEMBER 30,
                                           --------------------    --------------------
                                             2000        1999        2000        1999
                                           --------    --------    --------    --------
<S>                                        <C>         <C>         <C>         <C>
Net income (loss) ......................   $(10,052)   $(21,403)   $    548    $(23,029)
Foreign currency translation adjustments       (572)        329      (1,338)      1,040
                                           --------    --------    --------    --------
     Comprehensive loss ................   $(10,624)   $(21,074)   $   (790)   $(21,989)
                                           ========    ========    ========    ========
</TABLE>
                                       7
<PAGE>
                                  ITEQ, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)

      The Company records most of its revenues using the
percentage-of-completion method. Under this method, the Company recognizes as
revenues that portion of the total contract price, which the cost of work
completed to date bears to the estimated total cost of the work included in the
contract. Because contracts may extend over more than one fiscal period,
revisions of cost and profit estimates are made periodically and are reflected
in the accounting period in which they are determined. If the estimate of total
costs on a contract indicates a loss, the total anticipated loss is recognized
immediately. Contract costs include all direct material, labor and
subcontracting costs and those indirect costs related to contract performance,
such as supplies, tools and repairs.

      The Company recognizes revenue from certain short-term contracts using the
completed contract method of accounting. Revenue is recognized under this method
when a project is substantially complete. The contracts accounted for under this
revenue recognition method are typically less than three months in duration.

      The Company historically has experienced quarterly fluctuations in its
operating results. Operating results in any quarter are dependent upon the
timing of equipment and system sales, which may vary considerably among periods.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") pronouncement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Implementation of SFAS No. 133
is required effective January 1, 2001. The Company currently has no derivative
or hedging activities and it is not anticipated that this new pronouncement will
have a material impact.

NOTE 3 - LONG TERM OBLIGATIONS

   In October 1997, the Company refinanced its existing credit facilities under
a non-amortizing revolving credit facility with various financial institutions,
which matures in October 2002. As amended, the credit facility bears interest at
Fleet National Bank's ("Fleet") (fka BankBoston, N.A.) Base Rate plus the
Applicable Margin, as defined. This credit facility is secured by substantially
all of the assets of ITEQ, a pledge of 65% of the stock of each of ITEQ's
material foreign subsidiaries, and a pledge of the stock of ITEQ's domestic
subsidiaries and guarantees entered into by such domestic subsidiaries.

   The Company's credit facility requires the Company to maintain certain levels
of net earnings before interest, taxes and depreciation and amortization
("EBITDA"), interest coverage, working capital and stockholders' equity and
contains other restrictive covenants. Additionally, the credit facility limits
the ability of the Company to incur additional indebtedness, to pay dividends or
to make acquisitions and certain investments. As of December 31,1999 and through
April 3, 2000, the Company was not in compliance with certain financial
covenants of its loan agreement. As a result, the Company classified as current
the amounts outstanding under its credit facility as of December 31, 1999 as,
under the terms of the credit facility, balances borrowed are due and payable if
the event of default is not remedied within a specified time period.

                                       8
<PAGE>
                                   ITEQ, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)


   The Company and its lenders entered into a Limited Waiver and Eighth
Amendment to Revolving Credit Agreement on April 3, 2000 which waived compliance
with certain financial covenants in the credit facility through June 29, 2000.
On July 7, 2000, the Company and its lenders entered into a Limited Waiver and
Ninth Amendment to Revolving Credit Agreement (the "Ninth Amendment") which
waived compliance with certain financial covenants from June 29, 2000 through
December 29, 2000. As such, the Company has classified as current the amounts
outstanding under its credit facility as of September 30, 2000. The provisions
of the Ninth Amendment require that the capital expenditures may not exceed $750
during the last six months of 2000 and imposes a minimum level of earnings
before depreciation and amortization, interest and taxes. The Company believes
the amount of allowable capital expenditures to be adequate in support of
anticipated capital expenditure needs and that the Company will be able to
comply with the minimum level of earnings requirement. The Ninth Amendment
provides for a total commitment of approximately $56,200 with a maximum
borrowing capacity of $54,400, governed by a borrowing base calculation. As
required by the Ninth Amendment, the total commitment will be reduced by amounts
that correspond to net proceeds realized from the sale of assets. At September
30, 2000 and December 31, 1999, the balance outstanding was $54,271 and
$102,687, respectively. Balances outstanding at September 30, 2000 and December
31, 1999 bore interest at a rate of 10.75% and 9.8%, respectively. The Company
used the net proceeds from the sale of assets and businesses to reduce its
indebtedness under its credit facility during the nine-month period ended
September 30, 2000.

