<PAGE>

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

                                   FORM 10-Q


[X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
     For the quarterly period ended September 30, 1999.

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from ________ to ________.

                             Commission File Number
                                    0-20819


                                THERMATRIX INC.
             (Exact name of registrant as specified in its charter)


          Delaware                                          94-2958515
(State or other jurisdiction of                           (IRS Employer
incorporation or organization)                        Identification Number)


                         308 N. Peters Road, Suite 100
                           Knoxville, Tennessee 37922
                    (Address of principal executive offices)

                                 (865) 539-9603
              (Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports
     required to be filed by Section 13 or 15(d) of the Securities Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     registrant was required to file such reports), and (2) has been subject to
     such filing requirements for at least the past 90 days:

                         Yes      X         No
                              ---------        -----------


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

             Class                     Outstanding at September 30, 1999
             -----                     ---------------------------------
Common stock, $.001 par value                       7,800,109
<PAGE>

                                THERMATRIX INC.

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.  The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Certain Business Considerations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>


PART I.     FINANCIAL INFORMATION                                                Page
                                                                                 ----
<S>         <C>                                                                  <C>

Item 1.     Financial Statements........................................          3-5

            Condensed Consolidated Balance Sheets.......................            3

            Condensed Consolidated Statements of Operations.............            4

            Condensed Consolidated Statements of Cash Flows.............            5

            Notes to Condensed Consolidated Financial Statements........         6-12

Item 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................        13-24

PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings...........................................           24

Item 2.     Changes in Securities.......................................           24

Item 3.     Defaults Upon Senior Securities.............................           24

Item 4.     Submission of Matters to a Vote of Security Holders.........        24-25

Item 5.     Other Information...........................................           25

Item 6.     Exhibits and Reports on Form 8-K............................        25-32

            SIGNATURE...................................................           33


</TABLE>

                                       2
<PAGE>

                                THERMATRIX INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                           September 30,       December 31,
                                                                               1999                1998
                                                                           -------------       ------------
ASSETS                                                                      (Unaudited)         (Audited)
<S>                                                                        <C>                 <C>
            CURRENT ASSETS
            Cash, short-term investments and restricted cash                  $  1,075            $  3,214
            Accounts receivable, net                                            10,514               4,668
            Costs of uncompleted contracts, net                                    481                 ---
            Inventories                                                          1,870                 ---
            Prepaid expenses and other current assets
                                                                                 1,400                 232
                                                                              --------            --------
                  Total current assets                                          15,340               8,114

            PROPERTY AND EQUIPMENT, net                                          9,999                 572
            GOODWILL, net                                                        5,623                 ---
            PATENTS and Other Assets, net                                        1,619               1,406
                                                                              --------            --------

  TOTAL ASSETS                                                                $ 32,581            $ 10,092
                                                                              ========            ========

LIABILITIES AND STOCKHOLDERS' EQUITY
            CURRENT LIABILITIES
            Notes Payable                                                     $  5,721            $    ---
            Current Portion of Long Term Debt                                      365                 ---
            Accounts Payable                                                     9,332               4,881
            Accrued Payroll & Related Expenses                                     612                 ---
            Accrued Liabilities and Reserves                                     7,841                 965
                                                                              --------            --------
                  Total current liabilities                                     23,871               5,846

            LONG TERM LIABILITIES
            Other Liabilities                                                    1,860                 ---
                                                                              --------            --------
            TOTAL LONG-TERM LIABILITIES                                          1,860                 ---

            STOCKHOLDERS' EQUITY:
            Common stock, $0.001 par value                                           8                   8
            Series "E" convertible preferred, .001 par value                       ---                 ---
            Additional paid-in capital                                          54,800              48,795
            Accumulated Deficit                                                (48,104)            (44,576)
            Other Accumulated Comprehensive Income                                 146                  19
                                                                              --------            --------
                  Total stockholders' equity                                     6,850               4,246
                                                                              --------            --------

TOTAL LIABILITIES & STOCKHOLDERS EQUITY                                       $ 32,581            $ 10,092
                                                                              ========            ========
</TABLE>

           See notes to condensed consolidated financial statements.

                                       3
<PAGE>

                                THERMATRIX INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (Thousands of Dollars except for per share amounts)
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                         Three Months                            Nine Months
                                                     Ended September 30,                     Ended September 30,
                                            --------------------------------------  --------------------------------------
                                                   1999                1998                1999                1998
                                            ------------------  ------------------  ------------------  ------------------
<S>                                         <C>                 <C>                 <C>                 <C>
REVENUES                                              $11,014             $ 3,964             $31,879             $ 9,642
COST OF REVENUES                                        7,891               3,705              25,125               8,850
                                                      -------             -------             -------             -------
     Gross margin                                       3,123                 259               6,754                 792

OPERATING EXPENSES
     Research and development                             353                 390                 753               1,053
     Selling, general and administrative                3,082               1,247               9,600               4,113
                                                      -------             -------             -------             -------
          Total operating expenses                      3,435               1,637              10,353               5,166
                                                      -------             -------             -------             -------
          Loss from operations                           (312)             (1,378)             (3,599)             (4,374)

OTHER INCOME
     Interest income (expense), net                      (431)                 82                (767)                292
     Other income (expense), net                          260                   7                 872                  49
                                                      -------             -------             -------             -------
          Total other income                             (171)                 89                 105                 341
                                                      -------             -------             -------             -------
          Net loss before income taxes                   (483)             (1,289)             (3,494)             (4,033)

BENEFIT (PROVISION)

FOR INCOME TAXES                                          (17)                (17)                (34)                (50)
                                                      -------             -------             -------             -------
     Net loss                                         $  (500)            $(1,306)            $(3,528)            $(4,083)
                                                      =======             =======             =======             =======

BASIC NET LOSS PER SHARE                               $(0.06)             $(0.17)             $(0.46)             $(0.53)
                                                      =======             =======             =======             =======

BASIC WEIGHTED AVERAGE COMMON SHARES
 OUTSTANDING                                            7,786               7,696               7,748               7,668
                                                      =======             =======             =======             =======
</TABLE>

           See notes to condensed consolidated financial statements.

