<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

         (Mark One)

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

         For the fiscal year ended December 31, 2000 or

         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the transition period from          to
                                        --------    -------

         Commission file number 000-21813
                                ---------

<TABLE>
<S>                                                                    <C>
                                         Texas Equipment Corporation
-----------------------------------------------------------------------------------------------------------
                           (Exact name of registrant as specified in its charter)

                           Nevada                                                   62-1459870
-----------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)         (I.R.S. Employer Identification No.)

               1305 Hobbs Hwy, Seminole, Texas                                        79360
-----------------------------------------------------------------------------------------------------------
            (Address of principal executive offices)                                (Zip Code)
</TABLE>

         Registrant's telephone number: (915) 758-3643

         Securities registered under Section 12(b) of the Exchange Act:

Title of each Class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
      None                                                None

         Securities registered under Section 12(g) of the Exchange Act:

                               Title of each class
                          -----------------------------
                          Common Stock, $.001 par value

     Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

Yes  X     No
    ---       ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X
           ---


<PAGE>   2


     The market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 15, 2001, was approximately
$263,000 (for purposes of calculating this amount, only directors, officers and
beneficial owners of 5% or more of the Common Stock of the registrant have been
deemed affiliates).

     The number of shares outstanding of the registrant's Common Stock, as of
March 15, 2001, was 3,804,602.

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                                     PART I

                         CAUTIONARY STATEMENT REGARDING
                  FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS

     The future results of Texas Equipment Corporation ("TEC" or the "Company"),
including results reflected in any forward-looking statement made by or on
behalf of the Company, will be impacted by a number of important factors. The
factors identified below in the section entitled "Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Important Factors" are important factors (but not necessarily all
important factors) that could cause the Company's actual future results to
differ materially from those expressed in any forward-looking statement made by
or on behalf of the Company. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," or "continue" or comparable terminology is intended to
identify forward-looking statements. Forward-looking statements, by their
nature, involve substantial risks or uncertainties.

ITEM 1. BUSINESS.

     Unless the context otherwise indicates, the "Company" refers to TEC and its
wholly owned subsidiary, Texas Equipment Corporation ("TECI"), and TECI's wholly
owned subsidiary, New Mexico Implement Company, Inc. ("NMIC").

GENERAL

     The Company currently operates eight retail stores in two states,
specializing in the distribution, sales, service and rental of agricultural
equipment, primarily supplied by Deere & Company and its subsidiaries ("Deere").
The Company's stores are located in West Texas and Eastern New Mexico. The
Company acquired four of its agricultural equipment stores in 1997 and two in
1998. The 1998 acquisitions extended the Company's equipment retail store
network northward in West Texas with its Amarillo dealership purchase, and
westward in Texas with its acquisition of one store located in Tornillo, Texas,
about thirty miles southeast of El Paso, Texas and three miles from the border
between the US and Mexico. The Company believes that its network of stores
enables it to achieve operating benefits from increasing operational synergies.

     Deere, a leading manufacturer and supplier of agricultural equipment in the
United States, is the primary supplier of the equipment and parts sold by the
Company. Sales of new Deere equipment by the Company accounted for approximately
82% of the Company's new equipment sales in 2000. No other supplier accounted
for more than 2% of the Company's new equipment sales in 2000. The Company
expects that Deere products will continue to account for the majority of its new
agricultural equipment sales. The Company's stores also offer complementary
equipment from other suppliers and used equipment as part of its wholegoods
business segment. As part of its product support business segment, the Company
offers new and used parts, equipment rental and repair service, and other
related products and services. Financial information concerning the Company's
wholegoods and product support business segments is incorporated herein by
reference from Note 4 of the Notes to Consolidated Financial Statements.

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<PAGE>   4


INDUSTRY OVERVIEW

     According to industry sources, the United States retail sales of new
agricultural equipment in calendar 2000 increased to approximately $8.7 billion
compared to $8.0 billion in 1999 and $10.6 billion in 1998. Deere is the leading
supplier of agricultural equipment in the United States. Deere's market share in
1999 and 2000 was approximately 47% in both years.

     Within the Deere agricultural dealer system, dealers are not assigned
exclusive territories, but are authorized to operate at specific store
locations, which define a trade area. Currently, Deere has in excess of 1,600
agricultural dealer locations in the United States.

LIQUIDITY

     Since 1998 the agricultural industry has experienced a prolonged downturn,
especially in the geographic areas in which the Company does business. Commodity
prices have decreased substantially across all major production crops, which has
had, and will continue to have a significant effect on agricultural equipment
sales. Improvement in commodity prices is not expected to occur until the 2002
harvest season. As a result, the Company recorded significant losses in 1999 and
2000. Because of these losses, the Company has been unable to generate
sufficient cash flow to meet its obligations with its bank and John Deere.
Currently the Company is in default under its bank and dealership agreements. If
the Company is unable to obtain equity funding, or negotiate a change in its
dealership agreement with Deere, the Dealership agreement may be terminated. In
addition, the Company is currently negotiating with its bank to restructure its
loans. The Company believes that its bank loan and Deere dealership agreements
will be restructured; however, if the Company is unable to successfully
renegotiate its loans and dealership agreements, the Company may be unable to
sustain its operations. There is no assurance that the Company will be able to
obtain financing or successfully renegotiate its agreements with John Deere and
its bank.

AUDITORS' REPORT

     The Company's audit report includes an explanatory paragraph in the
auditor's opinion with respect to the Company's consolidated financial
statements at December 31, 2000. The paragraph states that our recurring losses
from operations and resulting continued dependence on access to external
financing and the need to restructure our dealership and bank agreements raise
substantial doubts about the Company's ability to continue as a going concern.
Furthermore, the factors leading to and the existence of the explanatory
paragraph may adversely affect our relationship with customers and suppliers and
have an adverse effect on our ability to obtain financing.

INCREASING MARKET SHARE

     The Company seeks to increase its market share by enhancing customer
service and generating customer loyalty. To accomplish this, the Company offers
a broad range of products, utilizes aggressive marketing programs, trains its
employees to have a strong customer orientation, employs state-of-the-art
service equipment, and maintains a computerized real-time inventory system. Each
agricultural retail equipment store offers a broad array of its respective Deere
equipment lines, and also sells complementary products from other suppliers,
based on the nature of each store's customer base. As the installed base of
equipment expands with the Company's increasing market share, the Company has
the opportunity to generate additional parts and service business. The Company
believes that each customer's experience with the Company's parts and service
departments and other value-added services can positively influence such

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<PAGE>   5


customer's overall satisfaction. Parts and service currently have higher profit
margins than equipment sales. The Company serves its customers' financing needs
by developing innovative ways to finance its products.

PURSUING ADDITIONAL ACQUISITIONS

     The Company, because of its inability to raise equity funding and the
significant losses incurred in 1999 and 2000, has discontinued its acquisition
strategy for the foreseeable future.

IMPLEMENTING THE TEC OPERATING MODEL

     The Company continues to develop, while addressing the cyclical nature of
the agricultural equipment industry, its operating model designed to improve the
performance and profitability of each of its retail equipment stores. Components
of this operating model include (i) pursuing aggressive marketing programs, (ii)
allowing store employees to focus on customers by managing administrative
functions, training, and purchasing at the corporate level, (iii) providing a
full complement of parts and state-of-the-art service functions, including a
computerized real-time inventory system and quick response, on-site repair
service, (iv) motivating store level management in accordance with corporate
goals, and (v) focusing on cost structures at the store level. The Company
centralizes such functions as accounting, purchasing, and employee recruitment,
allowing its store managers and personnel more time to focus on making sales and
providing product support to customers.

WHOLEGOODS

     With its eight Deere agricultural equipment stores located in West Texas
and Eastern New Mexico, the Company is one of the largest Deere retail
agricultural equipment dealer networks in the United States in total revenues
and accounted for approximately 1% percent, or $44.1 million of Deere's North
American agricultural wholegoods and parts sales of approximately $4.3 billion
in 2000. According to industry usage, "wholegoods" represents agricultural
machinery that can be sold either as an individual item or as part of a series
of machines to perform certain farming operations.

     The Company is a full-service supplier to farmers, offering a broad range
of farm equipment and related products. The Company's customers primarily farm
cotton and peanuts in the Southern Panhandle, corn, soybeans, wheat, sugar
beets, and potatoes in the Northern Panhandle, and cotton and alfalfa in Eastern
New Mexico and Tornillo, Texas. As a result of the customer mix and Deere's
product offerings, the Company's core products include grain and peanut
combines, cotton pickers and strippers, tractors, planting equipment and tillage
equipment. The Company's agricultural equipment stores also carry other
harvesting and crop handling machinery, as well as consumer and commercial
equipment. The sale of new and used Deere agricultural equipment is the primary
focus of the Company and accounted for approximately 82% and 86% of the
Company's new and used equipment sales in 2000 and 1999, respectively. The
Company, according to local market demand, also offers a variety of other new
and used wholegoods lines, which complement the Deere products and account for
the remaining wholegoods sales of the Company.

     The agricultural equipment stores are located in areas with significant
concentrations of farmers and typically serve customers within a 50 to 100 mile
radius. Each store displays a broad array of new and used equipment and has
fully-equipped service bays to provide in-store and on-site service and
maintenance of agricultural equipment. The Company believes it has a competitive
advantage over other agricultural dealers given its ability to draw on its
network of agricultural stores for equipment, parts and service, as well as the
economies of scale inherent in its centralized administrative, purchasing, and
inventory management functions.

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PARTS AND SERVICE

     The Company's retail agricultural equipment stores offer a broad range of
replacement parts and fully equipped service and repair facilities for their
respective product lines. The Company believes that product support through
parts and service will be increasingly important to its ability to attract and
retain customers for its agricultural equipment operations. Each store includes
four to six service bays staffed by highly trained service technicians.
Technicians are also available to make on-site repairs (other than engine and
transmission overhauls) of equipment that cannot be brought in for service. The
Company's service technicians receive training from Deere and certain other
suppliers, as well as additional in-store training conducted by the Company.

INVENTORY AND ASSET MANAGEMENT

     The Company maintains substantial inventories of equipment and parts in
order to facilitate sales to customers on a timely basis. The Company also is
required to build its inventory in advance of its selling seasons to ensure that
it will have sufficient inventory available to meet its customer needs and to
avoid shortages or delays. To maximize asset productivity, the Company maintains
a complete database on sales and inventory of parts and equipment, and has a
sophisticated, centralized real-time inventory control system. This system
enables each store to access the available inventory of the Company's other
stores before ordering additional parts or equipment from the supplier. As a
result, the Company minimizes its investment in inventory while still
effectively and promptly satisfying its customers' needs. Using this system, the
Company also monitors inventory levels and mix, and make adjustments as needed
in accordance with its operating plan.

DEERE AGRICULTURAL DEALER AGREEMENTS

     The Company has non-exclusive dealer agreements with Deere for each of its
Deere agricultural equipment stores, each of which authorizes the Company to act
as a dealer in Deere agricultural equipment (the "Agricultural Dealer
Agreements") at a specific authorized store location. The Company is not
required to pay a royalty fee under the Agricultural Dealer Agreements. Rather,
the Company agrees to stock, sell at retail and service Deere equipment in its
defined market area. The Company's areas of responsibility for the sale of Deere
agricultural equipment are in West Texas, the Texas Panhandle and Eastern New
Mexico. The Agricultural Dealer Agreements continue until terminated by Deere
upon a violation by the Company of the provisions contained therein and in
certain other circumstances described herein, although Deere may require the
execution of a new Agricultural Dealer Agreement at any time upon 30-day notice.
Any termination or non-renewal of the Dealership Agreements must be done by
Deere in accordance with state legislation designed to protect dealers from
arbitrary termination or non-renewal of franchise agreements. Applicable Texas
laws provide that termination or non-renewal of a dealership agreement may not
be done by a manufacturer without cause. The Company has consistently had its
Agricultural Dealer Agreements renewed and the Company anticipates obtaining
renewals in the future. However, no assurances can be given that such renewals
will be obtained.

     Pursuant to the Agricultural Dealer Agreements, the Company is required,
among other things, to maintain suitable facilities, provide competent
management, actively promote the sale of agricultural equipment in the
designated areas of responsibility, fulfill the warranty obligations of Deere
(with reimbursement at agreed rates therefor), maintain inventory in proportion
to the sales potential in each area of responsibility, provide service and
maintain sufficient parts inventory to service the needs of its customers,
maintain adequate working capital, and maintain stores only in authorized
locations. In addition, Deere has the right to have input into the selection of
the Company's management personnel, including managers of the

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Company's Deere equipment stores. Deere is obligated to make available to the
Company any finance plans, lease plans, floor plans, parts return programs,
sales or incentive programs or items and marketing materials prepared by Deere
for its agricultural equipment dealers. The Agricultural Dealer Agreements also
entitle the Company to use John Deere trademarks and trade names, with certain
restrictions.

     The agricultural equipment stores also offer John Deere consumer and
commercial equipment, for which the Company has entered into non-exclusive Lawn
and Garden Dealer Agreements containing substantially the same terms as the
Agricultural Dealer Agreements.

     The prior consent of Deere is required for the opening of any Deere store
within the Company's designated areas of responsibility and for the acquisition
of any other Deere dealership. In addition to termination for defaults under the
Agricultural Dealer Agreement, Deere may immediately cancel the Agricultural
Dealer Agreement by giving notice to the Company at any time after the
occurrence of any of the following: (i) death of Mr. Paul J. Condit or a major
shareholder unless an ownership succession plan has been approved by Deere and
certain other conditions are satisfied; (ii) change of control, as defined,
without the prior written consent of Deere; (iii) closeout or sale of a
substantial part of the Company's business, the commencement of dissolution or
liquidation proceedings with respect to the Company, or a change, without the
prior written approval of Deere, in the location of the dealership's principal
place of business under the agreement; (iv) default by the Company under any
chattel mortgage or other security agreement between Deere and the Company; and
(v) revocation or discontinuance of any guaranty of the Company's present or
future obligations to Deere.

     Under a 1998 agreement amending the terms of its dealership agreement with
Deere, the Company is required to maintain an equity-to-asset ratio, as defined,
of at least 30% at all times on and after December 31, 2000. Without Deere's
prior written consent, the Company is also prohibited from making Deere
agricultural dealership acquisitions, initiating new business activity, paying
dividends, repurchasing its capital stock, or making any other distributions to
stockholders if the Company's equity-to-assets ratio is below 30%, or if such
ratio would fall below 30% as a result of such action. If such ratio falls below
25%, Deere may elect to terminate the dealer agreements with one year's advance
written notice, although the Company has 180 days to cure. As of December 31,
2000, the Company's equity-to-asset ratio was approximately 13%. Subsequent to
the August 1998 date of such agreement, Deere waived compliance with the
equity-to-asset ratio until December 31, 2000 and approved the Company's
acquisition of the Amarillo dealership. The Company is currently negotiating
with Deere to continue to waive compliance with the equity-to-asset ratio until
December 2002. However, there is no assurance that Deere will grant the Company
a waiver.

     In addition to Deere, the Company is an authorized dealer at various stores
for suppliers of other equipment. The terms of such arrangements vary, but most
of the dealership agreements contain termination provisions allowing the
supplier to terminate the agreement after a specified notice period (usually 180
days), upon a change of control, and in the event of Mr. Paul Condit's death.