      As required by the Limited Waiver and Eighth Amendment, and subsequently
the Ninth Amendment to the Revolving Credit Facility, the Company retained an
investment banking firm to assist in reviewing and subsequently executing
restructuring alternatives. (see Note 1-Recent Events). It is uncertain whether
any such efforts to restructure the Company will be successful.

      The Company believes that based on its current levels of business, that it
can comply with the various financial covenants in the Ninth Amendment and that
cash generated from operations, existing cash balances and the available
borrowing capacity under its credit facility will be sufficient to meet the
anticipated cash requirements of the Company through December 29, 2000, the
expiration of the Ninth Amendment. In the event that the Ninth Amendment expires
before the Company is able to restructure the credit facility or unless
additional waivers are obtained, the ability of the Company to continue as a
going concern may be jeopardized.

NOTE 4 - DUE ON CONTRACTS AND OTHER RECEIVABLES, NET


      At September 30, 2000 and December 31, 1999 due on contracts and other
receivables consists of the following:
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,    DECEMBER 31,
                                                                    2000             1999
                                                               -------------    -------------
<S>                                                            <C>              <C>
Billings on completed contracts and contracts in progress ..   $      11,371    $      13,404
Allowance for doubtful accounts ............................            (409)            (360)
                                                               -------------    -------------
              Due on contracts and other receivables, net ..   $      10,962    $      13,044
                                                               =============    =============
</TABLE>
                                       9
<PAGE>
                                  ITEQ, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN
        THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)



NOTE 5 - INVENTORIES, NET

      Inventories consist of costs for which no related revenue has been
recognized. Inventories include materials used in the manufacturing process,
labor, overhead and purchased parts and are valued at the lower of cost or
market. The Company accrues certain open purchase orders as the Company would
incur substantial expense to cancel such purchase orders. These amounts are
included in work in progress inventory. Cost is determined by the average cost
method for materials and the first-in, first-out (FIFO) method for purchased
parts. Inventories at September 30, 2000 and December 31, 1999, consisted of the
following:

                                                   September 30,  December 31,
                                                       2000          1999
                                                  -------------  ------------
   Raw materials................................       $  1,159       $ 1,108
   Work in progress.............................          7,094         7,151
                                                  -------------  ------------
                                                          8,253         8,259

   Less: Allowance for obsolete inventory.......           (175)         (175)
                                                  -------------  ------------
                 Inventories, net...............        $ 8,078       $ 8,084
                                                  =============  ============


NOTE 6 - IMPAIRMENT OF ASSETS HELD FOR SALE

      SFAS No. 121 requires that long-lived assets held for sale be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. On June 27, 2000, the
Company adopted a restructuring plan to reduce its bank debt by selling its
operating units in the storage tank and filtration business segments. As the
restructuring plan has progressed, management's expectations of the level of
proceeds from sales of these business units are lower than originally estimated.
The change in management's expectations was a triggering event which indicated
the necessity of reviewing the carrying value of the assets held for sale. The
Company's review indicated that the carrying value of the assets held for sale
exceeded their estimated fair market value. Accordingly, the Company recorded an
impairment loss of $10,381 during the quarter ended September 30, 2000 to reduce
the carrying value of the assets held for sale to an amount equal to their
estimated fair market value.

      The assets and liabilities of businesses held for sale at September 30,
2000 have been separately stated on the accompanying consolidated balance sheet.
The "held for sale" amounts reflected on the consolidated balance sheet at
December 31, 1999 include the then corresponding assets and liabilities of the
businesses held for sale at September 30, 2000. The underlying assets and
liabilities comprising the amounts on the accompanying consolidated balance
sheets are as follows:

                                       10
<PAGE>
                                  ITEQ, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN
        THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)



                                                   SEPTEMBER 30,   DECEMBER 31,
                                                       2000            1999
                                                   -------------   -------------
Due on contracts and other .....................   $      13,445   $      29,938
   receivables
Costs in excess of billing .....................           7,847          10,922
Inventories, net ...............................           4,593           9,933
Prepaid expenses and other
   current assets ..............................             469           1,600
Property, plant and equipment, net .............           9,762          22,025

Other assets, net ..............................           7,671          31,741
                                                   -------------   -------------
     Assets of businesses held
       for sale ................................          43,787   $     106,159
                                                   =============   =============
Accounts payable ...............................   $       7,150   $      10,518
Accrued liabilities ............................           7,462          17,001

Billing in excess of cost ......................             675           4,308
                                                   -------------   -------------
     Liabilities of businesses
        held for sale ..........................   $      15,287   $      31,827
                                                   =============   =============


NOTE 7 - OTHER ASSETS, NET


      For the year ended December 31, 1999, the Company  recorded a write down
of $21,556 for impairment of the carrying value of goodwill  related to G.L.M.
Tanks and  Equipment,  Ltd.  and Exell,  Inc.  The Company  modifies  the life
and/or  carrying  amount  of  an  acquired  intangible  if  an  impairment  is
identified.

