<PAGE>   1
                   ANNEX I TO AGREEMENT DATED JANUARY 29, 1999
                                     BETWEEN
                                   ITEQ, INC.
                                       AND
                                 WILLIAM P. REID


                                  DEFINITION OF
                                  CERTAIN TERMS



         "BONUS PLAN" means (i) for calendar 1999, the Company's obligation to
pay to you the amounts, if any, to which you would be entitled under the
Company's corporate incentive bonus plan as presently in effect and (ii) for
each subsequent year, any Plan adopted by the Board which provides for the
payment of additional compensation on an annual basis to senior executive
officers contingent upon the Company's results of operations for that specific
year, as such Plan shall be amended or modified to, but not on or after, any
Effective Date.

         "BYLAWS" means the bylaws of the Company as in effect at the date
hereof and as the same shall be amended or otherwise modified to, but not on or
after, any Effective Date.

         "CAUSE" means (i) your conviction by a court of competent jurisdiction,
from which conviction no further appeal can be taken, of a felony-grade crime
involving scienter, or (ii) your willful failure to perform substantially your
duties with the Company (other than a failure due to physical or mental illness)
which is materially and demonstrably injurious to the Company, or (iii) only
prior to an Effective Date, the engaging by you in any "business" engaged in
activities in direct competition with the Company, whether as an employee,
officer or director or through the beneficial ownership by you of 10% or more of
the Voting Securities of such "business." No act or failure to act on your part
shall be considered "willful" unless done, or omitted to be done, by you in bad
faith and without reasonable belief that your action or omission was in, or not
opposed to, the best interests of the Company.

         "CHANGE OF CONTROL" means the earliest date at which:

         (i) Any Person is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the Company's
outstanding Voting Securities, other than through the purchase of Voting
Securities directly from the Company through a private placement; or


<PAGE>   2

         (ii) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least two-thirds of the directors comprising the
Incumbent Board shall from and after such election be deemed to be a member of
the Incumbent Board; or

         (iii) the Company is merged or consolidated with another corporation or
entity and as a result of such merger or consolidation less than 60% of the
outstanding Voting Securities of the surviving or resulting corporation or
entity shall then be owned by the former stockholders of the Company; or

         (iv) a tender offer or exchange offer is made and consummated by a
Person other than the Company for the ownership of 20% or more of the Voting
Securities of the Company then outstanding; or

         (v) all or substantially all of the assets of the Company are sold or
transferred to a Person as to which (A) the Incumbent Board does not have
authority (whether by law or contract) to directly control the use or further
disposition of such assets and (B) the financial results of the Company and such
Person are not consolidated for financial reporting purposes.

         Anything else in this definition to the contrary notwithstanding, no
Change of Control shall be deemed to have occurred by virtue of any transaction
which results in you, or a group of Persons which includes you, acquiring more
than 20% of either the combined voting power of the Company's outstanding Voting
Securities or the Voting Securities of any other corporation or entity which
acquires all or substantially all of the assets of the Company, whether by way
of merger, consolidation, sale of such assets or otherwise.

         "CHARTER" means the certificate of incorporation of the Company as in
effect at the date hereof and as the same shall be amended or otherwise modified
to, but not on or after, any Effective Date.

         "DEFINED CONTRIBUTION PLAN" means the ITEQ, Inc. 401K Plan, as the same
shall be amended or modified to, but not on or after, any Effective Date.

         "DISABILITY" means your continuing full-time absence from your duties
with the Company for 180 days or longer as a result of physical or mental
incapacity.

         "EFFECTIVE DATE" means the earliest date upon which (i) any of the
events set forth under the definition of Change of Control shall have occurred,
(ii) the receipt by the Company of a Schedule 13D stating the intention of any
Person to take actions 


<PAGE>   3

which, if accomplished, would constitute a Change of Control, or (iii) the
public announcement by any Person of its intention to take any such action, in
each case without regard for any contingency or condition which has not been
satisfied on such date.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.