                                       4
<PAGE>

                                THERMATRIX INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Thousands of Dollars)


<TABLE>
<CAPTION>
                                                                                               Nine Months Ended
                                                                                   -------------------------------------------
                                                                                     September 30,           September 30,
                                                                                          1999                    1998
                                                                                                  (Unaudited)
<S>                                                                                    <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                         $    (3,528)            $     (4,083)
       Adjustments to reconcile net loss to net cash used in operating
         activities -
         Depreciation and amortization                                                     1,770                      531
         Provision for doubtful accounts                                                     245                      190
       Changes in assets and liabilities net of effect from
         (Increase) decrease in accounts receivable                                          658                   (2,240)
         (Increase) decrease in costs of uncompleted contracts                               552                      279
         (Increase) decrease in inventory                                                    965                       --
         (Increase) decrease in prepaid expenses and other                                  (330)                     (45)
         (Increase) decrease in Goodwill                                                      --                       --
         (Increase) decrease in accounts payable                                         (12,191)                   2,500
         (Increase) decrease in accrued liabilities                                        7,390                       44
         (Increase) decrease in billings on uncompleted contracts in
         excess of costs                                                                  (1,631)                    (136)
                                                                                   -------------------     -------------------
                   Net cash provided by (used in) operating activities                    (6,100)                  (2,960)
                                                                                   -------------------     -------------------

CASH FLOWS FROM INVESTING ACTIVITIES
       Sale of short-term investments                                                      1,670                    1,940
       Purchases of property and equipment                                                  (121)                    (147)
       Increase in patents and other assets                                                 (310)                    (324)
       Purchase of Wahlco Environmental Systems, Inc. net of cash acquired                (1,740)                      --
                                                                                   -------------------     -------------------
                   Net cash provided (used) by investing activities                         (501)                   1,469
                                                                                   -------------------     -------------------

CASH FLOWS FROM FINANCING ACTIVITIES
       Proceeds from issuance of common stock                                                413                      112
       Proceeds form issuance of preferred stock                                           5,592                       --
                                                                                   -------------------     -------------------
                                                                                           6,005                      112
                                                                                   -------------------     -------------------


INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                                              (596)                  (1,379)
CUMULATIVE EFFECT OF FOREIGN EXCHANGE RATES ON CASH                                          127                       47
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD                                                1,544                    3,990
                                                                                   -------------------     -------------------
CASH & CASH EQUIVALENTS END OF PERIOD                                              $       1,075                 $  2,658
                                                                                   ===================     ===================

SUPPLEMENTAL CASH FLOW INFORMATION
       Cash paid during the year for interest (net of amount capitalized)                    535                       10
       Cash paid during the year for income taxes                                             40                       54
</TABLE>


           See notes to condensed consolidated financial statements.

                                       5
<PAGE>

                                THERMATRIX INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1999
                                  (Unaudited)


1.   BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.  The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.  These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months and nine months ended September 30, 1999 and 1998.  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, the disclosure of contingent 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.  The results for the three months and nine months
ended September 30, 1999 are not necessarily indicative of the results expected
for the full fiscal year.

The Company currently intends to finance its ongoing operations and strategic
growth plan by raising a combination of up to $27 million in equity and debt.
The Company had originally intended to complete the financing during fiscal
1999, but may not be able to complete all necessary financing until fiscal 2000.
The Company has engaged an investment advisory firm on an exclusive basis to
assist with the placement of up to $15 million in equity.  The Company is also
working with potential lenders concerning the placement of a senior term and
revolving credit facility of up to $12 million.  This financing is also intended
to pay the outstanding debt pursuant to the terms of the 1999 Credit Agreement.
As a result of the payment of an additional fee of $100,000, this debt now
matures on November 22, 1999.  The Company's financing is dependent upon the
ability to attract additional equity investors and to provide sufficient
security for credit facilities.  There can be no assurances as to the timing or
ultimate outcome of this financing.

The Company is also pursuing other alternatives to fund its remaining fiscal
1999 cash requirements.  Such alternatives include, among other things,
consideration of divestiture of a portion or portions of the Company's business
or real estate assets.  These strategies are dependent upon the Company's
ability to meet its forecasts, to develop increased sales and generate positive
gross margins, to achieve the timely collection of amounts due to the Company
and to identify parties willing and able to purchase a portion or portions of
the Company's business.  There can be no assurances as to the timing or ultimate
outcome of any of these alternatives.  The accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company's ability to continue as a going concern is
dependent upon completing the contemplated equity and debt transactions. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

                                       6
<PAGE>

Effective September 30, 1999 Arthur Andersen LLP of San Jose, California
resigned as the Company's independent public accountants. Arthur Andersen LLP
qualified its report on the financial statements of the Company for the year
ended December 31, 1998 with a "going concern" opinion.  For the year ended
December 31, 1997, Arthur Andersen LLP's report on the financial statements of
the Company was unqualified.  There have been no disagreements regarding any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure between the Company and Arthur Andersen LLP.  There
have been no reportable events between Arthur Andersen LLP and the Company.  The
Audit Committee of the Board of Directors approved the resignation of Arthur
Andersen LLP as the Company's independent public accountants.  The Company is
currently seeking a firm more convenient to its Knoxville, Tennessee offices to
serve as independent public accountant and intends to have a successor firm
engaged as soon as possible, but no later than December 31, 1999, the end of its
fiscal year.  As a result of the resignation of Arthur Andersen LLP, the Company
did not have a quarterly review conducted as of September 30, 1999 by an
independent public accountant as had been its previous practice.

2.   BASIC NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding.  No diluted loss per share information has been
presented in the accompanying statements of operations since potential common
shares from conversion of stock options and warrants are antidilutive.

3.   COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 (SFAS
130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements.  The following table reconciles comprehensive income under the
provisions of SFAS 130 for the three months and nine months ended September 30,
1999 and 1998.