FLOOR PLAN FINANCING

     Having adequate wholegoods and parts inventories at the Company's
agricultural equipment stores is important to meeting its customer needs and is
critical to achieving sales objectives. Accordingly, the Company attempts to
maintain at each store, or have readily available at other stores in its
network, sufficient inventory to satisfy anticipated customer needs. Inventory
levels fluctuate throughout the year and tend to increase before the primary
agricultural sales seasons. The cost of financing its inventory is an important
factor affecting the Company's results of operations.

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     Deere and Deere Credit offer new equipment floor plan financing to Deere
dealers for extended periods, to enable dealers to carry representative
inventories of equipment and to encourage the purchase of goods by dealers in
advance of seasonal retail demand. Deere charges variable market rates of
interest at or over the prime rate on balances outstanding after any
interest-free periods and retains a security interest in the inventories, which
it inspects periodically. The interest-free periods, which Deere changes
periodically, are currently four to twelve months. The interest rates for new
Deere equipment at year-end ranged from prime plus 50 basis points, or 10%, to
prime plus 300 basis points, or 12.50%, depending upon the length of time the
Company has the new equipment. Generally, the Company is not required to pay for
new equipment until it is sold.

     Deere also provides financing for used equipment accepted in trade,
repossessed equipment, and approved equipment from other suppliers, and receives
a security interest in such equipment. The used equipment floor plan rate
charged by Deere is currently prime plus 150 or 300 basis points, which is
determined by the type of equipment financed. At December 31, 2000 the
applicable interest rates ranged from 11.00% to 12.50%. To the extent available,
after the interest-free period under the Deere used equipment floor plan, the
Company may shift its financing to its Deere Credit wholesale line of credit.
However, in February 2001, because of the Company's inability to pay its
obligations to Deere on a timely basis, Deere has suspended the Company's
wholesale line of credit. As a result, the Company will only be able to shift
its floor plan equipment to the wholesale line of credit as the balance owed is
decreased. Deere classifies unpaid floor plan items as past due. The interest
rates on the outstanding balance of the wholesale line of credit are a defined
prime rate plus 50 or 75 basis points, which is determined by the type of
equipment financed. At December 31, 2000 the applicable interest rates ranged
from 10% to 10.25%.

     The Company finances equipment from manufacturers other than Deere through
its lines of credit, which total $3.2 million, at three other finance companies:
Agricredit Acceptance Company ("Agricredit"), Equipment Dealers Credit Company
("EDCO") and Transamerica Distributor Financing ("Transamerica"). The Company
has financing available through floor plan financing programs for equipment from
manufacturers other than Deere, which may be financed by such manufacturers
themselves or through third party lenders, depending on which option provides
the Company with the most favorable terms. These agreements provided for
interest at the rate of prime plus 150 basis points, or 11%, and the Company's
Transamerica line of credit provided for interest at the rate of prime plus 100
basis points, or 10.5%.

CUSTOMER FINANCING OPTIONS

     Financing options for customer purchases support the sales activities of
the Company. Significant financing sources for purchases by the Company's
customers are through programs offered by Deere and Agricredit. Generally, the
Company grants extended payment terms to only a few of its customers, who could
not qualify for the above financing.

     Deere's credit subsidiaries provide and administer financing for retail
purchases and leases of new and used equipment, primarily through Deere Credit.
Under Deere's retail financing plan the security interest is retained by Deere
Credit in the equipment financed. A small portion of the customer financing
provided by Deere is recourse to the Company. Deere retains a finance reserve
for amounts that the Company may be obligated to pay Deere, by retaining 1% of
the face amount of each contract financed under the Company's two dealer
accounts until the finance reserve reaches the lesser of 3% of the total dollar
amount of contracts outstanding or $600,000 for each dealer account. In the
event a customer defaults in paying Deere and there is a deficiency in the
amount owed to Deere, the Company has the option of paying the amount due under
its recourse obligations or using a portion of its finance reserve. The
Company's liability is capped at the amount of the finance reserve for each
dealer account, which, as of December 31, 2000, was approximately $251,000 and
$376,000 for its two finance reserve accounts.

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     Under Deere's equipment leasing plan the security interest is retained by
Deere Credit in the equipment leased. A small portion of the customer lease
provided by Deere is recourse to the Company. Deere retains a lease reserve for
amounts that the Company may be obligated to pay Deere, by retaining 1% of the
face amount of each lease contract under the Company's two dealer lease accounts
until the lease reserve reaches 3% of the total dollar amount of lease contracts
outstanding for each dealer account. In the event a customer defaults in paying
Deere and there is a deficiency in the amount owed to Deere, the Company has the
option of paying the amount due under its recourse obligations or using a
portion of its lease reserve. The Company's liability is capped at the amount of
the lease reserve for each dealer account, which at December 31, 2000 both
accounts were approximately $9,000.

     Deere Credit reviews the reserve account balances with the Company annually
and, if the reserve balances exceed the minimum requirements, Deere pays the
difference to the Company.

     Agricredit, through an agreement with the Company established in September
1997, also provides financing to the Company's customers. The financing provided
under the agreement by Agricredit to its customers is non-recourse to the
Company. Prior to September 1997 a portion of the customer financing provided by
Agricredit was recourse to the Company. The Company's liability is limited to
the portion withheld by Agricredit, which was approximately $50,000 at December
31, 2000.

PRODUCT WARRANTIES

     The manufacturer generally provides product warranties for new equipment
and parts. The term and scope of these warranties vary greatly by manufacturer
and by product. The Company does not provide additional warranties to retail
purchasers of new equipment. The manufacturer (such as Deere) pays the Company
for repairs to equipment under warranty. The Company generally sells used
equipment "as is" and without manufacturer's warranty, although manufacturers
sometimes provide limited warranties if the manufacturer's original warranty is
transferable and has not yet expired. Typically, the Company does not provide
additional warranties on used equipment.

COMPETITION

     The Company's agricultural retail equipment stores compete with
distributors of equipment from suppliers other than Deere, including Agco
Corporation, CNH Global N. V. (created from the Case Corporation and New Holland
N. V. merger) and Caterpillar Inc. The Company also competes with approximately
46 additional Deere agricultural dealerships located in the West Texas Panhandle
and Eastern New Mexico. These competing Deere agricultural dealers are located
in close proximity to one or more of the Company's stores. In addition, the
Company competes with independent used equipment dealers in its market area.
Competition among all new and used retail equipment dealers is primarily based
on price, value, reputation, quality, and design of the products offered by the
dealer, the customer service and equipment servicing provided by the dealer, and
the accessibility of the stores. The Company believes that its Deere dealership
network, broad product lines, ability to expand product support, and superior
quality Deere products have enabled it to compete effectively.

ENVIRONMENTAL AND GOVERNMENTAL REGULATIONS

     The Company's operations are subject to numerous federal, state, and local
rules and regulations, including laws and regulations designed to protect the
environment and to regulate the discharge of materials into the environment,
primarily relating to its service operations. Based on current laws and
regulations, the

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Company believes that it is in compliance with such laws and regulations and
that its policies, practices, and procedures are designed to prevent
unreasonable risk of environmental damage or violation of environmental laws and
regulations and any resulting material financial liability to the Company. The
Company is not aware of any federal, state, or local laws or regulations that
have been enacted or adopted, the compliance with which would have a material
adverse effect on the Company's results of operations or would require the
Company to make any material capital expenditure. No assurance can be given that
future changes in such laws or regulations or changes in the nature of the
Company's operations or the effects of activities of prior occupants or
activities at neighboring facilities will not have an adverse impact on the
Company's operations.

EMPLOYEES

     As of December 31, 2000, the Company employed 128 persons: 29 in sales; 62
in service; 24 in parts; and 13 in corporate and store administration. The
Company has no contracts or collective bargaining agreements with labor unions
and has never experienced work stoppages. The Company considers its relations
with employees to be satisfactory.

ITEM 2. PROPERTIES.

     The Company is headquartered in Seminole, Texas at its Deere dealer store
located at 1305 Hobbs Highway, Seminole, Texas 79360. The following table sets
forth the size of the Company's store locations:

<TABLE>
<CAPTION>

 Location              Acreage      Space*      Showroom*      Parts Storage*      Shop*
 --------              -------      ------      ---------      --------------      -----
<S>                    <C>          <C>         <C>            <C>                 <C>
Seminole, TX            13.94       50,000        9,875           14,000           26,125

Artesia, NM            14.295       10,898        2,250            3,948            4,700

Tornillo, TX            15.63       28,000        2,500           12,000           13,500

Plains, TX              6.025       21,000        2,200            8,600           10,200

Hereford, TX            10.97       26,700        3,900           12,000           10,800

Dimmitt, TX             10.02       35,500        5,400           11,200           18,900

Amarillo, TX             9.26       15,660        1,600            6,310            7,750

Friona, TX                5.0       18,000        4,100            5,600            8,300
</TABLE>


*    In square feet

     The Company owns all of its store locations that are subject to a bank term
loan and line of credit totalling approximately $7.3 million at December 31,
2000.

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ITEM 3. LEGAL PROCEEDINGS.

On May 2, 2000 the Company and its Chairman, Paul Condit, as well as certain
other members of the Condit family who are principal stockholders of the
Company, filed a lawsuit in Texas state district court in Gaines County, Texas
against Service Invest AS, a Norwegian shareholder, and certain other affiliated
shareholders seeking a declaratory judgment related to disputes that have arisen
between the parties (Texas Equipment Corporation, Texas Equipment Co., Inc.,
Paul Condit et al v. Service Invest AS, et al, Case No. 00-05-14040, 106th State
District Court, Gaines County, Texas). The defendant shareholders made their
principal investments in the Company (then named Marinex Multimedia) in
Regulation S offerings in early 1996 before the Company engaged in the September
1996 business combination with Texas Equipment Co. Inc. Texas Equipment Co. Inc.
was, prior to the business combination, wholly-owned by members of the Condit
family and its John Deere agricultural equipment dealerships have since 1997
represented the Company's only business activities. The defendant shareholders,
in discussions with the Company and the Condits, have contended that certain
provisions of the September 1996 business combination agreement require
surrender by the Condits of a portion of the shares of the Company they acquired
in the business combination. In addition, they contend that guarantee fees paid
by the Company to the Condits in the form of stock options for the past several
years in consideration of the personal guarantees by the Condits of the
Company's indebtedness to John Deere and the Company's bank are not warranted.
The Company and the Condits have vigorously disputed such contentions, noting
that the defendants' position as to their first claim ignores a provision in the
business combination agreement that expressly negates any requirement for a
return of shares by the Condits and, as to the second claim, noting that the
guarantee fee arrangement represents fair and customary non-cash consideration
for substantial personal guarantees required by the Company's creditors which
confer a substantial benefit upon the Company and, indirectly, all of its
non-guarantor shareholders. As to the first claim, the auditor provided for by
the business combination agreement also provided a report and analysis
supporting the position of the Company and the Condits and concluding that no
return of shares was required. The Company does not expect the litigation to
have a material adverse effect upon its operations or financial condition. There
have been no material developments with respect to this litigation since the
lawsuit was filed in May 2000.

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

     There were no matters submitted to a vote of stockholders during the fourth
quarter of the 2000 fiscal year.


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                                     PART II

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

     Prior to the date hereof, there has been a limited and sporadic trading
market for the Company's Common Stock, which presently trades on the NASD
Bulletin Board under the symbol "TEXQ." After its initial public offering in
1993, there was very little trading until the first quarter of 1996. On
September 7, 1999 the Company implemented a 7-for-1 reverse stock split. The
historical share and per share data included in this Report of Form 10-K has
been adjusted to give effect to this reverse split. According to information
furnished by the National Quotation Bureau, the high and low bid and high and
low asked quotations for each quarter during the 1999 and 2000 fiscal years are
as follows:

<TABLE>
<CAPTION>
                                    Bid                      Asked
                              -------------------------------------------
1999                          High         Low          High         Low
                              ----         ---          ----         ---
<S>                           <C>          <C>          <C>          <C>
March 31                      2.63         1.31         3.06         1.75
June 30                       3.28         1.53         3.50         1.75
September 30                  1.75         1.31         2.63         1.50
December 31                   1.38         0.44         2.25         0.50
2000
March 31                      0.44         0.44         0.63         0.50
June 30                       0.63         0.44         0.63         0.50
September 30                  0.75         0.38         1.38         0.63
December 31                   0.38         0.16         0.72         0.22
</TABLE>

     These market quotations represent inter-dealer prices, without retail
markup, mark down or commission and do not necessarily represent actual
transactions. As of March 15, 2001, there were approximately 730 holders of
record of the Company's Common Stock. During the 1999 and 2000 fiscal years the
Company has not paid any dividends or redeemed, repurchased or otherwise retired
any of its Common Stock and would currently be prohibited from paying cash
dividends under the terms of its lines of credit and Deere dealership
agreements. The Company presently intends to retain all earnings for the
operation and development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.


                                       12
<PAGE>   13


ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                  --------------------------------------------------------------------------------------
                                      2000               1999               1998              1997              1996(1)
                                  ------------       ------------       ------------      ------------      ------------
<S>                               <C>                <C>                <C>               <C>               <C>
Net Sales                         $ 57,648,203       $ 63,220,272       $ 67,998,233      $ 58,366,746      $ 28,094,196
Gross Profit                         7,077,351          8,705,144         10,464,665         7,825,628         4,092,807
Net (Loss) Income From
   Continuing Operations            (2,988,024)        (1,231,019)           952,635           815,370           883,155
Net (Loss) Income Per Share
   From Continuing Operation             (0.81)             (0.34)              0.27              0.23              0.35
Net (Loss) Income                   (2,988,024)        (1,231,019)           952,635           274,972           736,351
Net (Loss) Income Per Share              (0.81)             (0.34)              0.27              0.08              0.28
Total Assets                        31,846,035         35,866,092         47,845,617        28,528,585        11,612,258
Long-term Debt                       1,276,954          7,353,825          4,665,409         3,796,689         1,005,762
Dividends                                 0.00               0.00               0.00              0.00              0.00
</TABLE>


(1)     Financial data for all periods prior to September 1996 give pro forma
        effect to the business combination with TECI at that date and reflect
        only the operations of and financial condition of TECI. Such financial
        data does not reflect the operations or financial condition of Marinex,
        which conducted only limited development stage activities before its
        operations were discontinued in 1997.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION.

         As a specialty retailer, the Company distributes, sells, services and
rents equipment for the agricultural industry. The Company's primary supplier of
new equipment and parts is Deere & Company ("Deere"). The Company operates the
largest network of Deere agricultural equipment dealers in Texas and is one of
the largest in the United States. The Company's stores are located in West Texas
and in Eastern New Mexico.

         The Company generates its revenues from sales of new and used equipment
(wholegoods), sales of parts and service, and the rental of equipment. The
Company's highest gross margins have historically been generated from its parts
and service revenues. Due to product warranty time frames, usage patterns by
customers and market conditions, there generally is a time lag between the
increase and decrease in wholegoods sales and the effect on parts and service
revenues from such changes. As a result, changes in parts and service revenues
do not necessarily coincide with increases or decreases in wholegoods sales. In
addition, due to differences in gross margins between wholegoods sales and parts
and service revenue, gross margin percentages (total gross profit as a
percentage of total sales) will increase or decrease depending on the revenue
mix between wholegoods and parts and service.

         Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops. In 1999 and 2000, because of the downturn in the
agricultural equipment markets, relative quarterly sales and inventory
requirements have changed significantly from patterns prevailing in prior years.
See "Seasonality"

         The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts, acquisitions of additional retail locations
and capital expenditures. Historically, the Company has met these liquidity
requirements primarily through cash flow generated from operating activities,
floor plan financing and borrowings under credit agreements with Deere, Deere
Credit, Agricredit, EDCO,


                                       13
<PAGE>   14


Transamerica and commercial banks. Floor Plan financing from Deere and Deere
Credit represents the primary source of financing for wholegoods inventories,
particularly for equipment supplied by Deere. All lenders receive a security
interest in the inventory financed.

         Deere and Deere Credit offer floor plan financing to the Company and
other Deere dealers for extended periods and with varying interest-free periods,
depending on the type of equipment, to enable dealers to carry representative
inventories of equipment and to encourage the purchase of goods by dealers in
advance of seasonal retail demand. Down payments are not required and interest
may not be charged for a substantial part of the period for which inventories
are financed. Variable market rates of interest based on the prime rate are
charged on balances outstanding after any interest-free periods, which are
generally four to twelve months. Deere also provides financing to dealers on
used equipment accepted in trade and approved equipment from other suppliers.
Beginning in February 2001, Deere has suspended the normal terms on its
wholesale line of credit and parts purchases programs to the Company.

         Since 1998 the agricultural industry has experienced a prolonged
downturn. Commodity prices have decreased substantially across all major
production crops, which has had, and will continue to have a significant effect
on agricultural equipment sales. Improvement in commodity prices is not expected
to occur until the 2002 harvest season. As a result, the Company recorded
significant losses in 1999 and 2000, and because of these losses the Company has
been unable to generate sufficient cash flow to meet its obligation with its
bank and John Deere.

         Under its dealership agreement with John Deere the Company did not meet
the minimum equity requirement, as defined, as of December 31, 2000. If the
Company is unable to obtain equity funding, or negotiate a change in its
dealership agreement with Deere, the Dealership agreement may be terminated. As
a result of the default under the dealership agreement Deere has suspended
normal terms on its parts purchase programs to the Company beginning December
2000. The Company is now required to pay for parts on a bi-weekly basis. In
addition, beginning in February 2001, Deere has suspended its wholesale line of
credit to the Company, which has reduced the Company's ability to finance used
equipment. The Company believes that the Deere dealership agreements will be
restructured to allow for the removal of these restrictions.

         The Company did not meet the required cash flow coverage ratio and
minimum equity, as defined in its term loan agreement with its bank as of
December 31, 2000. The Company is currently negotiating with its bank to
restructure its loans. The Company believes that its bank loan will be
restructured; however, if the Company is unable to successfully restructure its
loans or obtain equity funding, the Company may have to consider the sale of
some or all of its store locations. There is no assurance that the Company will
be able to obtain financing or successfully renegotiate its agreements with John
Deere and its bank.


RESULTS OF OPERATIONS

2000 Compared to 1999

REVENUES

         Revenues decreased approximately $5,572,000, or 8.8%, to $57,648,203
for 2000 from $63,220,272 for 1999.

         The sale of wholegoods decreased approximately $4,308,000, or 8.9%, to
$44,149,679 for 2000 from $48,457,473 for 1999. This decrease was primarily due
to a $4,569,000 decrease in used equipment sales


                                       14
<PAGE>   15


while new equipment sales remained relatively flat with an increase of
approximately $262,000. The decrease in used equipment sales is the direct
result of the continued weakness in commodity prices. In addition, used
equipment prices were affected by aggressive discounts on new equipment offered
by the equipment manufacturers and severe drought in 2000 that affected the
equipment demand from the Company's customers that farm non-irrigated land. New
equipment sales remained flat primarily because of the aggressive discounts
offered by the equipment manufacturers. The agricultural equipment markets in
1999 and 2000 were affected by historically low commodity prices for corn,
soybean, wheat, peanuts and cotton. Weak worldwide demand and better than
average crop production in the last few years are the primary reasons for these
historically low commodity prices.

         Parts and service revenue decreased approximately $1,264,000, or 8.6%,
to $13,498,524 for 2000 from $14,762,797 for 1999. This decrease was directly
related to the prolonged downturn in the agricultural industry because of weak
commodity prices, which began in 1998 and progressively worsened in 1999 and
2000. As a result, the Company's customers have been forced to curtail parts and
service purchases. This trend is expected to continue in 2001. In addition, the
Company may experience the loss of, or further reduction in parts and service
sales because in December 2000 Deere stopped extending the Company financing
terms for parts purchases.

GROSS MARGINS

Gross profit decreased approximately $1,628,000, or 18.7%, to $7,077,351 for
2000 from $8,705,144 for 1999. The decrease in used equipment sales, parts and
service revenue and significantly lower margins on used equipment, which
includes a $700,000 for losses sustained as a result of fluctuations in market
demand, accounted for this decrease in gross profit.

Gross profit as a percentage of total revenues decreased to 12.3% in 2000 from
13.8% in 1999. The Company's highest gross margins are derived from its parts
and service revenues. For these periods the decline in gross profit percentage
was attributable to the decrease in wholegoods gross margins, including a
write-down of used equipment values, to 5.4% from 6.7 % and the decrease in
parts margins to 26.3% from 29.1%. The revenue mix between wholegoods sales and
parts and service revenue remained flat with parts and service revenue as a
percentage of total revenue at 23.4% in 2000 and 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

         Selling, general, and administrative expense as a percentage of total
revenues increased from 14.5% for 1999 to 15.4% for 2000. This increase is due
primarily to the decrease in sales of $5,572,000 without a corresponding
decrease in operating expenses.

         Selling, general, and administrative expense decreased approximately
$271,000, to $8,873,240 for 2000 from $9,144,727 for 1999. This decrease in
operating expenses was the result of lower parts department operating expenses
of approximately $49,000 and lower service department operating expenses of
approximately $109,000. Parts and service operating costs decreased because of
lower revenues and cost reductions that were implemented throughout 2000.
Selling and setup operating expenses decreased approximately $43,000, which was
primarily the result of the decrease in sales. Corporate administrative expenses
decreased $168,000 as the result of cost reductions in personnel and investor
relation expenses.


                                       15
<PAGE>   16



INTEREST EXPENSE

         Interest expense increased approximately $550,000 to $2,045,919 in 2000
from $1,495,534 in 1999. The increase was due primarily to the increased levels
of bank and floor plan financing because of higher Company owned inventory
levels, working capital loans and higher interest rates.

INTEREST INCOME

         Interest income decreased approximately $84,000 to $273,780 in 2000
from $357,493 in 1999. Interest income was earned in connection with the
financing of customer purchases. The amount the Company will earn depends on the
interest rates charged by competitors, lending policies of Deere Credit and
Agricredit and prevailing market conditions. In 2000 interest rates continued to
be competitive; however, because of the decrease in used equipment sales, which
typically do not have discounted interest rates, less interest income was earned
in 2000 compared to 1999. In addition, because of a change in the Agricredit
financing program, the Company received a one-time payment of previously
deferred interest income of $50,000 in 1999.

NON-CASH GUARANTEE FEE

         The non-cash guarantee fee was $68,509 in 2000 and $107,098 in 1999.
This fee is recorded in connection with the personal guarantee by three major
stockholders and one executive officer of the Company of approximately $14.4
million of accounts payable to Deere, and of a $7.3 million bank credit
facility. Guarantee fees related to such arrangements were paid in the form of
five-year options to acquire 459,373 shares of the Company's Common Stock in
1999 and 370,332 shares of the Company's Common Stock in 2000 with an option
price of $3.50.

NET LOSS

         Net loss increased approximately $1,757,000 to a net loss of $2,988,024
in 2000 from a net loss in 1999 of $1,231,019. This decrease was primarily the
result of the decrease in revenues and the related decrease in gross profit of
approximately $1,628,000.

         The loss per share in 2000 was $0.81, both basic and diluted, compared
to the loss per share in 1999 of $0.34, both basic and diluted, as a result of
the reasons described above.


1999 Compared to 1998

REVENUES

         Revenues decreased approximately $4,778,000, or 7%, to $63,220,272 for
1999 from $67,998,223 for 1998. Comparable store revenues (stores with full year
revenues in 1998 and 1999) decreased approximately $12,554,000, which was
partially offset by $7,776,000 in additional revenues from the dealership
acquisitions in Tornillo, Texas in June 1998 and in Amarillo, Texas in October
1998.

         The sale of wholegoods decreased approximately $5,872,000, or 11%, to
$48,457,473 for 1999 from $54,329,666 for 1998. Wholegoods sales from acquired
stores contributed approximately $5,733,000. Comparable store wholegoods sales
decreased approximately $11,605,000, which was the result of a $16,980,000, or
44%, decrease in new equipment sales, partially offset by a $5,375,000, or 44%
increase in


                                       16
<PAGE>   17


used equipment sales. The decrease in comparable store new equipment sales was
due primarily to the decrease in the sale of new harvest equipment, primarily
grain and peanut combines, as well as new tractor sales and to a lesser extent,
various other seasonal equipment, when compared to new equipment sales in 1998.
The increase in used equipment sales was the direct result of lower new
equipment sales. The agricultural equipment markets were affected by
historically low commodity prices for corn, soybean, wheat, peanuts and cotton
in 1999. Weak worldwide demand and better than average crop production in the
last few years are the primary reasons for these historically low commodity
prices.

         Parts and service revenue increased approximately $1,094,000, or 8%, to
$14,762,797 for 1999 from $13,668,567 for 1998. The contribution of parts sales
and service revenues from acquired stores of approximately $2,044,000 was offset
by a decrease of approximately $949,000 in comparable store parts sales and
service revenues. This decrease was directly related to the drought-related
downturn in the agricultural industry at the end of 1998 and the effect of weak
commodity prices, which began in 1998 and have continued to remain weak
throughout 1999. As a result, the Company's customers were forced to delay their
field preparation work until the end of the first quarter, which resulted in
lower than expected parts sales and service revenues during the first three
months of 1999. Parts and service sales were stronger in the final three
quarters of 1999 compared to the first quarter of 1999, but the increase was not
sufficient to replace the lost revenue in the first quarter.

GROSS MARGINS

Gross profit decreased approximately $1,760,000, or 16.8%, to $8,705,144 for
1999 from $10,464,665 for 1998. The decrease in comparable store new equipment
sales, parts and service revenue and lower margins on used equipment, which
includes $667,000 for losses sustained on inventory carrying amounts in excess
of selling prices resulting from fluctuations in equipment market demand,
resulted in a decrease in gross profit by approximately $2,969,000. This
decrease was offset in part by the contribution of gross profit from acquired
stores of approximately $1,209,000.

Gross profit as a percentage of total revenues decreased to 13.8% in 1999 from
15.4% in 1998. The Company's highest gross margins are derived from its parts
and service revenues. For these periods the decline in gross profit was
primarily attributable to the decrease in wholegoods gross margins as a
percentage of total wholegoods sales from 9.7% to 6.7%, which includes, the
write-down of used equipment values, offset in part by the shift in revenue mix
between wholegoods sales and parts and service revenue. Parts and service
revenue as a percentage of total revenue increased to 23% in 1999 from 20% in
1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

         Selling, general, and administrative expense as a percentage of total
revenues increased from 12.7% for 1998 to 14.5% for 1999. This increase was due
primarily to the decrease in comparable store sales of $12,554,000 without a
corresponding decrease in operating expenses.

         Selling, general, and administrative expense increased approximately
$912,000, to $9,144,727 for 1999 from $8,233,189 for 1998. Store acquisitions
accounted for approximately $1,022,000 of this increase, offset in part by the
decrease in comparable store operating expenses of approximately $110,000. This
decrease in comparable store operating expenses was the result of lower parts
department operating expenses of approximately $78,000 and lower service
department operating expenses of approximately $129,000. Parts and service
operating costs decreased because of lower revenues and cost reductions that
were implemented in early 1999. Selling and setup operating expenses increased
approximately $64,000 because of higher bad debt expense of approximately
$411,000 offset by lower salaries and commissions and other operating


                                       17
<PAGE>   18


expenses of approximately $347,000, which were the result of the decrease in
sales. Corporate administrative expenses remained flat from period to period.

INTEREST EXPENSE

         Interest expense increased approximately $644,000 to $1,495,534 in 1999
from $851,442 in 1998. The increase was due primarily to the increased levels of
bank and floor plan financing because of higher Company owned inventory levels
and working capital loans in 1999, in addition to acquisition debt from the
Tornillo and Amarillo store acquisitions in 1998.

INTEREST INCOME

         Interest income increased approximately $115,000 to $357,493 in 1999
from $242,628 in 1998. Interest income was earned in connection with the
financing of customer purchases. The amount the Company will earn depends on the
interest rates charged by competitors, lending policies of Deere Credit and
Agricredit and prevailing market conditions. In 1999 interest rates continued to
be competitive; however, because of the increase in used equipment sales, which
typically do not have discounted interest rates, more interest income was earned
in 1999 compared to 1998. In addition, because of a change in the Agricredit
customer-financing program, the Company received a payment of previously
deferred interest income of $50,000 in the third quarter of 1999.

NON-CASH GUARANTEE FEE

         The non-cash guarantee fee was $107,098 in 1999 and $154,724 in 1998.
This fee was recorded in connection with the personal guarantee by three major
shareholders and one executive officer of the Company of approximately $21
million of accounts payable to Deere, and of a $5.5 million bank credit
facility. Guarantee fees related to such arrangements were paid in the form of
fully-vested five-year options to acquire 437,690 shares of the Company's Common
Stock in 1998 and 459,373 shares of the Company's Common Stock in 1999 with an
option price of $3.50.

NET INCOME (LOSS)

         Net income decreased approximately $2,184,000 to a net loss of
($1,231,019) in 1999 from net income in 1998 of $952,635. This decrease was
primarily the result of the decrease in revenues, including a 20.1% decrease in
revenues on a comparable store basis, and the related decrease in gross profit
of approximately $1,883,000, an increase in store operating expenses of
$788,000, an increase in interest expense (net of interest income) of $530,000,
a decrease in other costs (net of other income) of $50,000, offset by a decrease
in the provision for income taxes of approximately $967,000.

         The loss per share in 1999 was ($0.34), both basic and diluted,
compared to earnings per share in 1998 of $0.27, both basic and diluted, as a
result of the reasons described above.


LIQUIDITY AND CAPITAL RESOURCES

         The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts and capital expenditures. Historically, the
Company has met these liquidity requirements primarily through cash flow
generated from operations, floor plan financing, and borrowings under credit
agreements with Deere, Deere Credit, Agricredit Acceptance Company
("Agricredit"), Equipment Dealers Credit Company


                                       18
<PAGE>   19



("EDCO") and Transamerica Distributor Financing ("Transamerica") and commercial
banks. Floor plan financing from Deere and Deere Credit represents the primary
source of financing for wholegoods inventories, particularly for equipment
supplied by Deere. All lenders receive a security interest in the inventory
financed. Deere and Deere Credit offer floor plan financing for extended periods
and with varying interest-free periods, depending on the type of equipment, and
to encourage the purchase of wholegoods by dealers in advance of seasonal retail
demand. Down payments are not required and interest may not be charged for a
portion of the period for which inventories are financed.

         The used equipment floor plan rate charged by Deere is currently prime
plus 150 or 300 basis points, which is determined by the type of equipment
financed. At December 31, 2000 the applicable interest rates ranged from 11% to
12.50%. To the extent available, after the interest-free period under the Deere
used equipment floor plan, the Company may shift its financing to its Deere
Credit wholesale line of credit. The interest rates on this line of credit are
currently based on a defined prime rate plus 50 or 75 basis points, which is
determined by the type of equipment financed. At December 31, 2000 the
applicable interest rates ranged from 10% to 10.25%. In February 2001, because
the Company has been past due on parts purchases, Deere suspended the Company's
ability to finance equipment purchases under its Deere Credit floor plan
facility. This action by Deere will make it difficult for the Company to finance
customers' trade-in equipment, which will affect new and used equipment sales.