      At September 30, 2000 and December 31, 1999, other assets consist of the
following:

                                                   SEPTEMBER 30,   DECEMBER 31,
                                                       2000            1999
                                                   -------------   -------------
Excess of costs over net assets acquired,
  net of accumulated amortization of $7,780
  and $7,315 at September 30, 2000 and
  December 31, 1999, respectively ..............   $      21,453   $      21,917
Licenses, trademarks and trade names, net
  of accumulated amortization of $ 1,656
  and $1,325 at September 30, 2000 and
  December 31, 1999, respectively ..............           5,852           6,183
Note Receivable from Related Party (see Note 8).           1,000            --

Other ..........................................               7             277
                                                   -------------   -------------
               Total ...........................   $      28,312   $      28,377
                                                   =============   =============

                                       11
<PAGE>
                                  ITEQ, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)


NOTE 8 - BUSINESS DISPOSITIONS


      During the first nine months of 2000, the Company concluded several sales
of its assets and businesses as part of its debt reduction initiative and
received gross proceeds totaling $53,863. Proceeds received were used to reduce
the Company's indebtedness under its credit facility. The following transactions
were concluded during the nine months ended September 30, 2000.

      In January 2000, the Company received $575 from the sale of substantially
all of the assets of its Clinton and Provo facilities located in Texas and Utah,
respectively, and $1,052 from the sale of certain tracts of land and
improvements in Birmingham, Alabama. The Company realized a gain of $109 on
these sales and the gain has been recorded in net gain on sales of assets in the
Company's results of operations for the nine months ended September 30, 2000.

      In February 2000, the Company received gross proceeds of $8,900 from the
sale of certain assets and properties associated with its San Luis Obispo,
California facility. In October 2000, the Company completed negotiations for the
release of $400 of the gross proceeds which had been held in escrow. The Company
realized a loss of $140 on this sale and the loss has been recorded in net gain
on sales of assets in the Company's results of operations for the nine months
ended September 30, 2000.

      In February 2000, the Company received gross proceeds of $4,000, in the
form of cash of $3,000 and a promissory note for $1,000, for the sale of 100% of
the issued and outstanding capital stock of Graver Manufacturing Co., Inc. to a
newly formed entity owned 35% by an unaffiliated individual and 65% by the
Company's Chairman of the Board. The promissory note bears interest at 9% and is
due in quarterly installments from September 30, 2002 until December 1, 2004.
The Company realized a gain of $263 on this sale and the gain has been recorded
in net gain on sales of assets in the Company's results of operations for the
nine months ended September 30, 2000. In connection with this transaction,
Graver Manufacturing, was independently appraised. Management is of the opinion
that the terms of this transaction were at least as favorable to the Company as
could have been obtained from an unrelated third party.

      In March 2000, the Company received gross proceeds of $40,000, less a
working capital adjustment of $664, from the sale of substantially all of assets
of its HMT operating unit. In March 2000, the Company realized a gain of $14,371
on this sale and the gain was recorded in gain on sales of assets in the
Company's results of operations during the first quarter of 2000. Approximately
$2,000 of the gross proceeds were held in escrow at the time the sale was
concluded. The Company recently negotiated the release of the amounts held in
escrow and the final calculation for working capital. As a result, the Company
has recognized an additional gain of $2,030 during the quarter ended September
30, 2000.

      Effective March 26, 1999, the Company sold the assets of Texoma Tank
Company, its tank leasing operation, for $13,956 (consisting of $13,206 in cash
and $750 in a short-term note receivable (subject to certain post-closing
adjustments)), resulting in a pre-tax gain of $4,156 which is included in gain
on sales of assets in the accompanying statements of operations for the nine
months ended September 30, 1999. Proceeds from the sale were used to reduce the
Company's bank borrowings.

                                       12
<PAGE>
                                  ITEQ, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)


      The dispositions concluded during 1999 and in the first quarter of 2000
have represented significant changes in the Company's results of operations. The
following results reflect, on a pro forma basis, the results of operations of
the Company as if all dispositions had occurred at the beginning of each period
presented.