<TABLE>
<CAPTION>
                                                  For the Three Months Ended
                                                        September 30,
                                                            ($000)
                                                --------------------------------
                                                         1999             1998
                                                --------------------------------
<S>                                               <C>               <C>
Net Loss                                          $       (500)        $ (2,050)
Other Comprehensive Income(Loss), net of tax
        Unrealized Currency Gain (Loss)           $        863         $     --
Comprehensive Income (Loss)                       $        363         $ (2,050)


                                                  For the Nine Months Ended
                                                        September 30,
                                                            ($000)
                                               ---------------------------------
                                                       1999              1998
                                               ---------------------------------
Net Loss                                          $     (3,528)        $ (6,293)
Other Comprehensive Income(Loss), net of tax
        Unrealized Currency Gain                  $        146         $     --
Comprehensive Income (Loss)                       $     (3,382)        $ (6,293)
</TABLE>


4.    NONCASH INVESTING AND FINANCING ACTIVITIES

The Company purchased all of the capital stock of Wahlco Environmental Systems,
Inc. for $2,231,000. In conjunction with the acquisition, liabilities were
assumed as follows:


                                       7
<PAGE>

     Fair value of assets acquired             $ 28,549,000
     Purchase of capital stock                    2,231,000
                                               ------------
     Liabilities assumed                       $ 26,318,000
                                               ============

The purchase price is composed of $1,582,000 paid at closing for the acquisition
of the capital stock, $350,000 paid at closing for fees and expenses related to
the acquisition, and $299,000 for other expenses related to the transaction.

Cash acquired in the acquisition was $491,000.
Reconciliation of amounts paid and the debt assumed to the total purchase price
is as follows:

     Current assets                            $ 11,661,000
     Property, plant and equipment               10,511,000
     Other assets                                   535,000
     Goodwill                                     5,842,000
                                               ------------
                                               $ 28,549,000
                                               ------------

     Current liabilities                       $ 22,179,000
     Long-term liabilities                        4,139,000
                                               ------------
                                               $ 26,318,000
                                               ------------
     Purchase price                            $  2,231,000
                                               ============

During the third quarter the Company adjusted the fair value of the property it
owns in Pontardulais, South Wales from approximately $731,000 (i.e.,
(Pounds)450,000) to approximately $4,874,000 (i.e., (Pounds)3,000,000).  The
adjustment was made based on an independent appraisal of the fair market value
that considered the Company's decision to vacate and dispose of the property and
a change in use from industrial to retail.  The Company has submitted an
application for such change in use to the local planning commission and believes
approval will be granted during the fourth quarter of fiscal 1999.

5.   ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.  The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheets as either an asset or liability
measured at its fair value.  The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.  Statement 133 is effective for fiscal
quarters of all fiscal years beginning after June 15, 2000.  The Company does
not expect the adoption of Statement 133 to have a material effect on its
financial position or results of operations.

6.   ACQUISITION OF WAHLCO ENVIRONMENTAL SYSTEMS, INC.

On January 13, 1999, the Company completed the acquisition of Wahlco
Environmental Systems, Inc. ("Wahlco").  Wahlco designs, manufactures, and sells
combined cycle gas turbine products, metallic and fabric bellows, air pollution
control equipment, and related products and services to electric utilities,
independent power producers, co-generation plants, and industrial manufacturers
worldwide.  The Company acquired all of the outstanding common shares and
warrants of Wahlco for the payment of approximately $1.9 million in cash.  If
certain other conditions are met, the Company will be required to make
additional payments of up to approximately $2.0 million to Wahlco shareholders.
As of September 30, 1999, the conditions related to the additional payments have
not been met.  Also, in conjunction with the acquisition, the Company agreed to
guarantee repayment by Wahlco of approximately $4.6 million of debt owed to
affiliates of Wexford Management, LLC ("Wexford"), Wahlco's largest shareholder
at the time of the acquisition, or guaranteed by Wexford to other parties.  The
Company had subsequently entered

                                       8
<PAGE>

into a new credit agreement with Wexford (See Note 8). The acquisition was
accounted for as a purchase and the results of Wahlco have been included in the
accompanying condensed financial statements from the date of acquisition. As of
the acquisition date, the Company has embarked on the formulation and
implementation of a plan to close duplicate and/or inefficient Wahlco facilities
and is reducing headcount accordingly. In addition, the Company has closed its
San Jose, California office which completes the move of its corporate
headquarters to Knoxville, Tennessee and closed its Englewood, Colorado sales
office. The costs involved to close facilities and terminate employees have been
recognized as liabilities assumed at the time of the Wahlco acquisition. The
types and amounts of exit liabilities included in the purchase price recorded in
connection with the acquisition are:

<TABLE>
<S>                                                           <C>
Personnel Terminations and Relocations                        $1,996,000
Facility Closures and Relocations                              1,720,000
Company Closures                                                 324,000
                                                              ----------
Total                                                         $4,040,000
                                                              ==========
</TABLE>

As of September 30, 1999, a total amount of $1,492,000 has been charged against
the foregoing liabilities.  At the present time the Company does not believe
that there are any unresolved issues that may result in additional liabilities
leading to an adjustment to the purchase price.

The allocation of the purchase price to the net assets acquired is preliminary
based on management's estimate of fair value.  Any changes in the allocation of
purchase price will have an effect on the amount of goodwill that has been
initially recorded.  During the third quarter of fiscal 1999 a change in the
allocation of the purchase price occurred as a result of the revaluation of the
Company's property in Pontardulais, South Wales.  As a result of such
revaluation the original amount of goodwill of $9,985,000 recorded on the
preliminary allocation of purchase price was decreased to $5,842,000.  Goodwill
will be amortized on a straight-line basis over a 20-year period.

The Company is providing the following unaudited pro forma operating data as if
the acquisition occurred on January 1, 1998.  The pro forma information for the
three months and nine months ended September 30, 1999 is not provided as the
results of Wahlco for the period from January 1, 1999 to January 13, 1999 are
not material to results of operations for the three months and nine months ended
September 30, 1999.