         "GOOD REASON" means any of the following:

                  (i) except as a result of your death or Retirement, or
         following the receipt by you of a Notice of Termination for Cause or
         due to Disability, a change in your status, title(s) or position(s) as
         an officer of the Company which, in your reasonable judgment, does not
         represent a promotion, with commensurate adjustment of compensation,
         from your status, title(s) and position(s) or the assignment to you of
         any duties or responsibilities which, in your reasonable judgment, are
         inconsistent with such status, title(s) or position(s), or the
         withdrawal from you of any duties or responsibilities which in your
         reasonable opinion are consistent with such status, title(s) or
         position(s), or any removal of you from or any failure to reappoint or
         reelect you to such position(s); or

                  (ii) a reduction by the Company in your base salary; or

                  (iii) the failure by the Company to continue in effect any
         Plan in which you were then participating other than as a result of the
         normal expiration or amendment of any such Plan in accordance with its
         terms, or the taking of any action, or the failure to act, by the
         Company which would adversely affect your continued participation in
         any such Plan on at least as favorable a basis to you as is the case on
         the date hereof or which would materially reduce your benefits under
         any of such Plan or deprive you of any material benefit enjoyed by you
         on the date hereof, except as proposed by you to the Board or the
         Compensation Committee thereof; or

                  (iv) the failure by the Company upon a Change of Control to
         obtain the assumption of this Agreement by any Successor (other than by
         merger or consolidation); or

                  (v) any purported termination by the Company of your
         employment which is not effected pursuant to a Notice of Termination;
         and for purposes of this Agreement, no such purported termination shall
         be effective; or

                  (vi) any refusal by the Company to continue to allow you to
         attend to matters or engage in activities not directly related to the
         business of the Company


<PAGE>   4

         which you attended to or were engaged in prior to the date hereof and
         which do not otherwise violate your obligations hereunder; or

                  (vii) any continuing material default by the Company in the
         performance of its obligations under this Agreement, whether before or
         after a Change of Control.

         "OTHER PLANS" means any thrift; bonus or incentive; stock option or
stock accumulation; pension; medical, disability, accident or life insurance
plan, program or policy of the Company which is intended to benefit the chief
executive officer and/or executive officers of the Company (other than the Bonus
Plan or Defined Contribution Plan).

         "PERSON" means any individual, corporation, partnership, group,
association or other "person," as such term is used in Sections 13(d) and 14(d)
of the Exchange Act, other than the Company or any Plans sponsored by the
ICompany.

         "PLANS" means the Bonus Plan, Defined Contribution Plan and Other
Plans.

         "RETIREMENT" means termination of your employment on the "normal
retirement date" coextensive with your attainment of age 65.

         "SEVERANCE PACKAGE" means your right to receive, and the Company's
obligation to pay and/or perform on, the following:

                  (a) on or within ten days following an applicable Termination
         Date, the Company shall pay to you a lump sum, cash amount equal to the
         sum of (i) three times the highest annual rate of Base Salary in effect
         during the current year or any of the three years preceding the
         Termination Date and (ii) three times the greater of (A) the maximum
         award you would have been eligible to receive under the Bonus Plan in
         respect of the current year, regardless of any limitations otherwise
         applicable to the Bonus Plan (i.e., the failure to have completed any
         vesting period or the current measurement period, or the failure to
         achieve any performance goal applicable to all or any portion of the
         measurement period) or (B) the largest award earned (whether or not
         paid) under the Bonus Plan in respect of any of the three years
         preceding the Termination Date; and

                  (b) in addition to your entitlement to the vested portion of
         your interest in the Defined Contribution Plan in accordance with the
         terms of that plan, the Company shall pay to you, on or within ten days
         following the applicable Termination Date, an amount in cash equal to
         the unvested portion of the Company's contributions to your account;
         and

                  (c) immediately upon an applicable Termination Date, all
         options and rights to contingent incentive compensation granted to you
         under the Plans (other 