         The Company annually reviews the terms of its financing arrangements
and interest rates with its lenders. The interest rates for new Deere equipment
at year-end ranged from prime plus 50 basis points, or 10.00%, to prime plus 300
basis points, or 12.50%, depending upon the length of time the Company has the
new equipment. Generally, the Company is not required to pay for new equipment
until it is sold.

         The Company's Agricredit and EDCO lines of credit, which at December
31, 2000 was $2.7 million, provide for interest at the rate of prime plus 150
basis points, or 11%. The Company's Transamerica line of credit, which at
December 31, 2000 was $500,000, provides for interest at the rate of prime plus
100 basis points, or 10.5%.

         On July 2, 1999 the Company received a $4,930,000 long-term loan at a
defined prime rate plus 150 basis points from a lender. The loan is
collateralized by substantially all of the Company's land, buildings, equipment
and furniture and fixtures. The proceeds were used to refinance $3,843,740 of
existing debt, provide $840,400 in working capital and loan fees of $245,860. As
of December 31, 2000 the Company did not meet the cash flow coverage ratio and
minimum equity requirements as defined in the agreement. The Company is
currently in negotiations with its bank to restructure this term loan and a
related line of credit. The total amount of this loan has been classified as a
current liability at December 31, 2000 and 1999.

         In addition to the term loan, the lender provides the Company with a
$1,750,000 line of credit at a defined prime rate plus 50 basis points,
collateralized by trade accounts receivable and Company owned equipment and
parts inventory. On February 15, 2000 the Company received an additional line of
credit of $750,000 at a defined prime rate plus 50 basis points, collateralized
by trade accounts receivable and Company owned equipment and parts inventory. At
December 31, 2000 the balance for these lines of credit were $2,416,063 and are
renewed on a monthly basis. The Company is currently in discussions with its
bank to restructure this loan.

         In August 2000 the Company entered into a five-year promissory note
agreement, due July 19, 2005 in equal installments at prime plus 50 basis
points, or 10% at December 31, 2000, with John T. Condit, an officer and major
stockholder of the Company, to borrow approximately $436,000 for working capital


                                       19
<PAGE>   20


purposes. The loan is secured by a second mortgage on the land, buildings,
service equipment and furniture and fixtures of the Company.

         Cash and cash equivalents decreased to $220,519 at December 31, 2000
from $307,509 at December 31, 1999. During 2000, operations provided net cash of
approximately $674,000 primarily because of the decrease in inventories of
approximately $2,796,000 and the decrease in accounts receivables of
approximately $606,000, offset in part by the fiscal year net loss of $2,988,024
and the decrease in floor plan payables of approximately $513,000. The decrease
in inventory was primarily due to the decrease in used equipment and parts sales
in 2000, which resulted in a decrease in new equipment and parts purchases.
Investing activities used cash of approximately $262,000, primarily for capital
expenditures. The Company's capital expenditures are expected to remain at the
levels incurred in 1999 and 2000.

EFFECTS OF INFLATION

         Inflation has not had a material impact upon operating results and the
Company does not expect it to have such an impact in the future. To date, in
those instances in which the Company has experienced cost increases it has been
able to increase selling prices to offset such increases in cost. There can be
no assurance, however, that the Company's business will not be affected by
inflation or that it can continue to increase its selling prices to offset
increased costs and remain competitive.


SEASONALITY

         Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops. In 1999 and 2000, because of the downturn in the
agricultural equipment markets, quarterly sales and inventory requirements have
changed significantly from patterns prevailing in prior years. The fourth
quarters of fiscal 1999 and 2000 reflect the impact of the equipment industry
downturn. The following schedule shows the percentage of sales in each quarter:

<TABLE>
<CAPTION>

                           First Qtr.      Second Qtr.    Third Qtr.        Fourth Qtr.
                           ----------      -----------    ----------        -----------
 <S>                       <C>             <C>            <C>               <C>
    1998 ..............       23%             24%           26%                 27%
    1999 ..............       27%             24%           28%                 21%
    2000 ..............       30%             27%           26%                 17%
</TABLE>

         The Company believes that quarterly sales will return to normal in 2002
when commodity prices and demand for agricultural equipment are expected to
improve.

CERTAIN IMPORTANT FACTORS

         In addition to the matters discussed above, there are several important
factors that could cause the Company's future results to differ materially from
those anticipated by the Company or which are reflected in any forward-looking
statement which may be made by or on behalf of the Company. Some of these
important factors (but not necessarily all such important factors) include the
following:

         o        Agricultural industry cycles and other economic conditions,
                  including interest rate fluctuations, economic recessions,
                  customer business cycles, and customer confidence in the
                  economy;

         o        The overall success of Deere and the Company's other
                  suppliers;


                                       20
<PAGE>   21


         o        The availability and terms of floor plan financing and
                  customer financing;

         o        The incentive and discount programs provided by Deere and the
                  Company's other suppliers, and their promotional and marketing
                  efforts;

         o        The introduction of new and innovative products by the
                  Company's suppliers;

         o        The manufacture and delivery of competitively-priced, high
                  quality equipment and parts by the Company's suppliers in
                  quantities sufficient to meet the requirements of the
                  Company's customers on a timely basis;

         o        The length of the crop growing season and winter and spring
                  weather conditions in West Texas and Eastern New Mexico, and
                  the confidence of the Company's agricultural customers in the
                  farm economy;

         o        Risks associated with expansion, including the management of
                  growth; and

         o        Continued availability of key personnel.


                                       21
<PAGE>   22



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         At December 31, 2000, approximately 93% of the Company's debt
obligations (includes short and long-term equipment and bank financing) have
variable interest rates. Accordingly, the Company's net income and after tax
cash flow are affected by changes in interest rates. Assuming the current level
of borrowings at variable rates and assuming a one percentage point increase in
the 2000 average interest rate under these borrowings, (which average rate was
approximately 10.34%) it is estimated that the Company's 2000 interest expense
would have increased by approximately $72,000 resulting in an increase in the
Company's 2000 net loss. In the event of an adverse change in interest rates,
management would likely take actions to mitigate its exposure. Because of the
uncertainty of the actions that would be taken and their possible effects, this
analysis assumes no such actions. Further this analysis does not consider the
effects of the change in the level of overall economic activity that could exist
in such an environment.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Company's consolidated balance sheets as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000, 1999 and 1998 are included under Item 14 hereof.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Effective September 29, 2000, the Company, with the approval of its
Board, appointed Hein + Associates LLP as its independent auditors for the
fiscal year ending December 31, 2000, to replace the firm of Ernst & Young LLP.

In connection therewith, the Company reported in its Form 8-K, and Ernst &
Young, LLP concurred, there had been no disputes between management and the
auditors and the auditors' reports for fiscal years 1998 and 1999 contained no
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope, or accounting principles, and during the
registrant's subsequent interim period to September 29, 2000 there were no
disagreements with the accountants on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved, would have caused the accounting firm to make
references in connection with its opinion to the subject matter of the
disagreement.



                                       22
<PAGE>   23


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>

             Name                 Age                     Position
             ----                 ---                     --------
<S>                               <C>      <C>
         Paul J. Condit           67       President, Director, Chief Executive Officer

         John T. Condit           36       Secretary, Treasurer, Director

         E.A. Milo Mattorano      55       Vice President, Chief Financial Officer

         James D. Arnold          32       Director

         Mickey L. Ray            51       Director
</TABLE>

         Paul J. Condit is President, Chief Executive Officer and a Director and
served the Company in his current capacities since its inception in 1987. He has
a B.S. degree from Oklahoma State University and has been in the farm equipment
business for over 28 years. Mr. Condit has served the Company and its
Subsidiary, TECI, in his current capacities since its inception in 1987, before
which time Mr. Condit owned and operated Condit Equipment Company for a total of
fifteen years.

         John Condit, the son of Paul J. Condit, serves as a Director and
Secretary of the Company and served the Company in his current capacities since
its inception in 1987. He obtained a BBA degree from Texas Tech University in
1986. Since May 1988 he has been President of Domicile Property Management,
Inc., a real estate acquisition and management firm, in San Antonio, Texas.

         E.A. Milo Mattorano has served as the Company's Chief Financial Officer
and a Vice President since December 1997. Mr. Mattorano has also served as a
partner of Tatum CFO Partners, LLP, a firm of professional chief financial
officers, since August 2000. Since March 6, 2001, Mr. Mattorano also serves as
the chief financial officer of TurboChef Technologies, Inc., a leading
rapid-cook technology company. From January 1995 until December 1997, Mr.
Mattorano served as Vice President and Chief Financial Officer of AXCESS Inc.
(formerly Lasertechnics, Inc.), a leading provider of asset management products
and solutions. From October 1989 to December 1994, Mr. Mattorano served as
Executive Vice President of Finance of Insilco Corporation, a conglomerate of
manufacturing companies in various industries. Mr. Mattorano is a CPA and worked
in the audit department of Deloitte & Touche for six years from 1974 to 1980.
Mr. Mattorano holds a B.S. in accounting from Adams State College, is a
certified public accountant and a member of the AICPA.

         James D. Arnold has served as a vice president and executive director
of the Covenant Health Foundation since December 1999. Mr. Arnold also serves as
a consultant to Chickasaw Technology, Inc., an internet-based software company
in Oklahoma City. From September 1997 to December 1999 Mr. Arnold served as the
Assistant Vice Chancellor of Texas Tech University. From 1995 to 1997, Mr.
Arnold was the Assistant Director of Development for the University of Texas at
Austin. From 1993 to 1995, he was the Director of Institutional Advancement for
Texas Tech Health Science Center at Odessa. Mr. Arnold worked


                                       23
<PAGE>   24


for Dell Computer Corporation from 1991 to 1993 as a senior Account
Representative. Mr. Arnold graduated with a BS degree in Business Administration
from the University of Texas at Austin in 1991 and received a Master of
Education in 1993 from Texas Tech University.

         Mickey L. Ray is the principal owner of Mickey Ray & Associates, an
insurance and financial planning and consulting service in Midland, Texas. Mr.
Ray is a CPA and was a partner in Ray, Davis & Ray Associates from 1978 until
1985, at which time he formed Mickey Ray & Associates. Prior to 1978, Mr. Ray
was a controller for The O'Connor-Braman Interest, an oil and gas operation, and
a controller for National City Lines, Inc., a Fortune Transportation company. A
graduate of Texas Tech in 1972 with a BBA degree in accounting, Mr. Ray has
served on several community, civic and professional boards and is a former Mayor
of the City of Seminole.

Compliance with Section 16(a) of The Securities Exchange Act of 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires each director and executive officer of the Company, and
each person who owns more than 10% of a registered class of the Company's equity
securities to file by specific dates with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of change in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. The Company is required to report
in this report any failure of its directors and executive officers to file by
the relevant due date any of these reports during the Company's fiscal year.

         To the Company's knowledge, all Section 16(a) filing requirements
applicable to the Company's executive officers, directors, and 10% stockholders
were complied with.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

         The following table sets forth certain information regarding
compensation paid by the Company during the last three fiscal years to each of
the executive officers of the Company and its subsidiaries who served during the
fiscal year ended December 31, 2000 (the "Named Executive Officers").



                                       24
<PAGE>   25

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                 LONG-TERM
                                                                               COMPENSATION
                                                                               ------------
                                             ANNUAL COMPENSATION                NUMBER OF
                                             -------------------                SECURITIES
NAME AND PRINCIPAL                                              OTHER ANNUAL    UNDERLYING
POSITION                         YEAR     SALARY      BONUS     COMPENSATION    OPTIONS(#)
-----------------------------    ----     ------      -----     ------------    -----------
<S>                              <C>     <C>        <C>         <C>               <C>
Paul J. Condit                   2000    $184,107   $     --    $     --          92,583
President and Chief              1999     250,000         --          --         114,844
Executive Officer                1998     120,101    110,000          --         109,423

John T. Condit                   2000       1,500         --          --          92,583
Secretary, Treasurer             1999       2,000         --          --         114,844
And Director                     1998       5,390         --          --         109,423

E.A. Milo Mattorano              2000     124,958         --          --          42,900
Vice President and Chief         1999     140,000     15,000          --              --
Financial Officer                1998     140,101     10,000          --              --
</TABLE>

Employment Contracts with Executive Officers

         In August 2000, Mr. Mattorano became a partner in the firm of Tatum CFO
Partners, LLP, and at that time the Company and Mr. Mattorano terminated his
prior employment agreement with the Company. The Company entered into an
agreement with Mr. Mattorano and Tatum CFO Partners, LLP whereby, Mr. Mattorano
will continue as an employee and the chief financial officer of the Company. The
agreement provides for two days a week at a minimum salary of $7,200 a month.
The agreement also provides for a 30-day notice of cancellation. In addition,
the Company has awarded 42,900 Common Stock options to Mr. Mattorano at an
exercise price of $.50.

         The Company has no other written employment contracts with its
officers.


                                       25
<PAGE>   26

Option Grants

         The following table sets forth information relating to stock option
grants made by the Company to each of the Named Executive Officers of the
Company during the fiscal year ended December 31, 2000. The Company has no plans
that provide for the granting of stock appreciation rights.

                              OPTION GRANTS IN 2000

<TABLE>
<CAPTION>
                                                                                     Potential Realizable
                                                                                       Value At Assumed
                                                                                     Annual Rates Of Stock
                                                                                      Price Appreciation
                                  Individual Grants                                     For Option Term
----------------------------------------------------------------------------------------------------------
     (a)                  (b)            (c)               (d)            (e)          (g)            (h)
--------------        ----------    -------------      -----------     ----------    -------        ------
                       Number of     Percent of
                      Securities    Total Options
                      Underlying     Granted to        Exercise or
                       Options      Employees in       Base Price      Expiration
     Name              Granted       Fiscal Year        ($/share)         Date          5%            10%
--------------        ----------    -------------      -----------     ----------    -------        ------
<S>                    <C>          <C>                <C>             <C>           <C>            <C>
Paul J. Condit         23,174(1)         6%               3.50           3/31/05     $    --        $   --
Paul J. Condit         23,117(1)         6%               3.50           6/30/05          --            --
Paul J. Condit         23,146(1)         6%               3.50           9/30/05          --            --
Paul J. Condit         23,146(1)         6%               3.50          12/31/05          --            --

John T. Condit         23,174(1)         6%               3.50           3/31/05          --            --
John T. Condit         23,117(1)         6%               3.50           6/30/05          --            --
John T. Condit         23,146(1)         6%               3.50           9/30/05          --            --
John T. Condit         23,146(1)         6%               3.50          12/31/05          --            --

E.A. Milo Mattorano    42,900(2)         10%              0.50           10/6/05          --            --
</TABLE>

----------
(1)      Represents five-year options granted on a quarterly basis in connection
         with the personal guarantee by Mr. Paul J. Condit and Mr. John T.
         Condit of the Company's floor plan with Deere and bank debt at an
         exercise price determined by the Board to be in excess of fair market
         value at the date of grant. Potential Realizable Values are calculated
         based upon the closing price on the date of award, which was $0.44,
         $0.47, $0.38 and $0.25, respectively for the four quarterly awards.