The pro forma information is unaudited and is not necessarily indicative of the
consolidated results that would have occurred if the transaction and adjustment
reflected therein had been consummated in the period presented, or at any
particular date in the future, nor does it purport to represent the financial
position, results of operations or changes in cash flows for future periods.

<TABLE>
<CAPTION>
                                            For the Three Months Ended      For the Nine Months Ended
<S>                                        <C>                            <C>
                                                September 30, 1998             September 30, 1998
                                           -----------------------------  -----------------------------
                                           ($000 except per share data)   ($000 except per share data)
Revenue                                          $      13,315                  $      38,533
Net Loss                                         $      (2,368)                 $      (7,434)
Basic Net Loss Per Share                         $       (0.31)                 $       (0.97)
</TABLE>


7.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding quantitative and qualitative disclosures about market
risks is included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 in Item 1-Description of Business, Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations, and in
Note 2 to the Consolidated Financial Statements.  Information regarding
quantitative and qualitative disclosures about market risks is also included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained herein.

                                       9
<PAGE>

8.  SEGMENTS

During 1998, the Company adopted Statement of Financial Accounting Standards
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information."  SFAS 131 requires a new basis of determining reportable business
segments, i.e. the management approach.  This approach requires that business
segment information used by management to assess performance and manage company
resources be the source for information disclosure.  Although the Company is
currently being organized operationally into eight divisions, at the present
time management is reviewing financial information on a geographic basis.  The
Company incurred approximately $353,000 and $753,000, respectively, in research
and development expenses during the three months and nine months ended September
30, 1999 relating to its diesel engine emission reduction technology.

The Company's operations by geographic area are as follows:
<TABLE>
<CAPTION>

    For the three months ended         United          United        Adjustments &
        September 30, 1999             States         Kingdom        Eliminations      Consolidated
        ------------------             ------         -------        -------------     ------------
<S>                                 <C>            <C>             <C>                <C>
              ($000)
Revenues                              $  5,491       $ 5,523                              $11,014
Gain (Loss) from Operations           $ (1,474)      $ 1,162                              $  (312)
Total Identifiable Assets

    For the nine months ended          United          United        Adjustments &
        September 30, 1999             States         Kingdom        Eliminations      Consolidated
        ------------------             ------         -------        --------------    ------------
              ($000)
Revenues                              $ 15,515       $16,364                              $31,879
Income (Loss) from Operations         $ (4,373)      $   774                              $(3,599)
Total Identifiable Assets             $128,176       $ 3,920          $(99,515)           $32,581
</TABLE>

9.    1999 CREDIT AGREEMENT

On February 25, 1999 the Company entered into the Second Amended and Restated
Credit Agreement among Wahlco and the Company, as Borrowers, and the Lenders and
Wexford as Agent for the Lenders (the "1999 Credit Agreement").  As of September
30, 1999, the debt outstanding was $5.7 million and bears interest at the rate
of 13% per annum, payable monthly in advance.  As a result of the payment of an
additional fee of $100,000, this debt now matures on November 22, 1999.  As a
further condition to the Lenders' execution and delivery of the 1999 Credit
Agreement, the Company agreed to confirm its grant to the Lenders of a security
interest in all existing and future assets and to cause all its significant
subsidiaries to enter into guarantees and grant to the Lenders additional
security interests and mortgages in all existing and future assets of the
Borrowers and significant subsidiaries.

As a further condition to the 1999 Credit Agreement, the Company issued to
Wexford a warrant to acquire 450,000 shares of common stock.  The warrants can
be exercised at any time on or before February 25, 2004 at an exercise price of
$3.05 per share.  The fair value of the warrant at the date of issuance was
recorded as additional interest cost and this amount is being recognized as
interest expense over the period that the Wexford debt is outstanding.

10.  ACQUISITION OF FERGUSON INTERNATIONAL, INC.

Pursuant to an Asset Purchase Agreement dated April 30, 1999 between InAmerica
Corporation and the Company, the Company acquired the assets of Ferguson
International Inc., a supplier of ammonia storage and handling systems used by
power companies to reduce emissions of NOx, a major contributor to smog
formation.  The Company accounted for the acquisition of the Ferguson business
as a purchase and the results of the Ferguson business are included in the
accompanying condensed financial statements from the date of acquisition.   The
Ferguson business was combined with and is operating as part of the Wahlco Air

                                       10
<PAGE>

Systems Division in Santa Ana, California.  In full consideration for the
transfer of the assets, the Company will pay InAmerica Corporation a royalty of
4% of the aggregate net invoice value of gross sales until the earlier of (i) 5
years from the closing date, or (ii) InAmerica Corporation has received $5
million aggregate royalty payments.  No consideration was exchanged or
liabilities assumed in connection with this acquisition.  Contrary to previous
reports, the Company has determined that it will account for the contingent
royalty payments as additional purchase price when they are generated.  To date
no royalty payments have been generated.


11.  ISSUANCE OF CONVERTIBLE PREFERRED STOCK, SERIES E

On June 30, 1999 the Company closed a private placement of 6,000 shares of
Series E 8% Convertible Preferred Stock, Series E (the "Series E Stock") at a
purchase price of $1,000 per share in the aggregate amount of $6,000,000.  The
two largest existing shareholders of the Company's common stock combined to
purchase $3 million of the Series E Stock and a single new investor purchased
the remainder (the "Investors").  The Series E Stock is convertible into common
stock of the Company on certain terms and at a conversion price to be determined
at the time of conversion in accordance with the Company's Certificate of
Designation.  The issuance of the Series E Stock was made pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof.  On July 9, 1999, the 10-day
notification period to shareholders was completed and the Company received net
proceeds of approximately $5.6 million after costs of issuance totaling
approximately $400,000.

