<PAGE>   1
                                                                    EXHIBIT 10.8

                               [ITEQ LETTERHEAD]



                                January 29, 1999


Mr. William P. Reid
23 Misty Grove Circle
Houston, Texas 77380

Dear Mr. Reid:

         ITEQ, Inc. (the "Company") considers the establishment and maintenance
of a sound and vital management to be essential for the protection and
enhancement of the best interests of the Company and its shareholders. In view
of your experience and performance in the business of the Company and its
subsidiaries, the Company desires to retain your services for an extended
period. In addition, the Company recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control may arise and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders.

         Accordingly, the board of directors of the Company (the "Board") has
determined that appropriate steps should be taken to assure the Company of the
continuation of your services and to reinforce and encourage the attention and
dedication of members of the Company's management to their assigned duties
without distraction in circumstances arising from the possibility of a change in
control of the Company. In particular the Board believes it important, should
the Company or its shareholders receive a proposal for or notice of transfer of
control of the Company, that you be able to assess and advise the Board whether
such transfer would be or is in the best interests of the Company and its
shareholders, and to take such other action regarding such proposal or transfer
as the Board might determine to be appropriate without being influenced by the
uncertainties of your own situation.

         In order to induce you into the employ of the Company, this letter
agreement (the "Agreement"), which has been approved by the Board, sets forth
the terms of your continued employment by the Company and the compensation and
severance benefits which the Company agrees will be provided to you in the event
of a change in control and if your employment with the Company should be
terminated under the circumstances described below.

         Reference is made to Annex I hereto for definitions of certain terms
used in this Agreement, and such definitions are incorporated herein by such
reference with the same effect as if set forth herein. Certain capitalized terms
used in this Agreement in connection with the description of




<PAGE>   2


various Plans are defined in the respective Plans, but if any conflicts with a
definition herein contained, the latter shall prevail.

         1.       Term of Employment. The Company hereby agrees to continue your
employment and you hereby agree to serve the Company for an employment period
commencing on the date hereof and initially ending the third anniversary from
the date hereof; provided, however, that on each successive January 29,
commencing in 2002, the employment period shall automatically be extended for
one additional year (with the date to which the employment period has most
recently been so extended being hereinafter referred to as the "Expiration Date"
and the period commencing the date hereof and ending on the Expiration Date
being hereinafter referred to as the "Employment Period"), subject to prior
termination of the Employment Period pursuant to Section 4 of this Agreement.

         2.       Duties.

                  (a) During the Employment Period, you shall serve the Company
as its President and Chief Operating Officer and perform your duties and
responsibilities diligently, faithfully and loyally and devote such time to the
Company's affairs as may be necessary to the end of achieving the proper,
efficient and successful operation of the Company's business. In such capacities
you shall (i) generally have the duties of such offices as specified in the
Bylaws, (ii) report directly to the Chief Executive Officer and (iii) have
general executive supervision and management of the business and affairs of
the operations of the Company, subject to the direction of the Chief Executive
Officer, the Board or any Committee thereof. The foregoing shall not,
however, be deemed to restrict you from attending to matters or engaging in
activities not directly related to the business of the Company, if reasonable in
scope and time commitment and not otherwise in violation of this Agreement.

                  (b) If during the Employment Period, (i) a tender offer or
exchange offer is made for more than 20% of the Company's outstanding Voting
Securities or (ii) a transaction is proposed which, if consummated, would result
in a Change of Control, you agree that you will not leave your employment with
the Company (other than as a result of Disability or upon Retirement) and will
also continue to render the services contemplated in the introductory paragraphs
of this Agreement.

         3.       Compensation.

                  (a) Base Salary. As compensation for your services, the
Company agrees to pay you basic compensation at the rate of $340,000 per annum
through December 31, 1999 ("Base Salary"), payable on a current basis in equal
installments not less frequently than monthly, subject only to such payroll and
withholding deductions as may be required by law or the terms of Plans in



<PAGE>   3
which you are a participant. For periods subsequent to December 31, 1999, your
Base Salary shall be established annually by the Compensation Committee of the
Board and paid on the same basis as for the prior year, but no such adjustment
shall result in a Base Salary for any year of less than the highest annual rate
so authorized by the Committee to be paid to you during any previous calendar
year(s) of the Company ended during the Employment Period, except upon your
prior written consent.