                                 THREE MONTHS ENDED         NINE MONTHS ENDED
                                     SEPTEMBER 30,            SEPTEMBER 30,
                               ----------------------    ----------------------
                                  2000         1999         2000         1999
                               ---------    ---------    ---------    ---------
Revenues ...................   $  35,903    $  35,846    $ 112,416    $ 109,516
Operating Loss .............   $ (10,391)   $  (3,456)   $ (10,475)   $  (5,167)
Net loss ...................   $ (12,082)   $  (4,630)   $ (15,028)   $  (8,004)
Basic loss per share .......   $   (0.43)   $   (0.16)   $   (0.53)   $   (0.28)


NOTE 9 - MERGER, ACQUISITION AND STRATEGIC CHARGES

      For the nine months and quarter ended September 30, 1999, the Company
recorded nonrecurring merger, acquisition and strategic charges totaling $2,813
and $75, respectively. The charge included the costs, estimated as incremental
jobs costs, to combine the operations of the Company and Astrotech including
losses associated with two plant closings and business integration and
reorganization costs including severance.

                                       13
<PAGE>
                                   ITEQ, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN
           THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)

NOTE 10 -- SEGMENT REPORTING
<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED       NINE MONTHS ENDED
                                             SEPTEMBER 30,           SEPTEMBER 30,
                                        ----------------------    ----------------------
                                           2000         1999         2000         1999
                                        ---------    ---------    ---------    ---------
<S>                                     <C>          <C>          <C>          <C>
Revenue from external customers
Storage .............................   $   7,757    $  36,947    $  34,676    $ 117,129
Process .............................      16,085       26,935       56,131       80,098
Filtration ..........................      12,081        8,309       33,495       23,446
                                        ---------    ---------    ---------    ---------
   Total ............................   $  35,923    $  72,191    $ 124,302    $ 220,673
                                        =========    =========    =========    =========
Depreciation and amortization
  Storage ...........................   $     157    $   1,202    $     775    $   3,546
  Process ...........................         530          739        1,636        2,139
  Filtration ........................         247          584          771          782
  Other .............................          16           17           48           50
                                        ---------    ---------    ---------    ---------
     Total ..........................   $     950    $   2,542    $   3,230    $   6,517
                                        =========    =========    =========    =========
Operating profit (loss)
  Storage ...........................   $   (1651)   $ (13,535)   $  14,068    $ (10,565)
  Process ...........................        (499)        (782)        (548)         110
  Filtration ........................      (5,365)      (1,341)      (4,740)      (2,112)
  Other .............................        (848)        (893)      (2,631)      (3,043)
                                        ---------    ---------    ---------    ---------
     Total ..........................   $  (8,363)   $ (16,551)   $   6,149    $ (15,610)
                                        =========    =========    =========    =========
Net earnings (loss) before income tax
  Storage ...........................   $  (1,627)   $ (13,735)   $  14,086    $ (10,538)
  Process ...........................        (485)        (750)        (529)          99
  Filtration ........................      (5,421)      (1,325)      (4,794)      (2,042)
  Other .............................      (2,519)      (3,285)      (8,215)      (9,948)
                                        ---------    ---------    ---------    ---------
     Total ..........................   $ (10,052)   $ (19,095)   $     548    $ (22,429)
                                        =========    =========    =========    =========
</TABLE>

                                       AS OF SEPTEMBER 30,    AS OF DECEMBER 31,
                                              2000                  1999
                                       -------------------   -------------------
Identifiable assets
   Storage .........................   $            20,407   $            73,188
   Process .........................                60,778                68,039
   Filtration ......................                25,665                28,988
   Other ...........................                 5,558                 8,385
                                       -------------------   -------------------
             Total .................   $           112,408   $           178,600
                                       ===================   ===================

The Company does not have material intersegment revenues.

                                       14
<PAGE>
                                     ITEM 2
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)

GENERAL

      ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures, and
services process and storage equipment and components. The Company's products
and services are utilized by customers in manufacturing processes requiring the
process, treatment, storage, or movement of gases and liquids. Management of the
Company believes that it is the leading domestic manufacturer and servicer of
shell and tube heat exchangers, principally for petrochemical and refining
applications. The Company is also a leading provider of maintenance services for
above-ground storage tanks ("AST") and related products primarily for oil
production and storage, petrochemical, refining, water storage, and agriculture
industries. The Company operates internationally, with its equipment, systems
and services sold or utilized in countries worldwide.