Under the Certificate of Designation, at the option of an Investor, the Series E
Stock is convertible into shares of the common stock of the Company based upon a
conversion price of the lower of (i) $5.00 per share, or (ii) 85% of the
arithmetic mean of the 15 lowest closing bid prices during the 30 trading days
preceding such date of conversion.  Fifty percent of the Series E Stock may be
converted after November 27, 1999 and remaining Series E Stock may be converted
after January 26, 2000.  On June 30, 2002, the Series E Stock will automatically
convert into shares of common stock based upon a conversion price of the lesser
of $5.00 or 85% of the market price, as defined.  The Company has the right to
redeem the Series E Stock at any time for 130% of the original purchase price
together with any accrued and unpaid dividends.  The Series E Stock bears a
dividend of 8% payable in cash or stock at the option of the Company.  Under the
Common Stock Purchase Warrant dated June 30, 1999 between the Company and each
of the Investors, the Company issued warrants to purchase common stock
equivalent to 35,000 shares of common stock per $1 million of Series E Stock
purchased (the "Warrants").  The Warrants may be exercised at $5.31 per share
prior to June 30, 2002.  The fair value of the Warrants at the date of issuance
has been recorded as an issuance cost of the Series E Stock.  If the Company's
securities remain delisted from the Nasdaq National Market for 45 consecutive
days (see Note 12), the conversion price of the Series E Stock will be reduced
to the lesser of $5.00 or 65% of the market price, as defined.  The restrictions
on the dates of conversion remain in effect.  In addition, if at any time the
Company's securities are not listed on either the Nasdaq National Market or the
Nasdaq SmallCap Market, the single new investor mentioned above has the option
to require the Company to redeem all or part of its Series E Stock at 130% of
the original purchase price.

12.  DELISTING FROM THE NASDAQ NATIONAL MARKET

Effective as of the close of business on September 17, 1999, the Company's
securities were delisted from the Nasdaq National Market as a result of a
determination made by a Nasdaq Listing Qualifications Panel.  On September 28,
1999,the Company appealed the Panel's decision and requested that the matter be
reviewed by the Nasdaq Listing and Hearing Review Council.  On October 25, 1999,
the Company's appeal was acknowledged and a review will be conducted in April
2000 by the Nasdaq Listing and Hearing Review Council. The Company's common
stock is currently being traded on the OTC bulletin board under the symbol
TMXI.OB.

13.  ACQUISITION OF GENFLEX PRODUCT LINE

                                       11
<PAGE>

Pursuant to an Agreement for the Sale and Purchase of the Genflex Assets dated
September 24, 1999, between BTR Industrial Holdings Limited and Teddington
Bellows Limited, the Company acquired the assets related to the Genflex product
line of bellows expansion joints.  The Company accounted for the acquisition of
the assets related to the Genflex product line as a purchase and the results of
the use of the assets are included in the accompanying condensed financial
statements from the date of acquisition.  The Genflex product line was combined
with and is operating as part of the Teddington Bellows Division in
Pontardulais, United Kingdom.  In full consideration for the transfer of the
assets, Teddington Bellows Limited will pay BTR Industrial Holdings Limited (i)
approximately $94,674 (i.e., (Pounds)57,378) for certain equipment, inventory,
customer contracts and records; (ii) contingent deferred compensation of 5% net
revenue from work-in-progress or new order for a period of 18 months from the
closing date; and (iii) contingent deferred compensation of 10% net revenue from
the sale of spare parts for a period of 24 months from the closing date.  BTR
Industrial Holdings Limited and Teddington Bellows Limited entered into a Loan
Note Agreement providing for payment of approximately $94,674 (i.e.,
(Pounds)57,378) on or before November 22, 1999.  The Company will account for
the contingent deferred compensation as additional purchase price when it is
generated.  To date no contingent deferred compensation has been generated.

                                       12
<PAGE>

                                THERMATRIX INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

The following discussion contains forward-looking information that involves
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from those indicated herein as a
result of certain factors, including those set forth under "Certain Business
Considerations."

The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998, contained in the Company's Annual Report on Form 10-K.

Effective September 30, 1999 Arthur Andersen LLP of San Jose, California
resigned as the Company's independent public accountants. Arthur Andersen LLP
qualified its report on the financial statements of the Company for the year
ended December 31, 1998 with a "going concern" opinion.  For the year ended
December 31, 1997, Arthur Andersen LLP's report on the financial statements of
the Company was unqualified.  There have been no disagreements regarding any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure between the Company and Arthur Andersen LLP.  There
have been no reportable events between Arthur Andersen LLP and the Company.  The
Audit Committee of the Board of Directors approved the resignation of Arthur
Andersen LLP as the Company's independent public accountants.  The Company is
currently seeking a firm more convenient to its Knoxville, Tennessee offices to
serve as independent public accountant and intends to have a successor firm
engaged as soon as possible, but no later than December 31, 1999, the end of its
fiscal year.  As a result of the resignation of Arthur Andersen LLP, the Company
did not have a quarterly review conducted as of September 30, 1999 by an
independent public accountant as had been its previous practice.

General
-------

Thermatrix Inc. is a global technology company engaged in the development,
design, manufacture, installation, commissioning and sale of industrial process
and utility equipment and systems to industrial manufacturers, electric
utilities, independent power producers and co-generation plants.  The Company
also provides mechanical plant installation services and rents associated
equipment.

The core component of the Company's technology is its proprietary flameless
thermal oxidizer ("FTO") for the destruction of volatile organic compounds and
hazardous air pollutants (collectively "VOCs").  The Company's products also
include PADRE(R), a proprietary technology used to capture and recover very low
concentration VOCs from low-to-medium flow vapor streams.  In addition to its
primary focus on the industrial VOC emissions control market, the Company is
currently focusing its development activities on the application of its FTO
technology to treat emissions from both mobile and stationary diesel engines.

On January 13, 1999, pursuant to an Agreement and Plan of Merger, dated November
9, 1998, (the "Merger Agreement"), among Wahlco Environmental Systems, Inc.,
("Wahlco"), the Company and TMX Acquisition Sub I, Inc., a wholly owned
subsidiary of the Company ("Merger Sub"), Merger Sub merged with and into Wahlco
(the "Merger"), and Wahlco became a wholly owned subsidiary of the Company at
the effective time of the Merger.