                  (b) Plans. In addition to your Base Salary, you will
participate in the Bonus Plan and be eligible to participate in the Defined
Contribution Plan and Other Plans, for each year during the Employment Period.

                  (c) Other. The Company shall reimburse you for all reasonable
expenses paid or incurred by you in the performance of your duties under this
Agreement in accordance with the Company's normal expense reimbursement policies
applicable to senior executives.

         4.       Termination.  Upon compliance by the initiating party with any
applicable procedures set forth in Section 5 hereof, your employment with the
Company:

                  (a) shall terminate automatically upon your death or
         Retirement;

                  (b) may be terminated prior to the Expiration Date at the
         discretion of the Chief Executive Officer or the Board upon your
         Disability;

                  (c) may be terminated prior to the Expiration Date at the
         discretion of the Chief Executive Officer or the Board for Cause;

                  (d) may be terminated prior to the Expiration Date at your
         discretion, other than for Good Reason;

                  (e) may be terminated prior to the Expiration Date at the
         discretion of the Chief Executive Officer or the Board prior to a
         Change of Control without Cause;

                  (f) may be terminated prior to the Expiration Date at the
         discretion of the Chief Executive Officer or the Board at or after a
         Change of Control without Cause;

                  (g) may be terminated prior to the Expiration Date at your
         discretion for Good Reason prior to a Change of Control; or




<PAGE>   4

                  (h) may be terminated prior to the Expiration Date at your
         discretion for Good Reason at or after a Change of Control.

         5.       Procedures for Termination.  If it is intended that your
employment be terminated:

                  (a) pursuant to Section 4(b), the Company shall transmit to
         you written notice setting forth the particulars upon which the Company
         bases its determination that a Disability exists, requiring that you
         resume your duties within 30 days following the date thereof, failing
         which a "final discharge" shall then occur;

                  (b) pursuant to Section 4(c), the Company shall transmit to
         you written notice setting forth the Cause for which you are proposed
         to be dismissed in sufficient detail to permit a reasonable assessment
         of the bona fides thereof, and setting a meeting with the Chief
         Executive Officer not less than 30 days following the date of such
         notice at which the Chief Executive Officer shall consider your
         termination and at which you and your counsel shall have the
         opportunity to be heard, following which the Chief Executive Officer
         shall either by resolution withdraw the notice, or if he so finds in
         his good faith opinion, issue his report within ten days thereafter
         that Cause exists and specifying the particulars of its findings, in
         which latter event a "final discharge" shall occur. After receipt of a
         notice of intended termination for Cause, you shall not have any
         authority to incur any obligation of any kind whatsoever on behalf of
         the Company pending withdrawal of such notice or "final discharge;"

                  (c) pursuant to Section 4(d), you shall transmit to the
         Company written notice specifying that your resignation is other than
         for Good Reason;

                  (d) pursuant to Section 4(e) or 4(f) the Company shall
         transmit to you written notice specifying that your termination is
         without Cause;

                  (e) pursuant to Section 4(g) or 4(h), you shall transmit to
         the Company written notice setting forth the particulars upon which you
         base your determination that Good Reason exists and, only if the stated
         basis therefor is capable of being cured, requesting a cure within 10
         days, failing which a "final separation" shall then occur, and if such
         stated basis is not capable of cure by the Company, "final separation"
         shall occur co-extensive with delivery of the notice.

         For purposes of this Agreement, a "Termination Date" shall be deemed to
have occurred upon (i) the happening of any event contemplated by Section 4(a)
[death or Retirement], (ii) the date



<PAGE>   5

of "final discharge" in the case of termination initiated under Sections 5(a)
[Disability] or 5(b)[Cause], (iii) the date of "final separation" in the case of
a termination initiated under Section 5(e) [Good Reason], or (iv) the 30th day
following the date of any notice contemplated by Sections 5(c) [resignation
without Good Reason] or 5(d) [discharge without Good Reason; provided, that any
proceeding initiated pursuant to Section 10 hereof within 15 days after the
giving of any notice under this Section 5 shall (anything else in this Agreement
to the contrary notwithstanding) automatically toll the effectiveness of any
Termination Date until final resolution of such proceeding. Each notice which
complies with the requirements of this Section 5 is hereinafter referred to as a
"Termination Notice".