      Volatility in oil prices and the oversupply of certain commodity chemicals
during 1998 and 1999 adversely effected many of the Company's customers in the
refining and petrochemical industries. Beginning in 1998 and continuing through
2000, certain of these customers deferred equipment purchases related to major
projects, resulting in reduced demand for the Company's products and services.
These factors have also increased pricing pressure on new equipment resulting in
a decline in the Company's gross margins and operating profits.

      As a result, in late 1999 and continuing through April 3, 2000, the
Company failed to meet certain financial requirements of its credit facility.
Consequently, in the fourth quarter of 1999, the Company adopted a debt
reduction initiative and planned to dispose of several businesses and assets. At
the end of the first quarter of 2000, substantially all such planned
transactions had been completed. During the period from September 30, 1999
through September 30, 2000, the Company reduced its outstanding debt from
$106,325 to $54,271.

      As of April 3, 2000 and subsequently on July 7, 2000, the Company and its
lenders entered into Limited Waivers and amended the credit facility whereby
compliance with certain financial covenants was waived through December 29,
2000. In connection with these waivers and amendments, the Company retained an
investment banking firm to assist in reviewing and implementing restructuring
alternatives.

      On June 27, 2000, management adopted a restructuring plan to reduce the
Company's bank debt by selling its operating units in the storage tank and
filtration business segments. As such, for balance sheet presentation purposes,
the assets and liabilities of the operating units in these segments have been
reclassified as "held for sale" as of September 30, 2000 and December 31, 1999.
As the restructuring plan has progressed, management's expectations of the level
of proceeds from the sales of these business units are lower than originally
estimated. Consequently, the Company may seek an equity infusion to further
reduce its bank debt and to facilitate obtaining a new, long-term credit
facility with more favorable terms. An equity infusion would likely have a
substantially dilutive impact on existing shareholders. It is uncertain whether
those efforts to sell the storage tank and filtration business units and to find
new equity and debt financing will be successful. In the event that the Limited
Waiver and Ninth Amendment executed on July 7, 2000 expires before the Company
is able to complete its restructuring plan, or unless

                                       15
<PAGE>
additional waivers are obtained, the ability of the Company to continue as a
going concern may be jeopardized

RESULTS OF OPERATIONS

      THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

      REVENUES

      For the third quarter of 2000, total revenues of $35,923 represented a
decrease of $36,268, or 50%, as compared to revenues of $72,191 for the third
quarter of 1999. Businesses sold or liquidated accounted for decreases of
$36,327. The remaining net increase of $59 represents a decrease of $5,805 for
process equipment operations, offset by increases for filtration operations of
$3,772 and storage tank operations of $2,092.

      COST OF REVENUES

      For the third quarter of 2000, cost of revenues decreased by $34,746, or
54%, to $30,168 from $64,914 for the third quarter of 1999. Businesses sold or
liquidated accounted for decreases of $32,241. Of the remaining decrease of
$2,505, decreases for process equipment operations of $5,765 were partially
offset by increases for filtration operations of $2,149 and storage tank
operations of $1,111.

      GROSS PROFIT

      The Company's gross profit, defined as revenues less cost of revenues,
decreased from $7,277 for the third quarter of 1999 to $5,755 for the third
quarter of 2000. Businesses sold or liquidated represented a decrease of $4,085
of the total decrease of $1,522. The Company's remaining storage tank
operations, consisting primarily of GLM, reflected a increase of $981 for the
2000 quarterly period, primarily as a result of increased business associated
with higher oil prices. Filtration operations reflected an increase of $1,622 in
the 2000 period as increased business for wet scrubbers in the foreign markets
and baghouses domestically more than offset decreases in the domestic market for
wet scrubbers. The Company's remaining process equipment operations, consisting
primarily of the Ohmstede business unit, reflected a decrease in gross profit of
$40 for the 2000 quarterly period as the market for new heat exchangers continue
to be weak.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")

      For the third quarter of 2000, SG&A expenses totaled $4,817 and
represented 13% of revenues. For the third quarter of 1999, SG&A expenses were
$9,225 and represented 13% of revenues. Of the total decrease of $4,408,
businesses sold or liquidated accounted for $4,064 with the remaining decrease
attributable to cost reduction programs initiated in late 1999 and 2000,
primarily at the Ohmstede business unit.

                                       16
<PAGE>
      DEPRECIATION AND AMORTIZATION

      Depreciation and amortization for the quarter ended September 30, 2000 was
$950 as compared to $2,542 for the comparable period in 1999. The decrease of
$1,592 was primarily attributable to assets sold in the last quarter of 1999 and
the first quarter of 2000.