(2)      Represents five-year options granted in the fourth quarter in
         connection with an employment agreement with Mr. Mattorano and Tatum
         CFO Partners, LLP. The exercise price was determined by the market
         price at the time of grant. Potential Realizable Values are calculated
         based upon the closing price on December 31, 2000.


                                       26
<PAGE>   27

Aggregate Option Exercises and Fiscal Year-End Option Value

         The following table sets forth information relating to the exercise of
common stock options by each of the Named Executive Officers of the Company,
during the fiscal year ended December 31, 2000 and the value of such
individuals' unexercised common stock options as of December 31, 2000.

<TABLE>
<CAPTION>
                                   AGGREGATE OPTION EXERCISES IN 2000 AND
                                       DECEMBER 31, 2000 OPTION VALUES
--------------------------------------------------------------------------------------------------
                                                         NUMBER OF
                                                        SECURITIES
                                                        UNDERLYING
                                                        UNEXERCISED             VALUE OF UNEXERCISED
                                                         OPTIONS AT            IN-THE-MONEY OPTIONS AT
                       NUMBER OF                     DECEMBER 31, 2000          DECEMBER 31, 2000(1)
                         SHARES                      -----------------        -----------------------
                        ACQUIRED                              #                           $
                      ON EXERCISE     VALUE             EXERCISABLE/                 EXERCISABLE/
NAME                  -----------    REALIZED           UNEXERCISABLE               UNEXERCISABLE
----                       #         --------           -------------               -------------
<S>                   <C>            <C>             <C>           <C>        <C>         <C>
Paul J. Condit           --             --           348,069           --           $  --   $  --

John T. Condit           --             --           348,069           --              --      --

E.A. Milo Mattorano      --             --            26,786       16,071              --      --
</TABLE>

----------
(1)      Based upon the closing bid price of $0.19 at December 31, 2000


                                       27
<PAGE>   28

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT.

         The following table sets forth the number of shares of Common Stock
beneficially owned as of March 15, 2001 for (a) each person known by the Company
to be the beneficial owner of more than 5% of the Company's Common Stock (the
only outstanding securities of the Company), (b) each current director of the
Company, (c) each of the Named Executive Officers of the Company and (d) all
directors and executive officers as a group. Except as otherwise indicated, the
persons or entities set forth in the table below have sole investment and voting
power with respect to all shares shown as beneficially owned, subject to
community property laws, where applicable. The business address of each director
and each current executive officer is c/o Texas Equipment Corporation, 1305
Hobbs Highway, P.O. Box 790, Seminole, Texas 79360.

<TABLE>
<CAPTION>
                                                       AMOUNT AND
                                                       NATURE OF
                         NAME AND ADDRESS              BENEFICIAL           PERCENT OF
TITLE OF CLASS         OF BENEFICIAL OWNER             OWNERSHIP               CLASS
--------------         -------------------             ----------           ----------
<S>                 <C>                                 <C>                  <C>
 Common Stock       Paul J. Condit                        348,069(1)           8.4%

 Common Stock       John T. Condit                        779,022(1)          18.8%

 Common Stock       Jeffrey E. Condit                   1,150,449(1)          27.7%

 Common Stock       Paul J. Condit II.                  1,150,449(1)          27.7%

 Common Stock       James D. Arnold                            --               --(3)

 Common Stock       E.A. Milo Mattorano                    26,786(2)            --(3)

 Common Stock       Mickey L. Ray                              --               --(3)

 Common Stock       1997 Condit Family Trust              371,429             10.3%

 Common Stock       All directors and executive
                    officers as a group (5 persons)     1,153,877             27.9%
</TABLE>

----------
(1)      Includes, in each case, the right to acquire 348,069 shares of Common
         Stock pursuant to options.

(2)      The right to acquire 26,786 shares of Common Stock pursuant to options.

(3)      Represents ownership of less than 1%.


                                       28
<PAGE>   29

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In 1999 and 2000 the Company recorded a non-cash charge of $107,098 and
$68,509, respectively in connection with the personal guarantee by the Condit
family of approximately $21 million and $14 million of average accounts payable
to Deere & Company, and of approximately $6.7 million and $7.3 million average
credit facility at the Company's bank during 1999 and 2000, respectively. These
required guarantee arrangements were paid in the form of five-year options to
acquire up to 459,373 and 370,332 shares of Common Stock with an option price of
$3.50 in 1999 and 2000, respectively. These options were granted pursuant to a
continuing agreement, which contemplates a guarantee fee, payable in stock
options of up to 6% of the average outstanding guaranteed balance. The Company
believes that this transaction was made on terms no less favorable to the
Company than could have been obtained from an unaffiliated third party.

In August 2000 the Company entered into an agreement with John T. Condit, an
officer and major stockholder of the Company, to borrow approximately $436,000
for working capital purposes. The loan is secured by a second mortgage on the
land, buildings, service equipment and furniture and fixtures of the Company.


                                       29
<PAGE>   30

                                     PART IV

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

(a) Financial Statements

The following financial statements are included herewith:

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
<S>                                                                                            <C>
Independent Auditor's Report - Hein + Associates LLP.......................................    F-2
Report of Independent Auditors - Ernst & Young LLP.........................................    F-3
Consolidated Balance Sheets - December 31, 2000 and 1999...................................    F-4
Consolidated Statements of Operations - Years Ended December 31, 2000,
       1999 and 1998.......................................................................    F-6
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2000,
       1999 and 1998.......................................................................    F-7
Consolidated Statements of Cash Flows- Years Ended December 31, 2000,
       1999 and 1998.......................................................................    F-8
Notes to Consolidated Financial Statements.................................................    F-10
</TABLE>

(b) Financial Statement Schedules

         The following financial statement schedule is filed as a part of this
report and should be read together with our financial statements:

<TABLE>
<S>                                                                                            <C>
           Schedule II - Valuation and Qualifying Accounts.................................    F-28
</TABLE>

(c) Reports on Form 8-K

         Form 8-K, Change in Auditors, filed October 1, 2000

(d) Exhibits

<TABLE>
<CAPTION>
  Item No.                          Item                                    Method of Filing
  --------                          ----                                    ----------------
<S>            <C>                                          <C>
    3(a)       Articles of Incorporation..................  Incorporated by reference to Exhibit 3(a) to
                                                            the Company's 1996 Form 10-K
    3(b)       By-Laws....................................  Incorporated by reference to Exhibit 3(b) to
                                                            the Company's 1996 Form 10-K
    10(a)      Acquisition Agreement for Texas              Incorporated by reference to Exhibit 3(a) to
                 Equipment Co. Inc........................  the Company's 1996 Form 10-K
    10(j)      Contract with John Deere & Company.........  Incorporated by reference to Exhibit 3(j) to
                                                            the Company's 1996 Form 10-K
    10(k)      Contract with John Deere & Company.........  Incorporated by reference to Exhibit 10(k)
                                                            to the Company's 9/30/1998 Form 10-Q
     21        List of Subsidiaries.......................  (filed herewith)
     23        Consent of Ernst & Young, LLP .............  (filed herewith)

</TABLE>


                                       30
<PAGE>   31

                                   SIGNATURES

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

Date: April 13, 2001

                                       TEXAS EQUIPMENT CORPORATION

                                       By: /s/ Paul J. Condit
                                          -------------------------------------
                                          Paul J. Condit
                                          President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                    Signature                                           Title                             Date
                    ---------                                           -----                             ----
<S>                                                 <C>                                            <C>

/s/ Paul J. Condit                                  Chairman of the Board, President, Chief
--------------------------------------------        Executive Officer and Director (principal
Paul J. Condit                                      executive officer)                             April 13, 2001

/s/ John T. Condit                                  Director and Secretary                         April 13, 2001
--------------------------------------------
John T. Condit


/s/ E.A. Milo Mattorano                             Vice President, Chief Financial Officer and
--------------------------------------------        Chief Accounting Officer (principal
E.A. Milo Mattorano                                 financial and accounting officer)              April 13, 2001

/s/ James D. Arnold                                 Director                                       April 13, 2001
--------------------------------------------
James D. Arnold

/s/ Mickey L. Ray                                   Director                                       April 13, 2001
--------------------------------------------
Mickey L. Ray
</TABLE>


                                       31
<PAGE>   32

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                       INDEX                                            PAGE
                       -----                                            ----
<S>                                                                     <C>
INDEPENDENT AUDITOR'S REPORT - HEIN + ASSOCIATES LLP                    F-2

REPORT OF INDEPENDENT AUDITORS - ERNST & YOUNG LLP                      F-3

CONSOLIDATED BALANCE SHEETS                                             F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                                   F-6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                         F-7

CONSOLIDATED STATEMENTS OF CASH FLOWS                                   F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              F-10
</TABLE>


                                       F-1

<PAGE>   33

                          INDEPENDENT AUDITOR'S REPORT


To the shareholders and Board of Directors
Texas Equipment Corporation and Subsidiaries


We have audited the consolidated balance sheet of Texas Equipment Corporation
and Subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule referred to in
the index at Item 14(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Equipment Corporation and Subsidiaries as of December 31, 2000, and the
consolidated results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred significant losses the past two
years and is out of compliance with the requirements of its major borrowing
arrangements at December 31, 2000. These factors raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



Hein + Associates LLP
Certified Public Accountants

Dallas, Texas
February 28, 2001


                                      F-2

<PAGE>   34

                         REPORT OF INDEPENDENT AUDITORS



To the shareholders and Board of Directors
Texas Equipment Corporation and Subsidiaries


         We have audited the consolidated balance sheet of Texas Equipment
Corporation and Subsidiaries as of December 31, 1998 and 1999 the related
consolidated statement of operations, stockholders' equity, and cash flow for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Equipment Corporation and Subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.


                                                Ernst & Young LLP

Dallas, Texas
March 3, 2000


                                       F-3
<PAGE>   35

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                             ASSETS
                                                                         December 31,
                                                                -----------------------------
                                                                    2000             1999
                                                                ------------     ------------
<S>                                                             <C>              <C>
CURRENT ASSETS
    Cash and cash equivalents                                   $    220,519     $    307,509
    Trade accounts receivable less allowance for doubtful
        accounts of approximately $210,000 and $110,000 for
        2000 and 1999, respectively                                  230,253          561,958
    Other receivables                                                853,425        1,127,502
    Inventories                                                   24,450,771       27,247,079
                                                                ------------     ------------

          TOTAL CURRENT ASSETS                                    25,754,968       29,244,048

PROPERTY AND EQUIPMENT, NET                                        5,170,923        5,481,180

FINANCE RECEIVABLES, NET                                             486,411          588,564

RECEIVABLES FROM OFFICER                                             137,396          134,800

GOODWILL, net of accumulated amortization of $104,883 and
       $92,170 for 2000 and 1999, respectively                        85,815           98,528

OTHER ASSETS                                                         210,522          318,972
                                                                ------------     ------------
                                                                $ 31,846,035     $ 35,866,092
                                                                ============     ============
</TABLE>

                 See notes to consolidated financial statements
                                       F-4

<PAGE>   36

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                    -----------------------------
                                                                        2000             1999
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
CURRENT LIABILITIES

          Floor plan payables                                       $ 17,113,025     $ 17,625,613
          Borrowings under line of credit                              2,416,063        1,749,811
          Accounts payable                                             1,116,790        1,215,398
          Accrued expenses                                               552,539          368,763
          Current maturities of long-term debt                         5,269,564          397,639
                                                                    ------------     ------------

TOTAL CURRENT LIABILITIES                                              26,467,981       21,357,224

LONG-TERM DEBT, net of current maturities                              1,276,954        7,353,825

DEFERRED TAX LIABILITY                                                        --          233,074

CONTINGENCIES (Notes 14 & 17)

STOCKHOLDERS' EQUITY

       Common stock, $.001 par value; authorized 50,000,000;
          issued and outstanding 3,804,602 in 2000 and
          3,607,311 in 1999                                                3,804            3,607

       Additional paid-in capital                                      3,465,605        3,298,647

       Retained earnings                                                 631,691        3,619,715
                                                                    ------------     ------------
               TOTAL STOCKHOLDERS' EQUITY                              4,101,100        6,921,969
                                                                    ------------     ------------
                                                                    $ 31,846,035     $ 35,866,092
                                                                    ============     ============
</TABLE>

                 See notes to consolidated financial statements
                                       F-5

<PAGE>   37

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                      ------------------------------------------------
                                                          2000              1999              1998
                                                      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>
REVENUES                                              $ 57,648,203      $ 63,220,272      $ 67,998,233

COST OF SALES                                           50,570,852        54,515,128        57,533,568
                                                      ------------      ------------      ------------

GROSS PROFIT                                             7,077,351         8,705,144        10,464,665

SELLING, GENERAL AND
      ADMINISTRATIVE EXPENSES                            8,873,240         9,144,727         8,233,189

                                                      ------------      ------------      ------------
(LOSS) INCOME FROM OPERATIONS                           (1,795,889)         (439,583)        2,231,476

OTHER INCOME (EXPENSE)
     Interest income                                       273,780           357,493           242,628
     Non-cash guarantee fee                                (68,509)         (107,098)         (154,724)
     Interest expense                                   (2,045,919)       (1,495,534)         (851,442)
     Other income                                          127,448            14,926            12,687
                                                      ------------      ------------      ------------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE       (3,509,089)       (1,669,796)        1,480,625
INCOME TAX (BENEFIT) EXPENSE                              (521,065)         (438,777)          527,990
                                                      ------------      ------------      ------------
NET (LOSS) INCOME                                     $ (2,988,024)     $ (1,231,019)     $    952,635
                                                      ============      ============      ============
NET (LOSS) INCOME PER SHARE
     Basic                                            $       (.81)     $       (.34)     $        .27
     Diluted                                          $       (.81)     $       (.34)     $        .27
NUMBER OF SHARES USED IN COMPUTATION
     Basic                                               3,707,034         3,578,277         3,526,597
     Diluted                                             3,707,034         3,607,638         3,560,187
</TABLE>


                 See notes to consolidated financial statements
                                       F-6

<PAGE>   38

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000


<TABLE>
<CAPTION>
                                                                     Common       Additional                        Total
                                                      Common         Stock         Paid-in         Retained      Stockholders'
                                                      Shares         Amount        Capital         Earnings         Equity
                                                   ------------   ------------   ------------    ------------    ------------
<S>                                                <C>            <C>            <C>             <C>             <C>
BALANCES, DECEMBER 31, 1997                           3,507,116   $      3,507   $  2,844,361    $  3,898,099    $  6,745,967

Stock options issued - guarantee fee                         --             --        154,724              --         154,724
Convertible debt discount                                    --             --        123,319              --         123,319
Stock issued                                             39,285             39         87,149              --          87,188
Net income                                                   --             --             --         952,635         952,635
                                                   ------------   ------------   ------------    ------------    ------------
BALANCES, DECEMBER 31, 1998                           3,546,401          3,546      3,209,553       4,850,734       8,063,833

Stock options issued - guarantee fee                         --             --        107,098              --         107,098
Stock bonus                                                  --             --       (124,737)             --        (124,737)
Stock issued in connection with convertible note         60,910             61        106,733              --         106,794
Net (loss)                                                   --             --             --      (1,231,019)     (1,231,019)
                                                   ------------   ------------   ------------    ------------    ------------
BALANCES, DECEMBER 31, 1999                           3,607,311          3,607      3,298,647       3,619,715       6,921,969