         6.       Effect of Termination.  If your employment is terminated:

                  (a) pursuant to Sections 4(a) [death or Retirement], 4(b)
         [Disability], 4(c) [Cause], or 4(d) [resignation without Good Reason],
         then you shall be entitled to receive (i) payment when due of your Base
         Salary through the end of the first monthly pay period ended after the
         Termination Date and (ii) all benefits under the Plans in which you are
         at the time a participant, to the extent the same are vested under the
         terms thereof at the Termination Date, and (except as otherwise
         provided herein) all other obligations of the Company under this
         Agreement shall thereupon cease; or

                  (b) pursuant to Sections 4(e) [discharge without Cause prior
         to Change of Control] or 4(g) [resignation for Good Reason prior to
         Change of Control], then you shall become entitled to all benefits
         conferred upon you by the Termination Package, and (except as otherwise
         provided herein) all other obligations of the Company under this
         Agreement shall thereupon cease; or

                  (c) pursuant to Sections 4(f) [discharge without Cause after
         Change of Control] or 4(h) [resignation for Good Reason after Change of
         Control], then you shall become entitled to all benefits conferred upon
         you by the Severance Package, and (except as otherwise provided herein)
         all other obligations of the Company under this Agreement shall
         thereupon cease.

         You shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment, nor shall the amount
of any payment provided for in this Agreement be reduced by any compensation
earned by you as the result of employment by another employer after any
Effective Date or Termination Date.
<PAGE>   6

         7. Excise Tax. To the extent that the acceleration of vesting or any
payment, distribution or issuance made to you pursuant to this Agreement
following any Effective Date or Change of Control is subject to federal income,
excise, or other tax at a rate above the rate ordinarily applicable to like
payments paid in the ordinary course of business ("Penalty Tax"), whether as a
result of the provisions of Section 280G(b)(1) and 4999(a) of the Internal
Revenue Code of 1986, as amended, any similar or analogous provisions of any
statute adopted subsequent to the date hereof, or otherwise, then the Company
shall pay you an additional amount of cash (the "Additional Amount") such that
the net amount received by you, after paying any applicable Penalty Tax and any
federal or state income tax on such Additional Amount, shall be equal to the
amount that you would have received if such Penalty Tax were not applicable.

         8. Deferral of Payments; Early Payments. At any time prior to a
Termination Date, you may irrevocably direct the Company that any amounts which
are or should become payable to you under the Severance Package or Termination
Package shall be paid to you in three equal installments, payable on or within
ten days following the Termination Date, and on the first and second
anniversaries of the initial installment payment. In addition, if any payment to
you in respect of a stock-based benefit which is precipitated by the occurrence
of an Effective Date or a Termination Date and which would, in and of itself,
give rise to a short-swing profit under Section 16(b) of the Exchange Act, then
both the payment and the entitlement to payment thereof, shall automatically be
deferred until the earliest date (not later than 183 days following a
Termination Date) at which the payment of such benefit would not, in and of
itself, result in a short-swing profit. The Company and you further agree that
when it has become apparent in our collective best judgment (as expressed by the
Compensation Committee of the Board, in the case of the Company) that a Change
of Control is likely to occur and further that a likely consequence thereof will
be the occurrence of a Termination Date, the Company and you will use reasonable
good faith efforts to undertake and conclude negotiations intended to result in
the payment to you of a portion of the Severance Package earlier than would
otherwise be the case hereunder, thereby increasing the benefit conferred upon
you and the tax efficiency of such payments to the Company, with any consequent
tax savings to be allocated between you and the Company in such reasonable
proportions as we shall agree; unless so agreed to by both parties in writing,
no such negotiation or agreement shall affect the Company's obligations to you
under any other provision of this Agreement.
<PAGE>   7

ten days following consummation of the Tender Offer nor more than three years
after the Effective Date, up to that number of Shares which shall be equal to
the product of (x) the number of Shares acquired by you upon exercise or
distribution of any benefit under any Plan prior to consummation of the Tender
Offer, multiplied by (y) the decimal equivalent of (I) the number of Shares
accepted for purchase or exchange in the Tender Offer, divided by (II) the
number of Shares timely and validly tendered pursuant to the Tender Offer. In
the event the above obligation to purchase Shares occurs by reason of a cash
tender offer or a combination cash tender offer and exchange offer, the cash
price per share to be paid to you hereunder shall be equal to the highest price
paid in cash pursuant to the Tender Offer. In the event such obligation occurs
by reason of an exchange offer, the cash price per share to be paid to you
hereunder shall be equal to the closing price, if traded on a stock exchange, or
the average bid and asked prices, if traded in the over-the-counter market, of
the security of the person so exchanged for the Shares (the "Exchange Security")
on the first day on which the Exchange Security could have been sold by you on
such exchange or in the over-the-counter market, as the case may be, in a
regular broker's transaction had your Shares been tendered and accepted,
multiplied by the number of Exchange Securities (or fraction thereof) issued in
the Tender Offer for each Company Share; and