The Company paid approximately $1.9 million in cash to acquire all of the common
shares and warrants of Wahlco.  The Wahlco shareholders are also entitled to
receive certain Contingent Payments as defined

                                       13
<PAGE>

in the Merger Agreement. The Contingent Payments, which are not related to
future operating results of the Company, will only be made to the Wahlco
shareholders in the event that (i) the Company is able to collect monies owed to
the Company by third parties, or (ii) a fully-reserved liability currently
recorded on the books of the Company is substantially reduced. The Company
believes, but can provide no assurances, that the Contingent Payments will not
exceed $2 million in total and may be substantially less than that amount.

In connection with the Merger, the Company agreed to guaranty to Wexford
Management LLC ("Wexford"), as Agent for certain lenders which are affiliates of
Wexford (the "Lenders"), the obligations of Wahlco to the Lenders under an
amended and restated credit agreement dated January 30, 1998 (the "1998 Credit
Agreement") and to The Chase Manhattan Bank under a non-committed line of credit
(the "Chase Facility") and to grant to the Lenders a security interest in all
existing and future assets of the Company.  The 1998 Credit Agreement was
subsequently replaced with the 1999 Credit Agreement.

The Company believes this merger to be strategically significant.  The business
and market synergies between the Company and Wahlco in the air pollution control
industry are excellent and the combination of the two firms will provide a more
balanced business with a stable base, above-average growth, and global presence
and performance.

The combined Company is organized operationally into eight divisions.  The two
Thermatrix Divisions are located in Knoxville, Tennessee and Hull, England and
supply turnkey VOC abatement systems including design, engineering,
manufacturing, installation and startup.  The Thermatrix Divisions offer a wide
range of solutions to VOC abatement including its patented FTO and adsorption
suitable for a broad range of flow and wide variation in composition.

Thermatrix Diesel Systems Division, relocated from San Jose, California to
Knoxville, Tennessee during the third quarter of fiscal year 1999, represents
the predominant research and development team of the Company.  Following an
extensive test program which proved that the FTO technology could destroy over
90% of the noxious emissions from diesel engines, the team has reconfigured the
FTO technology to permit the product development of smaller devices suitable for
use on mobile applications.  Partnerships are being developed with potential end
users of diesel after-treatment systems, and three agreements were entered into
during fiscal year 1998 for prototype testing on locomotives, buses, and
underground mining equipment.

The two Wahlco Metroflex Divisions are located in Lewiston, Maine and
Chesterfield, England and design and manufacture gas flow diverters and dampers
for the control and direction of gas flows in power generation facilities.  In
addition, it supplies fabric and metallic expansion joints and carries out
fabrication for external clients as well as the Thermatrix Divisions.

Wahlco Air Systems Division, located in Santa Ana, California, designs and
manufactures equipment to reduce and control air pollution at power generation
facilities.  Products and services include flue gas conditioning and equipment,
NOx reduction systems, and industrial electric heaters and thermocouples,
primarily for use in gas turbines.

Teddington Bellows Division, located in Pontardulais, South Wales, specializes
in the design and manufacture of metallic bellows and expansion joints for use
in pressurized piping systems. Teddington Bellows Division supplies external
customers as well as the Thermatrix Divisions, for which it also carries out
specialist fabrication.

Treste Services Division, located in Chesterfield, England, provides supplies
and leases mechanical and industrial equipment required for maintenance and
installation work.  Treste Services Division provides these services externally
as well as to all other divisions of the Company.

During the second quarter of fiscal 1999, the Company announced that it had
signed a letter of intent to acquire the Brockington and Scott Group, comprising
Brockington and Scott Holdings Limited and its

                                       14
<PAGE>

wholly owned subsidiary, Brockington and Scott Limited. Brockington and Scott,
which is located in Llandeilo, Carmarthenshire, South Wales, designs and
manufactures expansion joints and bellows for applications with diameters from
20 millimeters to 4,000 millimeters. Brockington and Scott markets its products
to the power industry and for use in marine, locomotive and diesel vehicle
applications. The Brockington and Scott operation is expected to be combined
with the Teddington Bellows Division. The Company has finalized the terms of a
definitive agreement for the acquisition of all shares of Brockington and Scott
by Teddington Bellows Limited, but the agreement remains in escrow pending a
final closing of the transaction. In full consideration for the purchase of the
shares, Teddington Bellows will pay the Sellers approximately $1,980,000 (i.e.,
(Pounds)1,200,000). The amount of approximately $660,000 (i.e., (Pounds)400,000)
is to be paid upon closing and approximately $330,000 (i.e., (Pounds)200,000) is
to be paid annually thereafter until the full amount of the consderation has
been paid.

During the second quarter of fiscal 1999, the Company also announced that it had
signed a letter of intent to acquire PANDA Supplies Limited, a supplier of
products and services to continuously operating facilities in the offshore oil
and petrochemical industries in the U.K.  PANDA's facilities are located in
northeast England and Scotland.  The PANDA operation is expected to be combined
with the Company's Treste Services Division.  As of this date, the Company had
not finalized the definitive agreement for the acquisition of PANDA.

On November 5, 1999 the Company entered into an exclusive agreement with Hamon
Research-Cottrell ("HR-C") of Somerville, New Jersey and EC&C Technologies of La
Canada-Flintridge, California ("EC&C") whereby the Wahlco Air Systems Division
would work with HR-C and EC&C to commercialize EC&C's proprietary Urea to
Ammonia (U2A(TM)) technology.  The agreement provides the Company and HR-C with
exclusive licensing rights to the U2A(TM) technology.  A patent for the U2A(TM)
technology has been allowed and is expected to be issued shortly.  The Company
intends to employ the process in NOx reduction applications for both stationary
and mobile sources.