      IMPAIRMENT OF ASSETS HELD FOR SALE

      On June 27, 2000, the Company adopted a restructuring plan to reduce its
bank debt by selling its operating units in the storage systems and filtration
business segments. As the restructuring plan has progressed, management's
expectations of the level of proceeds from the sales of the business units are
lower than originally estimated. The change in management's expectations was a
triggering event which indicated the necessity of reviewing the carrying value
of the assets held for sale. The Company's indicated that the carrying value of
the assets held for sale exceeded their estimated fair market value.
Accordingly, the Company recorded an impairment loss of $10,381 to reduce the
carrying value of the assets held for sale to an amount equal to their estimated
fair market value.

      During the third quarter of 1999, the Company accrued $11,986 as an
impairment of assets held for sale in anticipation of the sale of certain of its
storage tank operating units.

      MERGER, ACQUISITION AND STRATEGIC CHARGES

      For the three months ended September 30, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $75. These
charges included the costs, estimated as incremental jobs costs, to combine the
operations of the Company and Astrotech including losses associated with two
plant closings and business integration and reorganization costs including
severance.

      GAIN ON SALES OF ASSETS, NET

      In the first quarter of 2000, the Company completed the sale of its HMT
operating unit. At that time, a portion of the proceeds from the sale were held
in escrow. The Company recently negotiated a settlement of outstanding issues
related to the sale and the release of the amount in escrow. As a result, the
Company recognized an additional gain of $2,030 in the third quarter of 2000
related to this transaction.

      INTEREST EXPENSE, NET

      Interest expense for the quarter ended September 30, 2000, decreased $715
to $1,654 from $2,369 in 1999. The decrease in interest expense is primarily the
result of lower average debt balances as proceeds from asset sales were used to
reduce indebtedness. These savings have been partially offset by higher interest
rates charged during 2000.

      INCOME TAXES

      The Company did not record a provision for income taxes due to the
Company's net operating loss position which, for tax reporting purposes, totaled
approximately $27.9 million as of September 30, 2000. For financial reporting
purposes, a valuation allowance has been recorded to fully offset the Company's
deferred tax assets as of December 31, 1999 and September 30, 2000.

                                       17
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999

      REVENUES

      For the first nine months of 2000, total revenues of $124,302 represented
a decrease of $96,371, or 44%, as compared to revenues of $220,673 for the first
nine months of 1999. Businesses sold or liquidated accounted for decreases of
$99,272. The remaining net increase of $2,901 represents a decrease of $12,901
for process equipment operations, which was more than offset by increases for
filtration operations of $10,049 and storage tank operations of $5,753.

      COST OF REVENUES

      For the first nine months of 2000, cost of revenues decreased by $86,760,
or 45%, to $104,693 from $191,453 for the first nine months of 1999. Businesses
sold or liquidated accounted for decreases of $87,337. Of the remaining net
increase of $577, decreases for process equipment operations of $10,547 were
offset by increases for filtration operations of $6,948 and storage tank
operations of $4,176.

      GROSS PROFIT

      The Company's gross profit, defined as revenues less cost of revenues,
decreased from $29,220 for the first nine months of 1999 to $19,609 for the
first nine months of 2000. Businesses sold or liquidated represented $11,935 of
the total decrease of $9,611. The Company's remaining storage tank operations,
consisting primarily of GLM, reflected an increase of $1,577 for the 2000
period, primarily as a result of increased business associated with higher oil
prices. Filtration operations reflected an increase of $3,100 in the 2000 period
as increased business for wet scrubbers in the foreign markets and baghouses
domestically more than offset decreases in the domestic market for wet
scrubbers. The Company's remaining process equipment operations, consisting
primarily of the Ohmstede business unit, reflected a decrease in gross profit of
$2,353 for the 2000 nine-month period as the market for new heat exchangers
continues to be very weak.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")

      For the first nine months of 2000, SG&A expenses totaled $16,511 and
represented 13% of revenues. For the first nine months of 1999, SG&A expenses
were $27,670 and represented 13% of revenues. Of the total decrease of $11,159,
businesses sold or liquidated accounted for $9,462, with the remaining decrease
attributable to cost reduction programs initiated in late 1999 and 2000,
primarily in the Ohmstede business unit.

      DEPRECIATION AND AMORTIZATION

      Depreciation and amortization for the nine months ended September 30, 2000
was $3,230 as compared to $6,517 for the comparable period in 1999. The decrease
of $3,287 was primarily attributable to asset write-downs at the end of 1999 and
assets sold in the first quarter of 2000.