                  (b) if a Change of Control occurs pursuant to a Tender Offer
and (i) a merger, consolidation, reorganization, sale, spin-off, or purchase of
assets under which all remaining outstanding Shares will be converted into or
become exchangeable for cash, or for securities ("Merger Security") issued or to
be issued by the Person who made the Tender offer (or a subsidiary or affiliate
of such Person), is thereafter proposed to the Company or its shareholders, and
(ii) such merger, consolidation, reorganization or purchase of assets occurs
less than three years after the Effective Date, and (iii) the amounts of cash
into which each Share would be converted if the transaction is effected wholly
for cash, or the Merger Security Value (as defined below) if such transaction is
effected wholly for Merger Securities, or the sum of the cash and the Merger
Security Value if the Transaction is effected partly for cash and partly for
Merger Securities, as the case may be, is less than 95% of the per share price
that would have been paid by the Company for such portion of your Shares had you
exercised your option to require the Company to purchase such Shares under
Section 9(a) above, the Company shall pay you (whether or not a Termination Date
has occurred following a Change of Control), an amount in cash equal to the
difference between the aggregate price you would have received from the number
of Shares the Company would have been required to purchase from you had you
exercised such option under Section 9(a) and the amount of cash and/or the
Merger Security Value received for the same number of Shares in such merger,
consolidation, reorganization or purchase of assets. Such cash payment shall be
made to you on a business day selected by you upon no less than ten calendar
days' notice to the Company or its Successor (as hereinafter defined). For
purposes of this Section 9(b), "Merger Security Value" shall mean the closing
price, if traded on a stock exchange, or the average bid and asked prices if
traded



<PAGE>   8

         9. Dispute Resolution. It is irrevocably agreed that if any dispute
arises between us under this Agreement, or as to any interpretive matter under
or alleged breach of this Agreement, the exclusive remedy of each of us shall be
to commence binding arbitration proceedings under the rules of the American
Arbitration Association (the "Rules"), with any such arbitration proceeding to
be conducted in Houston, Texas, applying the substantive law of the State of
Texas ("Arbitration"). If Arbitration is commenced prior to an Effective Date,
each of us will deposit with the arbitrator(s), 50% of the arbitrator's
preliminary estimate of the costs of arbitration (excluding counsel fees and
expenses) as security for costs; if Arbitration is commenced after an Effective
Date, the Company will be solely responsible for all costs thereof and shall
deposit with the arbitrator(s) 100% of the arbitrator(s) preliminary estimate
thereof. Notwithstanding any contrary provision of the Rules or Texas law, the
Company shall have the burden of proof with respect to any of the following
which are at issue in Arbitration: (i) that Cause or Disability existed at the
time any notice was given to you under Section 5 based upon either them and/or
the sufficiency of such notice; and (ii) that Good Reason did not exist at the
time notice was given to the Company under Section 5 based upon Good Reason (but
only if such notice was dated on or after an Effective Date) and/or the
sufficiency of such notice; and (iii) that a Change of Control has not occurred.
Any final ruling of the arbitrator(s) in an Arbitration shall be final and
binding for all purposes, and judgment on any Arbitration award may be entered
and enforced in any court having jurisdiction.

         The Company and you irrevocably agree that in the event the
arbitrator(s) shall determine (after hearing) that any matter presented in
Arbitration is one which under Texas law is not susceptible to arbitration, in
such event (and only in such event), (i) exclusive jurisdiction over the
non-arbitrable issue shall be in the lowest Texas state court of general
jurisdiction sitting in Harris County, Texas, (ii) we are each at the time
present in Texas for the purpose of conferring personal jurisdiction; (iii) any
such action may be brought in such courts, and any objection that the Company or
you may now or hereafter have to the venue of such action or proceeding in any
such court or that such action or proceeding was brought in an inconvenient
court is waived, and we each agree not to



<PAGE>   9

plead or claim the same, (iv) service of process in any such proceeding or
action may be effected by mailing a copy thereof by registered or certified
mail, return receipt requested (or any substantially similar form of mail),
postage prepaid, to such party at the address provided in Section 13 hereof, (v)
no punitive or consequential damages shall be awarded in any such action or
proceeding and we each agree not to plead or claim the same; and (vi) prior to
any trial on the merits, we will submit any such non-arbitrable issue to court
supervised, non-binding mediation.