Stock options issued - guarantee fee                         --             --         68,509              --          68,509
Stock issued in connection with convertible note        197,291            197         98,449              --          98,646
Net (loss)                                                   --             --             --      (2,988,024)     (2,988,024)
                                                   ------------   ------------   ------------    ------------    ------------
BALANCES, DECEMBER 31, 2000                           3,804,602   $      3,804   $  3,465,605    $    631,691    $  4,101,100
                                                   ============   ============   ============    ============    ============
</TABLE>

                 See notes to consolidated financial statements
                                       F-7

<PAGE>   39

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                                   ------------------------------------------------
                                                                       2000              1999              1998
                                                                   ------------      ------------      ------------
<S>                                                                <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss) income                                              $ (2,988,024)     $ (1,231,019)     $    952,635
     Adjustment to reconcile net (loss) income to net cash
      provided by (used in) operating activities:
         Amortization and depreciation                                  583,474           488,157           454,109
         Common stock issued                                                 --                --            34,688
         Deferred taxes                                                (233,074)               --                --
         Stock bonus plan distributions                                      --          (124,737)               --
         Guarantee fee                                                   68,509           107,098           154,724
         Interest on convertible note                                    57,517            58,872            35,646
         Loss on sale of equipment                                           --            10,131                --
    Changes in operating assets and liabilities, net of
     effects of business acquired:
         Accounts and other receivables                                 605,782          (548,874)        1,070,513
         Inventories                                                  2,796,308        11,994,635       (11,322,551)
         Floor plan payable                                            (512,588)      (13,271,135)        7,806,716
         Accounts payable                                               (98,608)          338,007            67,137
         Accrued liabilities                                            183,776           (12,016)          (73,617)
         Finance receivable                                             102,153           338,992          (150,153)
         Income tax liability                                                --          (648,544)          226,041
         Other assets                                                   108,450          (256,791)           88,966
                                                                   ------------      ------------      ------------
    NET CASH PROVIDED BY (USED IN)
         OPERATING ACTIVITIES                                           673,675        (2,757,224)         (655,146)
                                                                   ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
         Purchases of land, buildings and equipment                    (348,706)         (310,719)         (399,150)
         Proceeds from sale of equipment                                 88,666            69,881                --
         Store acquisitions                                                  --                --          (832,554)
         Stockholders' receivables                                       (2,596)            7,490           (49,672)
                                                                   ------------      ------------      ------------
    NET CASH USED IN INVESTING ACTIVITIES                              (262,636)         (233,348)       (1,281,376)
                                                                   ------------      ------------      ------------
</TABLE>

                                   (CONTINUED)

                 See notes to consolidated financial statements
                                       F-8

<PAGE>   40

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED


<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                      ------------------------------------------------
                                                          2000              1999              1998
                                                      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES
        Proceeds from line of credit                  $    666,252      $    291,422      $  1,458,389
        Proceeds from long-term debt                     2,259,322         6,379,107         7,134,139
        Repayments of long-term debt                    (3,423,603)       (3,866,580)       (6,266,624)
                                                      ------------      ------------      ------------
    NET CASH FLOW PROVIDED BY (USED IN)
        FINANCING ACTIVITIES                              (498,029)        2,803,949         2,325,904
                                                      ------------      ------------      ------------
NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                            (86,990)         (186,623)          389,382
CASH AND CASH EQUIVALENTS AT THE
    BEGINNING OF YEAR                                      307,509           494,132           104,750
                                                      ------------      ------------      ------------
CASH AND CASH EQUIVALENTS AT THE END
    OF YEAR                                           $    220,519      $    307,509      $    494,132
                                                      ============      ============      ============
SUPPLEMENTAL DISCLOSURES OF
    CASH FLOW INFORMATION
        Cash paid for:
           Interest expense                           $  2,045,919      $  1,533,794      $    851,442

           Income taxes                               $         --      $    520,942      $    352,350

NON-CASH INVESTING AND FINANCING ACTIVITIES:
        Common stock issued in connection with
          convertible note                            $     98,646      $    106,794      $         --
</TABLE>

                 See notes to consolidated financial statements
                                       F-9


<PAGE>   41

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1: BUSINESS

The consolidated financial statements of Texas Equipment Corporation ("the
Company") ("TEC") (a Nevada Corporation), include wholly-owned subsidiaries
Texas Equipment Co., Inc., ("TECI") and New Mexico Implement Company, Inc.
("NMIC").

The Company is a retailer of agricultural equipment primarily supplied by Deere
& Company ("Deere") and other equipment with its headquarters in Seminole,
Texas. TECI's market area represents West Texas, the Texas Panhandle and Eastern
New Mexico.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries. Intercompany items and transactions have
     been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

     The Company classifies highly liquid temporary investments with an original
     maturity of three months or less when purchased as cash equivalents.

INVENTORIES

     Inventories are stated at the lower of cost or market value. Cost is
     determined using the specific identification method for new and used
     agricultural equipment and average cost for parts. The Company provides for
     losses sustained as a result of fluctuations in market demand in the period
     when inventory carrying amounts in excess of selling price is first
     identified.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation is provided for
     over the estimated useful lives ranging from three to forty years of the
     individual assets using accelerated and straight-line methods.

FINANCE RECEIVABLES

     The Company offers its customers financing arrangements through programs
     offered by Deere Credit and Agricredit Acceptance Corporation
     ("Agricredit") whereby the Company's customers can finance or lease
     selected purchases. Because a portion of the customer's contract is
     recourse to the Company, these credit corporations retain a reserve for
     amounts that the Company may be obligated to pay. The credit corporations
     review the reserve balances with the Company annually and if the balances
     exceed certain minimum requirements, the difference is paid to the Company
     ("Finance Receivable"). The Finance Receivables and related revenue is
     recognized as income when the credit corporations fund the related
     financing arrangement ("Contract"). The Company receives interest income on
     the Finance Receivable held by the credit corporation. In the event a
     customer defaults on their Contract and there is a deficiency in the amount
     owed to the credit corporation, the Company has the option of paying the
     amount due under its recourse obligations or using a portion of its finance
     reserve. The Company traditionally experiences losses against such finance
     reserves and has provided an allowance of $200,000 in 2000 and 1999,
     respectively.


                                      F-10
<PAGE>   42

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

INTANGIBLES

     Goodwill, which represents the excess cost over the fair value of net
     assets acquired, is amortized on a straight-line basis over 15 years.

ACCOUNTING FOR LONG-LIVED ASSETS

     The Company reviews property and equipment, goodwill and other long-lived
     assets for impairment whenever circumstances and situations change such
     that there is an indication that the carrying amounts may not be
     recoverable. If this review indicates that the asset will not be
     recoverable, as determined based on the expected undiscounted cash flows of
     the asset over the remaining amortization period, the Company's carrying
     value of the asset will be adjusted accordingly. At December 31, 2000 the
     Company believes that there has been no impairment of its long-lived
     assets.

FLOOR PLAN PAYABLES

     Deere provides various inventory-financing arrangements for its dealers.
     The terms of these arrangements generally include a four-to-twelve-month
     interest-free term followed by a term during which interest is charged.
     Payoff of the floor plan generally occurs at the earlier of sale of the
     equipment or in accordance with the terms of the financing arrangements.
     All amounts owed to Deere are guaranteed by the majority stockholders of
     the Company and are collateralized by inventory.

REVENUE RECOGNITION

     Revenue on equipment and parts sales is recognized upon delivery of product
     to customers. Rental and service revenue is recognized at the time such
     services are provided.

ACCOUNTING FOR INCOME TAXES

     The Company accounts for income taxes under the liability method, which
     requires the recognition of deferred tax assets and liabilities for the
     expected impact of the differences between the financial statements and tax
     basis of assets and liabilities.

DEALERSHIP AGREEMENTS

     The Company has entered into agreements with Deere, which authorizes the
     Company to act as an authorized dealer of Deere agricultural equipment. The
     dealer agreements continue until terminated by Deere or the Company in
     accordance with certain specified provisions.

     The Company is required to meet certain performance criteria and equity
     ratios, to maintain suitable facilities, to actively promote the sale of
     Deere equipment, to fulfill warranty obligations, and to maintain stores
     only in the authorized locations. The Company's principal stockholders are
     also required to maintain certain voting control and ownership interests.
     The agreement also contains certain provisions that must be complied with
     in order to retain the Company's dealership agreements in the event of
     certain changes in control, as defined, or the death of the chief executive
     officer of the Company.


                                      F-11
<PAGE>   43

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

     Deere is obligated to make available to the Company a floor plan and other
     financing programs that it offers to other dealers, provide promotional and
     marketing materials, and authorize the Company to use Deere trademarks and
     trade names.

     Sales of Deere related new equipment and parts represents approximately
     57%, 47% and 52% of the total sales for the years ended December 31, 2000,
     1999 and 1998, respectively.

STOCK BASED COMPENSATION

     The Company applies SFAS No. 123, Accounting for Stock-Based Compensation.
     SFAS No. 123 encourages, but does not require, companies to recognize
     compensation expense for grants of stock, stock options, and other equity
     instruments to employees based on fair value. Companies that do not adopt
     the fair value accounting rules must disclose the impact of adopting the
     new method in the notes to the financials statements. Transactions in
     equity instruments with non-employees for goods or services must be
     accounted for on the fair value method. The Company has elected not to
     adopt the fair value accounting prescribed by SFAS No. 123 for employees,
     and is subject only to the disclosure requirements prescribed by SFAS No.
     123.

EARNINGS PER SHARE

     Basic earnings (loss) per share ("EPS) are calculated using the weighted
     average number of common shares outstanding for the period. Diluted EPS is
     calculated using the weighted average number of common shares and
     potentially dilutive common equivalents outstanding during the period.
     Potentially dilutive common stock equivalents in connection with stock
     options and shares issuable upon conversion of convertible debt were
     excluded from the diluted EPS calculation for 2000 because they were
     anti-dilutive. The Company's potentially dilutive common stock equivalents
     were anti-dilutive or immaterial for 1999 and 1998. Accordingly, basic EPS
     equals diluted EPS for those periods.

CONCENTRATIONS AND CREDIT RISK

     The Company places its cash and temporary cash investments with financial
     institutions that the Company believes to be highly creditworthy.

     The Company's market area represents West Texas, the Texas Panhandle and
     Eastern New Mexico. Substantially all the Company's sales are derived from
     farmers located within the Company's market area. The Concentration of
     credit risk within this group of customers may impact the Company, either
     positively or negatively, in that these customers may be similarly affected
     by industry-wide changes in economic or other conditions.

     The Company grants credit, generally with collateral, to its customers,
     which are located in the Company's market area. Management believes that
     its billing and collection policies are adequate to minimize potential
     credit risk.

     Deere is the primary supplier of the equipment and parts sold by the
     Company. The Company is also significantly dependent upon Deere for
     financing its new and used equipment purchases.


                                      F-12
<PAGE>   44


                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts reported in the balance sheet for cash, receivables,
     and accrued expenses approximate fair value based on the short-term
     maturity of these instruments. The carrying amounts of the Company's
     borrowing arrangements approximates fair value based on prevailing market
     rates of interest currently available to the Company for debt with similar
     terms and maturities.

ACCOUNTING ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities at
     the date of the financial statements and the reported amounts of revenues
     and expenses during the reporting period. Actual results could differ from
     those estimates. Various valuation assumptions are involved in the estimate
     of the carrying values of new and used equipment inventory. It is at least
     reasonably possible those estimates could be revised in the near term and
     that those revisions could be material.

RECLASSIFICATION

     Certain prior year amounts have been reclassified to conform to current
     year presentation.

NOTE 3: LIQUIDITY

     The Company has incurred significant losses in fiscal years 1999 and 2000.
     These losses are the result of the significant downturn in the agricultural
     industry primarily because of the significant drop in commodity prices
     across all major crop categories. The Company did not meet its minimum
     equity and cash flow requirements under its bank loan agreement at December
     31, 2000 and is currently in default. In addition, the Company's dealership
     agreement with Deere requires the Company to maintain a minimum equity to
     total asset ratio of 25% as of December 31, 2000. The Company did not meet
     this requirement. These factors raise substantial doubt about the Company's
     ability to continue as a going concern. The Company is currently in
     discussions with Deere to waive the minimum equity requirement and is in
     negotiation with its bank to restructure its term loan and lines of credit.
     There is no assurance that the Company will be successful in renegotiating
     its bank loan agreements or obtaining an equity waiver from Deere.

     Management believes it will be successful in its negotiations with Deere
     and its bank, and that sufficient waivers and equity funding will be
     obtained. In addition, the Company believes that commodity pricing will
     improve. However, if the Company is unable to obtain additional financing
     or restructure its bank loans and dealership agreements, it will have to
     significantly curtail its current level of operations and sell its assets.


                                      F-13
<PAGE>   45

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4: SEGMENT INFORMATION

     The Company has two reportable segments: wholegoods and product support.
     Distribution of these products and services are made directly to customers
     through eight Deere dealerships located in West Texas, Texas Panhandle and
     Eastern New Mexico. Wholegoods represents agricultural equipment that can
     be sold either as an individual item or as part of a series of machines to
     perform certain farming operations. Product support represents replacement
     parts for equipment and the service of the agricultural equipment on-site
     or at the dealership location.

     The Company evaluates performance of and allocates resources to its
     operating segments based on profit or loss from operations exclusive of
     interest expense, goodwill amortization and income taxes. The accounting
     policies of the reportable segments are the same as those described in the
     summary of significant accounting policies. Inter-segment sales and profits
     are insignificant.

     The Company's reportable segments are business units that offer different
     products or services. The reportable segments are each managed separately
     because they each distribute distinct products and services in the initial
     and after-market environment.

<TABLE>
<CAPTION>
                                                                                    Product
                                                                 Wholegoods         Support
                                                                ------------     ------------
<S>                                                             <C>              <C>
YEAR ENDED DECEMBER 31, 2000
Sales and revenues from external customers                      $ 44,149,679     $ 13,498,524
Depreciation expense                                                 166,906          394,438
Segment operating (loss) profit                                   (1,059,447)         465,640
Segment assets:
       Property, plant and equipment                                 876,289        4,178,034
       Inventory                                                  21,003,044        3,447,727
                                                                ------------     ------------
YEAR ENDED DECEMBER 31, 1999
Sales and revenues from external customers                      $ 48,457,473     $ 14,762,797
Depreciation expense                                                 159,029          306,944
Segment operating profit                                            (216,686)       1,146,921
Segment assets:
       Property, plant and equipment                                 928,868        4,428,720
       Inventory                                                  22,726,453        4,520,626
                                                                ------------     ------------
YEAR ENDED DECEMBER 31, 1998
Sales and revenues from external customers                      $ 54,329,666     $ 13,668,567
Depreciation expense                                                 142,773          286,311
Segment operating profit                                           2,052,658        1,088,973
Segment assets:
       Property, plant and equipment                                 970,343        4,626,463
       Inventory                                                  34,752,482        4,489,232
                                                                ------------     ------------
</TABLE>

                                      F-14

<PAGE>   46

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4: SEGMENT INFORMATION (CONT'D)

RECONCILIATION OF SEGMENT INFORMATION TO THE CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                            -------------------------------------------------
                                                                 2000              1999              1998
                                                             ------------      ------------      ------------
<S>                                                          <C>               <C>               <C>
       REVENUE
       Total external revenues for reportable segments       $ 57,648,203      $ 63,220,272      $ 67,998,233
                                                             ------------      ------------      ------------
              Total consolidated revenue                       57,648,203        63,220,272        67,998,233
                                                             ------------      ------------      ------------
       OPERATING PROFIT
       Total profit for reportable segments                      (593,807)          930,235         3,568,283
       Unallocated amounts:
              Administrative expense                           (1,202,082)       (1,369,818)       (1,336,807)
              Other income                                        127,448            14,926            12,687
              Interest expense                                 (2,045,919)       (1,495,534)         (851,442)
              Interest income                                     273,780           357,493           242,628
              Non-cash guarantee fee                              (68,509)         (107,098)         (154,724)
                                                             ------------      ------------      ------------
              Total consolidated income (loss)
               before taxes                                    (3,509,089)       (1,669,796)        1,480,625
                                                             ------------      ------------      ------------
       ASSETS
       Total assets for reportable segments                    29,505,094        32,604,667        44,838,520
       Other assets                                             2,340,941         3,261,425         3,007,097
                                                             ------------      ------------      ------------
              Total consolidated assets                        31,846,035        35,866,092        47,845,617
                                                             ------------      ------------      ------------
       OTHER SIGNIFICANT ITEMS
       Depreciation expense                                       561,344           465,974           429,084
       Other depreciation and amortization                         22,130            22,183            25,025
                                                             ------------      ------------      ------------
              Total depreciation and amortization                 583,474           488,157           454,109
                                                             ------------      ------------      ------------
</TABLE>

NOTE 5: ACQUISITIONS

On June 15, 1998, the Company signed an agreement to purchase the assets
(building, land, equipment and inventory) of Romney Implement Company
("Romney"), which operated a Deere dealership in Tornillo, Texas (in the El Paso
metropolitan area), for approximately $3,082,000. The Company assumed
approximately $1,679,000 of indebtedness payable to Deere, assumed other Romney
indebtedness of approximately $408,000, new bank loan for $571,000, cash of
$177,000 and issued a three year 10% Convertible Note to the principals of
Romney for approximately $247,000. (See Note 13 for details of the Convertible
Note).