<PAGE>   5

         than the Bonus and Defined Contribution Plans and medical, disability,
         accident and life insurance plans and programs for which separate
         provision is made herein) which are not then fully vested, exercisable,
         distributable or otherwise performable by the Company shall immediately
         become fully vested, exercisable, distributable or otherwise
         performable by the Company as though any and all applicable performance
         goals had been met or achieved at maximum levels for all performance
         periods (including those extending beyond the Termination Date) and any
         and all other Plan contingencies had been satisfied in full at the
         Termination Date and the maximum benefits thereunder had been earned at
         the Termination Date, and solely for purposes of determining when any
         outstanding option shall lapse or expire, you shall be deemed to remain
         in the Company's employ until the option would have otherwise expired
         notwithstanding any contrary provision in the pertinent stock option
         plan or related option agreement;

                  (d) following an applicable Termination Date, you shall
         receive all benefits under and in accordance with the terms of the
         Plans (other than the Bonus and Defined Contribution Plans and medical,
         disability, accident and life insurance plans and programs and any
         subsequently adopted Other Plan fitting the description contained in
         clause (c) above, for all of which separate provision is made herein)
         in which you are at the time a participant, but only to the extent the
         same are vested under the terms of such Plans at the Termination Date;
         and

                  (e) unless you give notice to the Company pursuant to the next
         sentence within 90 days following an applicable Termination Date, the
         Company shall maintain in full force and effect, at its sole expense
         for the continued benefit of you and your dependents during the period
         from the Termination Date through the earlier of (i) two years from the
         Termination Date or (ii) the commencement date of equivalent benefits
         from a new employer, all insured and self-insured employee welfare
         benefit Plans in which you were entitled to participate immediately
         prior to the Termination Date. Alternatively, if you notify the Company
         that you so elect, the Company shall pay you within five days of such
         notification an amount in cash equal to two times the average annual
         cost incurred by the Company during the preceding three calendar years
         as a result of your participation in such welfare benefit Plans (or
         such fewer whole calendar years as you have so participated). If your
         participation in any such welfare benefit Plan is barred, the Company,
         at its sole cost and expense, shall arrange to have issued for the
         benefit of you and your dependents individual policies of insurance
         providing benefits substantially similar (on an after-tax basis) to
         those which you are entitled to receive under such Plans. You shall not
         be required to pay any premiums or other charges for such policies. At
         the end of two years after the Termination Date, the Company, provided
         you have not previously received or are not then receiving equivalent
         benefits from a new employer, shall arrange, at its sole cost and
         expense, to enable you to convert you and your dependents' coverage
         under such Plans to individual policies or programs upon the same terms
         as employees of the Company may apply for such conversions.


<PAGE>   6

         Anything else in this Agreement to the contrary notwithstanding, if an
applicable Termination Date results from a merger or a tender offer or an
exchange offer, then unless otherwise agreed to by both parties in writing, all
amounts to which you shall at the closing thereof, or which you may upon
subsequent notice or lapse of time, become entitled under this Severance Package
or Section 9 shall be accelerated to, and become immediately due and payable
contemporaneously with, such closing.

         "SHARES" means shares of Common Stock, $.001 par value, of the Company
at the date of this Agreement, as the same shall be subsequently amended,
modified or changed. The term "market value," when used with respect to a Share
means the closing price therefor on the NASDAQ National Market or if not listed
thereon, on such other exchange as shall at the time constitute the principal
exchange for trading in Shares.

         "TERMINATION PACKAGE" means your right to receive, and the Company's
obligation to pay and/or perform on, the following:

                  (a) on or within ten days following an applicable Termination
         Date, the Company shall pay to you a lump sum cash amount equal to the
         one times the highest annual rate of base salary in effect during the
         current year or any of the three years preceding the Termination Date.

                  (b) following an applicable Termination Date, you shall
         receive all benefits under and in accordance with the terms of the
         Plans (other than the Bonus Plan, for which separate provision is made
         above) in which you are at the time a participant, but only to the
         extent the same are vested under the terms of such Plans at the
         Termination Date.

         "VOTING SECURITIES" means, with respect to any corporation or business
enterprise, those securities which under ordinary circumstances are entitled to
vote for the election of directors or others charged with comparable duties
under applicable law.