      IMPAIRMENT OF ASSETS HELD FOR SALE

      On June 27, 2000, the Company adopted a restructuring plan to reduce its
bank debt by selling its operating units in the storage systems and filtration
business segments. As the restructuring plan has progressed, management's
expectations of the level of proceeds from the sales of the business units are
lower than originally estimated. The change in management's expectations was a
triggering event which indicated the necessity of reviewing the carrying value
of the assets held for sale. The Company's indicated that the carrying value of
the assets held for sale exceeded their estimated fair market value.
Accordingly, the Company recorded an impairment loss of $10,381 to reduce the
carrying value of the assets held for sale to an amount equal to their estimated
fair market value.

                                       18
<PAGE>
      During the nine months ended September 30, 1999, the Company accrued
$11,986 as an impairment of assets held for sale in anticipation of the sale of
certain of its storage tank operating units.

      MERGER, ACQUISITION AND STRATEGIC CHARGES

      For the nine months ended September 30, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $2,813. These
charges included the costs, estimated as incremental jobs costs, to combine the
operations of the Company and Astrotech including losses associated with two
plant closings and business integration and reorganization costs including
severance.

      GAIN ON SALES OF ASSETS, NET

      In the first nine months of 2000, the Company recognized a gain of $16,662
for the sale of businesses and assets. This amount was comprised primarily of a
gain of $16,401 related to the sale of the HMT operating unit and a gain of $263
related to the sale of the Graver unit.

      In the first nine months of 1999, the Company sold the assets of Texoma
Tank Company and recognized a gain of $4,156.

      INTEREST EXPENSE, NET

      Interest expense for the nine months ended September 30, 2000, decreased
$1,307 to $5,551 from $6,858 in 1999. The decrease in interest expense is
primarily the result of lower average debt balances as proceeds from asset sales
were used to reduce indebtedness. These savings have been partially offset by
higher interest rates charged in 2000.

      INCOME TAXES

      The Company did not record a provision for income taxes due to the
Company's net operating loss position which, for tax reporting purposes, totaled
approximately $27.9 million as of September 30, 2000. For financial reporting
purposes, a valuation allowance has been recorded to fully offset the Company's
deferred tax assets as of December 31, 1999 and September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

      At September 30, 2000, the Company's cash position was $3,057 compared
with $5,287 at December 31, 1999. The Company's existing capital resources
consist of cash balances, cash provided by its operating activities and funds
available under its line of credit. The Company's operating activities consumed
$3,904 in cash during the nine months ended September 30, 2000.

      The Company's cash requirements consist of its general working capital
needs, capital expenditures, obligations under its leases and indebtedness. The
Company's general working capital requirements consist of salary costs and
related overhead and the purchase price of materials and components, and may
also include subcontract costs incurred prior to the receipt of corresponding
progress payments under the contract with respect to which such costs are
incurred.

      In October 1997, the Company refinanced its existing credit facilities
under a non-amortizing

                                       19
<PAGE>
revolving credit facility with various financial institutions, which matures in
October 2002. As amended, the credit facility bears interest at Fleet National
Bank's ("Fleet") (fka BankBoston, N.A.) Base Rate plus the Applicable Margin, as
defined. This credit facility is secured by substantially all of the assets of
ITEQ, a pledge of 65% of the stock of each of ITEQ's material foreign
subsidiaries, and a pledge of the stock of ITEQ's domestic subsidiaries and
guarantees entered into by such domestic subsidiaries.

      The Company's credit facility requires the Company to maintain certain
levels of net earnings before interest, taxes and depreciation and amortization
("EBITDA"), interest coverage, working capital and stockholders' equity and
contains other restrictive covenants. Additionally, the credit facility limits
the ability of the Company to incur additional indebtedness, to pay dividends or
to make acquisitions and certain investments. As of December 31,1999 and through
April 3, 2000, the Company was not in compliance with certain financial
covenants of its loan agreement. As a result, the Company classified as current
the amounts outstanding under its credit facility as of December 31, 1999 as,
under the terms of the credit facility, balances borrowed are due and payable if
the event of default is not remedied within a specified time period.