On October 9, 1998, the Company signed an agreement to purchase the assets
(building, land, equipment and inventory) of Texas Tractor Co., which operated a
Deere dealership in the Amarillo, Texas metropolitan area, for approximately
$5,537,000. The Company assumed approximately $5,233,000 of indebtedness payable
to Deere and approximately $168,000 under a bank note payable, paid cash of
approximately $83,000 and issued 21,429 shares of the Company's Common Stock,
which had a market value at closing of approximately $53,000.

These acquisitions were accounted for as purchases and accordingly, the assets
acquired and liabilities assumed were recorded at their estimated fair values.


                                      F-15
<PAGE>   47
                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5: ACQUISITIONS (CONT'D)

The following information summarizes the unaudited pro-forma results of
operations of the Company for the year ended December 31, 1998 as if the
acquisitions had occurred on January 1, 1998 and included such adjustments,
which are directly attributable to the acquisitions. This information should not
be considered indicative of future results of operations or the results that
would have been obtained had the acquisitions actually occurred on January 1, of
the year presented.

<TABLE>
<CAPTION>
                                                                1998
                                                             (Unaudited)
                                                             -----------
<S>                                                          <C>
             Revenue                                         $81,768,629
                                                             ===========
             Net income                                      $   966,205
                                                             ===========
             Net income per share - Basic
                 And Diluted                                 $      0.27
                                                             ===========
</TABLE>

NOTE 6: INVENTORIES

At December 31, 2000 and 1999, inventories consisted of:

<TABLE>
<CAPTION>
                                               2000             1999
                                           ------------     ------------
<S>                                        <C>              <C>
             New equipment                 $ 10,138,936     $ 10,349,224
             Used equipment                  10,864,108       12,377,229
             Parts                            3,447,727        4,520,626
                                           ------------     ------------
                                           $ 24,450,771     $ 27,247,079
                                           ============     ============
</TABLE>

Substantially all the inventories are pledged as security for floor plan and
bank financing.

NOTE 7: PROPERTY AND EQUIPMENT

At December 31, 2000 and 1999, property and equipment consisted of:

<TABLE>
<CAPTION>
                                                       2000             1999
                                                   ------------     ------------
<S>                                                <C>              <C>
             Land and buildings                    $  4,360,884     $  4,412,437
             Vehicles                                 1,174,307        1,127,380
             Furniture and fixtures                   1,398,451        1,177,480
             Equipment and tools                        824,876          824,892
                                                   ------------     ------------
                                                      7,758,518        7,542,189
             Less accumulated depreciation           (2,587,595)      (2,061,009)
                                                   ------------     ------------
                                                   $  5,170,923     $  5,481,180
                                                   ============     ============
</TABLE>

Depreciation of buildings and equipment is recorded principally on the
straight-line method using estimated useful lives from three to forty years.
Substantially all of the land, buildings and equipment are pledged as security
for bank loans. Depreciation expense was $570,760, $475,444 and $441,396 for the
years ended December 31, 2000, 1999 and 1998, respectively.


                                      F-16
<PAGE>   48

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8: FINANCE RECEIVABLES

The Company's finance receivables were as follows at December 31:

<TABLE>
<CAPTION>
                                                  2000             1999
                                              ------------     ------------
<S>                                           <C>              <C>
Deere Credit                                  $    636,310     $    738,463
Agricredit Acceptance                               50,101           50,101
                                              ------------     ------------
                                                   686,411          788,564
Less allowance of doubtful accounts               (200,000)        (200,000)
                                              ------------     ------------

                                              $    486,411     $    588,564
                                              ============     ============
</TABLE>

The applicable outstanding financed balances were as follows:

<TABLE>
<CAPTION>
                                                  2000             1999
                                              ------------     ------------
<S>                                           <C>              <C>
Deere Credit                                  $ 54,641,925     $ 51,434,638
Agricredit Acceptance                            5,525,877        8,099,385
                                              ------------     ------------
                                              $ 60,167,802     $ 59,534,023
                                              ============     ============
</TABLE>

Deere Credit provides and administers financing for retail purchases and leases
of new and used equipment. Under Deere's retail financing and lease plans, Deere
Credit retains the security interest in the equipment financed. A portion of the
customer financing and lease contract provided by Deere is recourse to the
Company. Deere retains a finance and lease reserve for amounts that the Company
may be obligated to pay Deere, by retaining 1% of the face amount of each
contract financed or leased. The finance reserve is capped at the lesser of 3%
of the total dollar amount of the finance contracts outstanding or $600,000 for
each dealer account. The lease reserve is capped at 3% of the total dollar
amount of lease contracts outstanding for each dealer account. In the event a
customer defaults in paying Deere and there is a deficiency in the amount owed
to Deere, the Company has the option of paying the amount due under its recourse
obligations or using a portion of its finance or lease reserves. The Company's
liability is capped at the amount of the reserves for each dealer account,
which, as of December 31, 2000, were $250,894 and $376,275 for its two finance
reserve accounts and the two lease reserve accounts were $9,141.

Agricredit, through a joint venture agreement with the Company, also provides
financing to the Company's customers. The financing provided by Agricredit is
non-recourse to the Company. At December 31, 2000 the portfolio amount under the
joint venture was $4,962,359. Prior to September 1997 $563,518 of the customer
financing provided by Agricredit was recourse to the Company. The Company's
liability is limited to the portion withheld by Agricredit, which was $50,010 at
December 31, 2000.


                                      F-17
<PAGE>   49

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9: INCOME TAXES

Significant components of income taxes are as follows for the years ended
December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                          2000              1999             1998
                                                      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>
Current                                               $   (287,991)     $   (438,777)     $    527,990
Deferred                                                  (233,074)               --                --
                                                      ------------      ------------      ------------
Total income tax expense (benefit)                    $   (521,065)     $   (438,777)     $    527,990
                                                      ============      ============      ============
</TABLE>

A reconciliation of income tax (benefit) computed at the U.S. federal statutory
tax rate to the Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                       2000         1999         1998
                                                      ------       ------       ------
<S>                                                   <C>          <C>           <C>
Tax at federal statutory rate                            (34)%        (34)%         34%
Effect of valuation allowance on
     deferred tax asset                                   20%
State and local taxes, net of federal benefit             --           --            2%
Other                                                     (1)%          8%          --
                                                      ------       ------       ------
                                                         (15)%        (26)%         36%
                                                      ======       ======       ======
</TABLE>

The significant components of the Company's net deferred tax liabilities were as
follows:

<TABLE>
<CAPTION>
                                                                    2000             1999
                                                                ------------     ------------
<S>                                                             <C>              <C>
        Net deferred tax liabilities:
              Depreciation                                      $    190,608     $    200,875
              Intangible assets                                       29,176           33,499
              Operating loss carry-forwards                         (954,435)              --
              Allowance for doubtful accounts                        (33,870)              --
              Other                                                   47,160           (1,300)
                                                                ------------     ------------
                 Net deferred tax (assets) liabilities              (721,361)         233,074
              Less valuation allowance                               721,361               --
                                                                ------------     ------------
        Net deferred tax liabilities                            $         --     $    233,074
                                                                ============     ============
</TABLE>

In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Due to the losses incurred in 1999 and 2000 and the uncertainty of
the Company future profitability, management is unable to conclude on a more
likely than not basis that deferred income tax assets will be realized.

At December 31, 2000, the Company has net operating loss carry-forwards for
federal income tax purposes of $2.8 million, which may be used against future
taxable income, if any, and which expire in year 2016. Any change in ownership
under Internal Revenue Code Section 382 could limit the annual utilization of
these carry-forwards and cause some amount of the carry-forwards to expire
unutilized.


                                      F-18
<PAGE>   50
                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10: FLOOR PLAN PAYABLES:

Floor plan payables are financing arrangements for inventory. The terms of these
arrangements may include a four-to-twelve-month interest-free term followed by a
term during which interest is charged. Payoff of the floor plan generally occurs
at the earlier of, sale of the inventory or in accordance with the terms of the
financing arrangements. All amounts owed are guaranteed by three major
stockholders and the President of the Company and are collateralized by the
specific inventory financed. Floor plan payables consisted of the following as
of December 31:

<TABLE>
<CAPTION>
                                                                                         2000            1999
                                                                                     ------------     ------------
<S>                                                                                  <C>              <C>
Interest bearing:
     Deere & Company and Deere Credit Services, Inc., inventory notes, due as
     inventory is sold, interest at various rates, from 8.75% to 11.25% at
     December 31, 2000, based on a defined prime ...............................     $  6,584,490     $  7,644,336

     Current portion of long-term floor plan (see Note 12) .....................        1,345,187          907,604
                                                                                     ------------     ------------
                           Total interest bearing ..............................        7,929,677        8,551,940
Non-interest bearing:
     Deere & Company and Deere Credit Services, Inc. ...........................        8,161,202        7,433,237

     Other equipment suppliers .................................................        1,022,146        1,640,436
                                                                                     ------------     ------------
                           Total floor plan financing ..........................     $ 17,113,025     $ 17,625,613
                                                                                     ============     ============
</TABLE>

The Company has certain floor plan financing agreements containing various
restrictive covenants which, among other matters, require the Company to
maintain minimum net worth levels, as defined, and place limits on additional
indebtedness. At December 31, 2000 the Company was required by Deere to have a
net equity balance of 25% of total assets or approximately $7.9 million. As a
result, under the dealership agreement, the Company has 180 days to increase its
equity through additional equity funding. If the Company doesn't meet the
covenant at the end of the 180-day period, Deere can terminate the dealership
agreement with the Company.

NOTE 11: LINES OF CREDIT

On June 30, 1999 the Company received a $1,750,000 line of credit from its bank,
which replaced a similar line of credit for the same amount. This line of credit
is collateralized by a second mortgage on substantially all of the Company's
land, buildings, equipment, furniture and fixtures, accounts receivables and
Company owned inventory. The maturity date is April 15, 2001. On February 15,
2000 the Company received an additional line of credit from the same bank for
$750,000 with a maturity date of April 15, 2001. Interest on both lines of
credit is at a defined prime rate plus 50 basis points, which at December 31,
2000 was 10%. The balances due on these lines of credit were $2,416,063 and
$1,749,811 at December 31, 2000 and 1999, respectively. Principal is due at
maturity or as due dates are extended by the bank. Interest is paid monthly. The
Company is attempting to refinance these lines of credit as part of its term
loan restructuring (See Note 12).


                                      F-19
<PAGE>   51

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12: LONG-TERM DEBT

On June 30, 1999 the Company received a $4,930,000 long-term loan from its bank.
The loan is sponsored by the Rural Business - Cooperative Service of the United
States Department of Agriculture. The proceeds were used to refinance
approximately $3,843,740 of existing debt, provide $840,400 in working capital
and loan fees of $245,860. The loan fees were included in other assets and being
amortized over the life of the loan until December 31, 2000, when the balance of
$226,468 was charged to expense.

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                     2000             1999
                                                                                 ------------     ------------
<S>                                                                              <C>              <C>
BankLoan due July 1, 2019, bearing interest at a defined prime rate plus
    150 basis points, or 11% at December 31, 2000, payable in monthly
    installments of $45,244, collateralized by substantially all of the
    Company's land, buildings, furniture and fixtures, automobiles and
    service
    equipment ..............................................................     $  4,889,636     $  4,906,889

Equipment financed by Deere, Agricredit , Trans America or EDCO, due in
    various amounts through may 1, 2003, interest at various rates from
    11.00% to 12.50%, collateralized by new and used equipment
    inventory ..............................................................        1,520,406        2,540,759

Convertible note payable (see note 13) .....................................           69,915          111,042
Note payable to major stockholder, due July 19, 2005, interest
    at prime plus 50 basis points, which at December 31, 2000
    was 10% ................................................................          432,356               --
Various notes payable, collateralized by buildings, equipment and
    land, due in various amounts through December 31, 2005,
    interest at various rates from 8.5% to 12% .............................          979,393        1,100,378
                                                                                 ------------     ------------
                                                                                    7,891,706        8,659,068
Less current portion - floor plan (Note 10) ................................        1,345,187          907,604
Less current portion........................................................        5,269,564          397,639
                                                                                 ------------     ------------
                                                                                 $  1,276,954     $  7,353,825
                                                                                 ============     ============
</TABLE>

Aggregate maturities of long-term debt before considering the reclassification
described below are as follows:

<TABLE>
<S>                                         <C>
                   December 31, 2001        $  1,360,522
                                2002             549,276
                                2003             471,353
                                2004             305,325
                                2005             284,319
                          Thereafter           4,920,911
                                            ------------
                                            $  7,891,706
                                            ============
</TABLE>


                                      F-20
<PAGE>   52

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12: LONG-TERM DEBT (CONT'D)

The Company's bank loan contains various restrictive covenants, which among
other matters, require the Company to maintain minimum net worth levels and cash
flow requirements, as defined, and place limits on additional indebtedness.
Under its bank loan agreement dated June 30, 1999, the Company did not meet the
Cash Flow Coverage Ratio and minimum equity requirements (as defined) at
December 31, 2000. In addition, the Company's dealership agreement with Deere
requires the Company to maintain a minimum equity to total asset ratio of 25% as
of December 31, 2000 and the Company did not meet this requirement. As a
result, the Company is in default under these agreements and has reclassified
the entire outstanding balance as current. The Company is currently in
discussions with its bank to restructure its bank loan and lines of credit (see
Note 11), the related financial covenants and its Deere dealership agreements.

Deere, the Company's principal supplier of wholegoods and parts, has
subordinated the debt due to themselves with regard to the collateral of
non-Deere wholegoods and parts for the above bank loan.