Results of Operations
---------------------

Revenues were $11.0 million and $31.9 million, respectively, for the three
months and nine months ended September 30, 1999, up from $4.0 million and $9.6
million, respectively, for the three months and nine months ended September 30,
1998.  The increase in revenues was primarily attributable to the acquisition of
Wahlco.  Revenues from European operations for the three months and nine months
ended September 30, 1999 were 50% and 51%, respectively, compared to 67% and 60%
of revenues for the three months and nine months ended September 30, 1998.

The Company had a gross margin contribution of $3.1 million and $6.8 million,
respectively, in the three months and nine months ended September 30, 1999
compared to a gross margin contribution of $259,000 and $792,000 in the
comparable periods in 1998.  The increase in gross margin was primarily
attributable to higher revenues as a result of the acquisition of Wahlco, which
were sufficient to absorb the fixed and semi-fixed costs of engineering and
operations in the United States and Europe, as well as a reduction in reserves
as a result of the resolution of warranty issues.

Research and development expenses were $353,000 and $753,000, respectively, in
the three months and nine months ended September 30, 1999, compared to $390,000
and $1,053,000 for the comparable periods in 1998.  The decrease in research and
development expense was primarily attributable to the benefits of the grant
award received from the Advanced Technology Program of the National Institute of
Standards and Technology, an agency of the U.S. Department of Commerce.
However, on September 24, 1999, the Company requested an early termination of
the grant award because the catalyst development program undertaken by a
subcontractor to the Company had not produced the expected results.  Research
and development expenses were largely attributable to expenditures for the
development and testing of a prototype system utilizing the Company's patented
FTO technology for the treatment of diesel engine emissions from mobile sources.

                                       15
<PAGE>

Selling, general and administrative expenses increased to $3.1 million and $9.6
million, respectively, for the three months and nine months ended September 30,
1999, compared to $1.2 million and $4.1 million in the comparable periods in
1998.  The increase in selling, general and administrative expenses reflects the
higher costs of operating the combined entity after the Wahlco acquisition.

Liquidity and Capital Resources
-------------------------------

Total cash and short-term investments was $1.1 million at September 30, 1999, a
decrease from $3.2 million of cash and short-term investments at December 31,
1998.  Net cash used in operating activities was $6.1 million in the nine
months ended September 30, 1999, primarily due to the acquisition of Wahlco in
January 1999, compared to $3.0 million used in operating activities during the
nine months ended September 30, 1998.  There can be no guarantee that sufficient
funds will be generated to cover the negative cash flow position.  Failure to
correct the situation will directly impact the ability to secure new orders, the
ability to attract and retain quality staff and the ability to meet all existing
obligations, all of which will have serious negative consequences for the
Company's business, results of operations and financial condition.

On June 30, 1999 the Company closed a private placement of 6,000 shares of
Series E Stock at a purchase price of $1,000 per share in the aggregate amount
of $6,000,000.  The two largest existing shareholders of the Company's common
stock combined to purchase $3 million of the Series E Stock and a single new
investor purchased the remainder (the "Investors").  The Series E Stock is
convertible into common stock of the Company on certain terms and at a
conversion price to be determined at the time of conversion in accordance with
the Company's Certificate of Designation.  The issuance of the Series E Stock
was made pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended, provided by Section 4(2) thereof.  On July
9, 1999, the 10-day notification period to shareholders was completed and the
Company received net proceeds of approximately $5.6 million after costs of
issuance totaling approximately $400,000.

Under the Certificate of Designation, at the option of the Investor, the Series
E Stock is convertible into shares of the common stock of the Company based upon
a conversion price of the lower of (i) $5.00 per share, or (ii) 85% of the
arithmetic mean of the 15 lowest closing bid prices during the 30 trading days
preceding such date of conversion.  Fifty percent of the Series E Stock may be
converted after November 27, 1999 and remaining Series E Stock may be converted
after January 26, 2000.  On June 30, 2002, the Series E Stock will automatically
convert into shares of common stock based upon a conversion price of the lesser
of $5.00 or 85% of the market price, as defined.  The Company has the right to
redeem the Series E Stock at any time for 130% of the original purchase price
together with any accrued and unpaid dividends.  The Series E Stock bears a
dividend of 8% payable in cash or stock at the option of the Company.  Under the
Common Stock Purchase Warrant dated June 30, 1999 between the Company and each
of the Investors, the Company issued warrants to purchase common stock
equivalent to 35,000 shares of common stock per $1 million of Series E Stock
purchased (the "Warrants").  The Warrants may be exercised at $5.31 per share
prior to June 30, 2002.  The fair value of the Warrants at the date of issuance
has been recorded as an issuance cost of the Series E Stock.  If the Company's
securities remain delisted from the Nasdaq National Market for 45 consecutive
days (see Note 12), the conversion price of the Series E Stock will be reduced
to the lesser of $5.00 or 65% of the market price, as defined.  The restrictions
on the dates of conversion remain in effect.  In addition, if at any time the
Company's securities are not listed on either the Nasdaq National Market or the
Nasdaq SmallCap Market, the single new investor mentioned above has the option
to require the Company to redeem all or part of its Series E Stock at 130% of
the original purchase price.

The Company currently intends to finance its ongoing operations and strategic
growth plan by raising a combination of up to $27 million in equity and debt.
The Company had originally intended to complete the financing during fiscal
1999, but may not be able to complete all necessary financing until fiscal 2000.
The Company has engaged an investment advisory firm on an exclusive basis to
assist with the placement of up to $15 million in equity.  The Company is also
working with potential lenders concerning the

                                       16
<PAGE>

placement of a senior term and revolving credit facility of up to $12 million.
This financing is also intended to pay the outstanding debt pursuant to the
terms of the 1999 Credit Agreement. As a result of the payment of an additional
fee of $100,000, this debt now matures on November 22, 1999. The Company's
financing is dependent upon the ability to attract additional equity investors
and to provide sufficient security for credit facilities. There can be no
assurances as to the timing or ultimate outcome of this financing.