         If proceedings are commenced prior to an Effective Date, all actual
costs of Arbitration or court proceedings involving any non-arbitrable issue
(excluding, in each case, counsel fees and expenses), shall be apportioned by
the arbitrator(s) or the court in such manner as shall be deemed equitable in
light of any final Arbitration award or judgment; if commenced on or after an
Effective Date, all such costs shall be borne exclusively by the Company.

         Anything else in this Section to the contrary notwithstanding, nothing
in this Agreement shall impair your ability to seek specific performance of your
right to be paid under, and to receive all other benefits conferred by, Section
3 of this Agreement during the pendency of any dispute or proceeding concerning
Sections 5, 6 and/or 8 hereof.

         10.      Successors; Binding Agreement.

                  (a) Upon your written request, the Company will seek to have
any Successor (as defined below), by agreement in form and substance
satisfactory to you, expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it. If there has been a Change of Control prior to, or a Change of Control will
result from, any such succession, then failure of the Company to obtain at your
request such agreement prior to or upon the effectiveness of any such succession
(other than by merger or consolidation) shall constitute Good Reason for
termination by you of your employment and, upon delivery of a Notice of
Termination by you to the Company, you shall be entitled to the benefits
provided in Section 6(c) hereof. "Successor" shall mean any Person that succeeds
to, or has the ability to control, the Company's business as a whole, directly
by merger, consolidation or spin-off or indirectly by purchase of the Company's
Voting Securities or acquisition of all or substantially all of the assets of
the Company.

                  (b) This Agreement shall inure to the benefit of and be
enforceable by your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.



<PAGE>   10

         11. Fees and Expenses. The Company shall pay all legal fees and
reasonable expenses incurred by you (including costs of arbitration) as a result
of (a) your termination following a Change of Control (including all such fees
and expenses, if any, incurred in contesting or disputing any such termination)
or (b) your seeking to obtain, assert or enforce any right or benefit conferred
upon you by this Agreement.

         12. Notices. Any and all notices required or permitted to be given
hereunder shall be in writing and shall be deemed to have been given when
delivered in person to the persons specified below or deposited in the United
States mail, certified or registered mail, postage prepaid and addressed as
follows:


                  If to the Company:   ITEQ, Inc.
                                       2727 Allen Parkway
                                       Houston, Texas 77019
                                             Attention: Chief Executive Officer



<PAGE>   11


                  If to you:                 William P. Reid
                                             23 Misty Grove Circle
                                             The Woodlands, TX 77380


         Either party may change, by the giving of notice in accordance with
this Section 12, the address to which notices are thereafter to be sent.

         13.      Validity.  The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.

         14.      Survival.  All obligations undertaken and benefits conferred
pursuant to this Agreement, except those set forth in Sections 1 and 2, shall
survive the Employment Period and continue thereafter until performed in full.

         15.      Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in writing signed by you and the Chairman of the Compensation Committee of the
Board. No waiver by either party hereto at any time of any breach by the other
party hereto of, or of compliance with, any condition or provision



<PAGE>   12

of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the internal laws of the State of Texas.

         If this letter correctly sets forth our understanding with respect to
the subject matter hereof, please sign and return one copy of this letter to the
Company.

                                     Sincerely,

                                     ITEQ, INC.


                                     BY: /s/ Mark E. Johnson
                                        ----------------------------------------
                                             Mark E. Johnson
                                             Chief Executive Officer

Agreed to as of the 29th
day of January, 1999.

/s/ William P. Reid
---------------------------------
    William P. Reid

<PAGE>   13
                  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


                                       A-1
<PAGE>   14
         (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 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.


                                       A-2
<PAGE>   15
         "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 which you attended to or were engaged in prior
         to the date hereof and which do not otherwise violate your obligations
         hereunder; or


                                       A-3
<PAGE>   16
                  (viii) 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
Company.

         "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 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


                                       A-4
<PAGE>   17
         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.

         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


                                       A-5
<PAGE>   18
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.


                                       A-6