In August 2000 the Company entered into a five-year promissory note agreement
with John T. Condit, an officer and major stockholder of the Company to borrow
approximately $436,000 for working capital purposes. The note is due July 19,
2005 in equal installments at prime plus 50 basis points, or 10% at December 31,
2000 and is secured by a second mortgage on the land, buildings, service
equipment and furniture and fixtures of the Company.

The three majority stockholders of the Company and the President have guaranteed
the indebtedness payable to the bank, Deere, and Agricredit (floor plan
payable). During 2000, 1999 and 1998, these individuals have received stock
options as a fee for such guarantee (see Note 14). The fee recorded for the year
ended December 31, 2000, 1999 and 1998 was $68,509, $107,098 and $154,724,
respectively.

NOTE 13: CONVERTIBLE NOTE PAYABLE

On June 15, 1998, the Company issued a three year 10% Convertible Note (the
"Note") to the principals of Romney for $246,638. Principal and interest is
convertible into the Company's Common Stock over a three-year period with
conversion prices at the lesser of $7 or market price (as defined) in the first
year, the lesser of market price or $10.50 in the second year and the lesser of
market price or $14 the third year. If at any time during each of the three
years market price equals or exceeds the conversion price, the entire note will
convert into Common Stock. The Company has assigned a value of $123,319 to the
conversion feature of the note. This value is being amortized ratably as an
interest rate adjustment over the life of the note or until conversion. Assuming
the note is not converted until maturity, the effective yield is approximately
23%. On each anniversary of the Note, one third of the note will be converted
into the Common Stock. On June 15, 2000 and 1999 the Company issued 197,291 and
60,910 shares of Common Stock, respectively, as payment of principal and
interest on the Note. The Note balance at December 31, 2000 was $69,915 (see
Note 12).

NOTE 14: STOCKHOLDERS' EQUITY

Capital Stock

On September 7, 1999 the Company implemented a 7-for-1 reverse stock split. The
historical share and per share data included in the accompanying financial
statements has been adjusted to give effect to the reverse split.


                                      F-21
<PAGE>   53

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14: STOCKHOLDERS' EQUITY (CONT'D)

During March 1998, the Company issued 17,858 shares of its Common Stock in a
lawsuit settlement. (See Note 17)

During October 1998, the Company issued 21,429 shares of its Common Stock to the
principal of Texas Tractor Co. in connection with the acquisition of the
Amarillo Deere dealership. (See Note 5)

On June 15, 2000 and 1999, the Company issued 197,291 and 60,910 shares of its
Common Stock in payment of its second and first installments, respectively,
including interest, on a Convertible Note. (See Note 13)

Employee Stock Bonus Plan

The Company has an Employee Stock Bonus Plan (the "Plan"), so as to enable its
eligible employees to acquire an interest in capital stock of the Company.
Contributions to the Plan may be made at the discretion of the Company; however,
no contributions have been made in 2000, 1999 and 1998.

Dealership Agreement Requirements

Under the Company's amended dealership agreement with Deere, the Company is
required to maintain an equity-to-asset ratio, as defined, of at least 30% at
all times on and after the earlier of December 31, 2000, 120 days following any
completion of a public offering by the Company involving gross proceeds of at
least $20,000,000 and immediately following any further expansion of the
Company's agricultural area of responsibility under its Deere dealership
agreements. Without Deere's prior written consent, the Company is prohibited
from making Deere agricultural dealership acquisitions, initiating new business
activity, paying dividends, repurchasing its capital stock, or making any other
distributions to stockholders if the Company's equity-to-asset ratio is below
30%, or if such ratio will fall below 30% as a result of such action, unless
waived by Deere. If such ratio falls below 25%, Deere may elect to terminate the
dealer agreements with one year's advance written notice, although the Company
has 180 days to cure this default once it receives notice from Deere. At
December 31, 2000 the Company did not meet the equity to asset ratio of 25%.

NOTE 15: ACCOUNTING FOR EMPLOYEE STOCK OPTIONS

Guarantee Fee Options

During 2000, 1999 and 1998, the Company granted 370,332, 459,373 and 437,690
fully-vested stock options to the guarantors (majority shareholders and officer
of the Company) of the floor plan payable and bank loans, exercisable at $3.50
per share for a period of five years. Expense of $68,509, 107,098 and $154,724
has been recorded as guarantee fees for such options during the years ended
December 31, 2000, 1999 and 1998, respectively.

These stock options were valued at the date of grant using the Black-Scholes
option-pricing model. The weighted average fair value of stock options granted
during the years ended December 31, 2000, 1999 and 1998 was $0.18, $0.23 and
$0.35, respectively. Value was estimated using the following weighted average
assumptions: annual dividends of zero; expected volatility of 106% in 2000, and
50% in 1999 and 1998; risk-free interest rate of 5.75% in 2000 and 7% in 1999
and 1998; and expected life of five years.

                                      F-22

<PAGE>   54
NOTE 15: ACCOUNTING FOR EMPLOYEE STOCK OPTIONS -- (CONT'D)

Employee Stock Options

In 1997 the Company granted 42,857 four-year stock options to an officer of the
Company exercisable at $3.50 per share for a period of five years. These stock
options were issued pursuant to an employment agreement and included a four-year
vesting period. In August 2000, the employment agreement was terminated, the
outstanding options were cancelled and the Company and officer entered into a
new employment agreement that provided for the granting of 42,900 stock options.
These stock options are fully vested over one year and are exercisable at $0.50
per share for a period of five years. No employee stock options were granted in
each of the years ended December 31, 1999 and 1998.

A summary of the Company's outstanding stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                         Weighted
                                                                          Average
                                                                      Exercise Price
                                                  Options                Per Share
                                             -----------------      ------------------
<S>                                          <C>                    <C>
Outstanding, December 31, 1997                    167,737                 $ 2.85
  Granted                                         437,690                 $ 3.50
  Exercised                                            --                 $   --
  Canceled or expired                                  --                 $   --
                                                ---------                 ------
Outstanding, December 31, 1998                    605,427                 $ 3.32
  Granted                                         459,373                 $ 3.50
  Exercised                                            --                 $   --
  Canceled or expired                                  --                 $   --
                                                ---------                 ------
Outstanding, December 31, 1999                  1,064,800                 $ 3.40
  Granted                                         413,232                 $ 3.19
  Exercised                                            --                 $   --
  Canceled or expired                             (42,857)                $ 3.50
                                                ---------                 ------
Outstanding, December 31, 2000                  1,435,175                 $ 3.33
                                                =========                 ======
Options exercisable at December 31, 2000        1,420,875                 $ 3.36
                                                =========                 ======
Options exercisable at December 31, 1999        1,043,371                 $ 3.40
                                                =========                 ======
Options exercisable at December 31, 1998          573,284                 $ 3.31
                                                =========                 ======
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                      Options Outstanding                       Option Exercisable
                              --------------------------------------        --------------------------
                                            Weighted       Weighted                           Weighted
                                             Average        Average                           Average
                              Number        Remaining      Exercise          Number           Exercise
Range of Exercise Prices    Outstanding        Life          Price          Exercisable         Price
------------------------    -----------     ---------      --------         -----------       --------
<S>                         <C>             <C>            <C>              <C>               <C>
$  .50                          42,900          4.75        $ 0.50             28,600          $ 0.50
$ 2.63 to $3.50              1,392,275          3.77        $ 3.42          1,392,275          $ 3.42
                            ----------         -----        ------         ----------          ------

                             1,435,175          3.80        $ 3.33          1,420,875          $ 3.36
                            ==========         =====        ======         ==========          ======
</TABLE>

Stock Based Compensation

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the employee stock
options. Under SFAS No. 123, employee stock options are valued at the date of
grant using the Black-Scholes option-pricing model, and are amortized to expense
over the option's vesting period. Had compensation cost been determined based on
a fair value at the date of grant for employee options issued, pursuant to the
employee compensation provisions of SFAS No. 123, the Company's net (loss)
income and (loss) income per share would have been adjusted to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                   2000             1999           1998
                                                   ----             ----           ----
<S>                                           <C>             <C>              <C>
          Net income (loss)
               As reported                    $ (2,988,024)    $ (1,231,019)    $ 952,634
               Pro forma                      $ (2,997,788)    $ (1,259,482)    $ 924,171
          Net income (loss) per share
            (basic and diluted)
               As reported                    $      (0.81)    $      (0.34)    $    0.27
               Pro forma                      $      (0.81)    $      (0.35)    $    0.26
</TABLE>

The weighted average fair value of employee stock options granted during the
year ended December 21, 2000, was $0.34. Value was estimated using the following
weighted average assumptions: annual dividends of zero; expected volatility of
106%; risk-free interest rate of 5.75%; and expected life of five years.

                                      F-23
<PAGE>   55

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16: EMPLOYEE BENEFIT PLANS

During 1998 the Company's health benefit plan was a minimum funded plan with
specific and aggregate stop loss insurance provided to limit the Company's
overall exposure. The specific stop loss was $20,000 per employee. In 1999 the
Company changed to a fully insured plan. The expense associated with the health
benefit plan aggregated $383,177, $395,103 and $357,336 for 2000, 1999 and 1998,
respectively.

TECI, a subsidiary of the Company, has a defined contribution retirement plan
(the "401 (k) Plan"), which covers all employees that have attained the age of
twenty-one (21) years and have one year of service. Contributions by TECI are
discretionary, and TECI has made no contributions to the 401(k) Plan during the
years presented.

NOTE 17: LITIGATION

In February 1998, the Company settled litigation with a business consultant
pursuant to the acquisition agreement between Marinex and TECI, whereby the
consultant received 17,858 shares of common stock. The issuance of the shares
was originally accounted for as part of the acquisition of TECI by Marinex;
therefore, no additional amounts were recorded in 1998.

On May 2, 2000 the Company and its Chairman, Paul Condit, as well as certain
other members of the Condit family who are principal shareholders of the
Company, filed a lawsuit in Texas state district court in Gaines County, Texas
against Service Invest AS, a Norwegian shareholder, and certain other affiliated
stockholders seeking a declaratory judgment related to disputes that have arisen
between the parties (Texas Equipment Corporation, Texas Equipment Co., Inc.,
Paul Condit et al v. Service Invest AS, et al, Case No. 00-05-14040, 106th State
District Court, Gaines County, Texas).

NOTE 18: EARNINGS PER SHARE

The following summarizes the computation of weighted average shares outstanding
and the net income (loss) per share for the years ended December 31:

<TABLE>
<CAPTION>
                                                                2000              1999              1998
                                                            ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>
    Net (loss) income .................................     $ (2,988,024)     $ (1,231,019)     $    952,635
    Weighted average number of common shares
       outstanding - basic ............................        3,707,034         3,578,277         3,526,597
    Dilutive effect of convertible debt and options ...               --            29,361            33,590
    Common and potential common shares
       outstanding - diluted ..........................        3,707,034         3,607,638         3,560,187
    Basic and dilutive net (loss) income per share ....     $      (0.81)     $      (0.34)     $       0.27
</TABLE>


                                      F-24
<PAGE>   56

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Unaudited quarterly financial information follows:

<TABLE>
<CAPTION>
                                                                        Quarters Ended
                                                   ----------------------------------------------------------      Fiscal
                                                     March 31       June 30       Sept. 30        Dec. 31(a)         Year
                                                   ------------   ------------   ------------    ------------    ------------
<S>                                                <C>            <C>            <C>             <C>             <C>
2000

    Revenues ...................................   $ 17,615,551   $ 15,452,904   $ 14,943,707    $  9,636,041    $ 57,648,203

    Gross profit ...............................      2,459,362      2,151,945      2,053,681         412,363       7,077,351

    Net (loss) .................................       (110,839)      (109,061)      (177,147)     (2,590,977)     (2,988,024)

    Earnings per share - basic and
      diluted ..................................   $      (0.03)  $      (0.03)  $      (0.05)   $      (0.68)   $      (0.81)

    Number of shares used in the
      computation of earnings per
      share, basic and diluted .................      3,607,311      3,804,602      3,804,602       3,804,602       3,707,034

1999

    Revenues ...................................   $ 17,112,323   $ 15,226,620   $ 17,089,207    $ 13,792,122    $ 63,220,272

    Gross profit ...............................      2,455,799      2,432,782      2,365,536       1,451,027       8,705,144

    Net income (loss) ..........................        119,610        136,995         61,084      (1,548,708)     (1,231,019)

    Earnings per share - basic and
      diluted ..................................   $       0.03   $       0.04   $       0.02    $      (0.43)   $      (0.34)

    Number of shares used in the
      computation of earnings per share:

        Basic ..................................      3,512,274      3,524,972      3,607,311       3,578,277       3,578,277

        Diluted ................................      3,543,494      3,530,845      3,630,800       3,607,638       3,607,638
</TABLE>

(a)  In the fourth quarter of 1999 as a result of the significant downturn in
     the agricultural equipment market, the Company sustained $667,000 in losses
     on inventory carrying amounts in excess of selling prices resulting from
     fluctuations in inventory market demand. In addition, in the fourth quarter
     of 1999, the Company recorded approximately $300,000 in bad debt reserves.
     The remainder of the loss was due to operating losses incurred in the
     fourth quarter of 1999. In the fourth quarter of 2000 the Company sustained
     $700,000 in additional losses on inventory carrying amounts in excess of
     selling prices resulting from fluctuations in inventory market demand. The
     Company also recorded $100,000 in additional bad debt reserves. The
     remainder of the loss was due to operating losses incurred in the fourth
     quarter of 2000.


                                      F-25
<PAGE>   57

                           TEXAS EQUIPMENT CORPORATION
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                  Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                   Balance at   Charges to   Charges to                Balance at
                                                   Beginning     Costs and     Other                     End of
   Description                                     of Period     Expenses     Accounts    Deductions     Period
   -----------                                     ----------   ----------   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>          <C>          <C>
   Allowance for doubtful accounts:
   Year Ended December 31, 1998 (Unaudited)        $   76,000   $       --   $       --   $       --   $   76,000
   Year Ended December 31, 1999 (Unaudited)            76,000       33,564           --           --      109,564
   Year Ended December 31, 2000                       109,564      100,000           --           --      209,564

   Allowance for finance receivable:
   Year Ended December 31, 1998 (Unaudited)                --      291,886           --      291,886           --
   Year Ended December 31, 1999 (Unaudited)                --      200,000           --           --      200,000
   Year Ended December 31, 2000                       200,000      408,079           --      408,079      200,000
</TABLE>

<PAGE>   58

                  TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
         Item No.                          Item                                      Method of Filing
         --------                          ----                                      ----------------
<S>                   <C>                                              <C>
           3(a)       Articles of Incorporation..................      Incorporated by reference to Exhibit 3(a) to
                                                                       the Company's 1996 Form 10-K
           3(b)       By-Laws........................................  Incorporated by reference to Exhibit 3(b) to
                                                                       the Company's 1996 Form 10-K
           10(a)      Acquisition Agreement for Texas                  Incorporated by reference to Exhibit 3(a) to
                        Equipment Co. Inc.........................     the Company's 1996 Form 10-K
           10(j)      Contract with John Deere & Company.....          Incorporated by reference to Exhibit 3(j) to
                                                                       the Company's 1996 Form 10-K
           10(k)      Contract with John Deere & Company.....          Incorporated by reference to Exhibit 10(k)
                                                                       to the Company's 9/30/1998 Form 10-Q
            21        List of Subsidiaries...........................  (filed herewith)
            23        Consent of Ernst & Young LLP ............        (filed herewith)
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