      The Company and its lenders entered into a Limited Waiver and Eighth
Amendment to Revolving Credit Agreement on April 3, 2000 which waived compliance
with certain financial covenants in the credit facility through June 29, 2000.
On July 7, 2000, the Company and its lenders entered into a Limited Waiver and
Ninth Amendment to Revolving Credit Agreement (the "Ninth Amendment") which
waived compliance with certain financial covenants from June 29, 2000 through
December 29, 2000. As such, the Company has classified as current the amounts
outstanding under its credit facility as of September 30, 2000. The provisions
of the Ninth Amendment require that the capital expenditures may not exceed $750
during the last six months of 2000 and imposes a minimum level of earnings
before depreciation and amortization, interest and taxes. The Company believes
the amount of allowable capital expenditures to be adequate in support of
anticipated capital expenditure needs and that the Company will be able to
comply with the minimum level of earnings requirement. The Ninth Amendment
provides for a total commitment of approximately $56,200 with a maximum
borrowing capacity of $54,400, governed by a borrowing base calculation. As
required by the Ninth Amendment, the total commitment will be reduced by amounts
that correspond to net proceeds realized from the sale of assets. At September
30, 2000 and December 31, 1999, the balance outstanding was $54,271 and
$102,687, respectively. Balances outstanding at September 30, 2000 and December
31, 1999 bore interest at a rate of 10.75% and 9.8%, respectively. The Company
used the net proceeds from the sale of assets and businesses to reduce its
indebtedness under its credit facility during the nine-month period ended
September 30, 2000.

      As required by the Limited Waiver and Eighth Amendment, and subsequently
the Ninth Amendment to the Revolving Credit Facility, the Company retained an
investment banking firm to assist it in reviewing and subsequently executing
restructuring alternatives. (see Note 1-Recent Events). It is uncertain whether
any such efforts to restructure the Company will be successful.

      The Company believes that based on its current levels of business, that it
can comply with the various financial covenants in the Ninth Amendment and that
cash generated from operations, existing cash balances and the available
borrowing capacity under its credit facility will be sufficient to meet the
anticipated cash requirements of the Company through December 29, 2000, the
expiration of the Ninth Amendment. In the event that the Ninth Amendment expires
before the Company is able to restructure the credit facility or unless
additional waivers are obtained, the ability of the Company to continue as a
going concern may be jeopardized.

                                       20
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

      This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in the preceding discussion regarding the Company's
financial position, business strategy, and plans of management for future
operations are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.

                                       21
<PAGE>
                                    ITEM 3
          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      MARKET RISK. The Company's results of operations are affected by certain
conditions outside the Company's control, including overall industrial economic
conditions and specifically the demand for hydrocarbon processing products and
services.

      INTEREST RATE RISK. Based on the Company's overall interest rate exposure
during the nine months ended September 30, 2000, and assuming similar interest
rate volatility in the future, a near-term (12 months) change in interest rates
would not materially affect the Company's consolidated financial position,
results of operations or cash flows. A 10% change in the rate of interest would
not have a material effect on the Company's financial position, results of
operations or cash flows.

      FOREIGN CURRENCY RISK. Except for sales from certain foreign subsidiaries,
the Company's sales are either U.S. dollar denominated or payable in currency
with fixed exchange rates against the U.S. dollar. The Company has operations in
Canada, Germany and Singapore in addition to operations in the United States and
other countries. These companies' functional currencies are the Canadian dollar,
the German Mark and the Singapore dollar, respectively. The Company's financial
results from these foreign operations are translated into U.S. dollars in
consolidation. As such, the Company is exposed to foreign currency risk to the
extent that there are fluctuations in local currency exchange rates against the
U.S. dollar.

      FOREIGN OPERATIONS. The Company has operations in other countries as
mentioned above. As a result, the Company is exposed to risks normally
associated with operations located outside the U.S. and Canada, including
political, economic, social and labor instabilities, as well as foreign exchange
controls, currency fluctuations and taxation changes.

                                       22
<PAGE>
                          PART II --- OTHER INFORMATION

ITEM 5.  OTHER EVENTS.

      On September 6, 2000, the Company issued a press release announcing that,
as previously anticipated, its common stock had been delisted from the Nasdaq
Stock Market's National Market System due to noncompliance with Nasdaq's net
worth and profitability requirements for continued listing. Subsequently, on
September 8, 2000, the Company's common stock began trading on the OTC Bulletin
Board System under the ticker symbol ITEQ.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(A)   EXHIBITS:


*27 --     Financial Data Schedule.

-------------
*      Filed herewith.

(B)   REPORTS ON FORM 8-K.

      The Company filed no reports on Form 8-K during the quarter ended
      September 30, 2000.

                                       23
<PAGE>
                                  SIGNATURES

      Pursuant to the requirements 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.

                                          ITEQ, INC.



      Date:  November 13, 2000            __________________________________
                                          William P. Reid
                                          President, Chief Executive Officer
                                          and Secretary



      Date:  November 13, 2000            __________________________________
                                          Douglas R. Harrington, Jr.
                                          Vice President, Chief Financial
                                          Officer and Assistant Secretary

                                       24


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