The Company is also pursuing other alternatives to fund its fiscal 1999 cash
requirements.  Such alternatives include, among other things, consideration of
divestiture of a portion or portions of the Company's business or real estate
assets.  These strategies are dependent upon the Company's ability to meet its
forecasts, to develop increased sales and generate positive gross margins, to
achieve the timely collection of amounts due to the Company and to identify
parties willing and able to purchase a portion or portions of the Company's
business.  There can be no assurances as to the timing or ultimate outcome of
any of these alternatives.

The Company expects to complete the acquisition of Brockington and Scott as well
as PANDA in fiscal 1999.  The Company plans to finance these acquisitions with a
portion of the proceeds from the additional equity and/or debt financing to be
completed in fiscal 1999.

Year 2000 Compliance

Year 2000 issue arises from computer programs that use two digits rather than
four to define the applicable year.  Such computer programs may cause computer
systems to recognize a date using "00" as the calendar year 1900 rather than the
calendar year 2000.  Systems that do not properly recognize such information
could generate erroneous dates or cause a system to fail.

The Company has conducted a review of its products and internal computer systems
to identify the systems that could be affected by the Year 2000 issue. The
Company believes its products and the overwhelming majority of its management
information systems are, or will be, compliant.  Expenditures to date have not
been material and the Company does not anticipate that costs of remedial actions
going forward will be material.  To date, no Year 2000 problems have been
encountered and no IT projects have been, nor are any expected to be, deferred.

The Company's program to assess and, where necessary, remediate significant
information systems readiness includes the following phases:

  .  Phase 1 - Identification of significant systems.  This phase was completed
     on February 1, 1999.

  .  Phase 2 - Assessment of each system's compliance status by contacting
     manufacturers via telephone, web pages, or testing, as appropriate.  This
     phase was completed on March 1, 1999.

  .  Phase 3 - Identification of remedial steps to be taken and associated
     worst-case costs in cases of non-compliance.  This includes hardware and
     software upgrades, patches, or replacement.  This phase was completed on
     March 30th, 1999.

  .  Phase 4 - Implementation and testing of remedies.  With the exception of
     two accounting systems, Phase 4 was completed on October 15, 1999.

  .  Phase 5 - Development of contingency plans.  The target completion date for
     this phase is December 15, 1999.

Significant information systems include:

  .  Network systems hardware and operating systems, including file servers,

                                       17
<PAGE>

     and associated operating system software.

  .  Applications software - accounting/ERP, design, office suite, e-mail

  .  Communications systems - telephone, voice mail, fax

Discussion of compliance status of significant information systems.  All network
-------------------------------------------------------------------
hardware has been assessed and is believed to be 100% compliant.  Patches
available from manufacturers at no cost have been applied to those operating
systems deemed non-compliant.  All applications servers are in compliance; these
include accounting and e-mail hardware.  Testing has included setting system
dates forward to 12/31/99 and allowing them to roll over to January 1, 2000 and
in certain cases, compliance testing programs available from manufacturers have
been run.  In all cases, date testing was successful.

The corporate and Thermatrix Ltd. offices utilize the same accounting system,
and a compliant version has been supplied by the manufacturer as part of the
annual maintenance contract.  The update was installed in the corporate office
in June and testing is expected to be complete at that location by July 15th.
Installation and testing are expected to be completed in the UK office by
September 15th.  To date, accounting systems at Wahlco are 33% compliant.  Two
systems are not currently compliant; financial constraints have delayed
upgrades.  The design software used company-wide does not perform date
calculations; date stamping of drawings is dependent upon system dates.

Office suite applications at Thermatrix and Wahlco have had compliant updates
applied to those computer systems deemed critical.  Client and server e-mail
applications updates have been completed.  E-mail software for Wahlco is
believed to be in compliance at this time; any required updates have been
applied.

For all divisions, equipment including fax machines and telephone systems have
been tested and found to be compliant, and manufacturers and vendors have
verified that compliance.  Voice mail systems for Thermatrix are compliant.
Wahlco has one non-compliant system; the nature of the difficulties likely to
occur with this system have been deemed non-critical.

Discussion of significant non-information systems.  Significant non-information
--------------------------------------------------
systems include environmental, power, and alarm systems at Company physical
facilities.  The Company has received assurances from building owners and/or
property management companies that they are working to ensure no disruptions in
facilities systems by contacting equipment and service vendors.  These companies
have been included in questionnaire distributions and their progress toward
compliance assessment and testing is being monitored.  Electronic alarm systems
and locks procured by the Company (all divisions) are in compliance.

Discussion of third party compliance.  The Company's business may be disrupted
-------------------------------------
in other ways by Year 2000 problems of third parties, which may affect, for
example, the Company's ability to obtain needed materials or deliver its
products.  The Company is in the process of determining whether its domestic and
international vendors, equipment manufacturers, customers, and others with whom
it deals are Year 2000 compliant and has requested that such persons complete
and return surveys with respect to their Year 2000 issues.

Surveys requesting the compliance review status of key suppliers and
manufacturers of products, services, internal systems, and status of their key
third party providers have been distributed.  Key suppliers are defined as those
companies or individuals whose Y2K non-compliance could have a material adverse
effect on the Company's business.  To date, 85% of the surveys have elicited a
response; all have indicated that compliance review and testing will be
completed in time to assure no disruption in service to the Company.  Wahlco has
received a 56% response rate to telephone and mail surveys. The Company's vendor
compliance program includes the following tasks: assessing vendor compliance
status, tracking vendor compliance progress, and developing contingency plans,
including identifying alternate suppliers, as needed.  Tracking of vendor
compliance will be ongoing. Failure to respond will result in

                                       18
<PAGE>

follow-up contact through further mail or phone correspondence, contingency plan
development or vendor/product replacement.

Contingency plans.  Beyond ensuring that its own systems are compliant and
------------------
identifying alternative suppliers to avert disruptions, the Company has not
completed contingency plans aimed at ensuring the continuity of critical
business operations before and after December 31, 1999.  Possible problem areas
have been identified, and contingency plans are expected to be completed by
December 15th, 1999.

Because of its readiness and its reliance on a broad and diverse network of
suppliers and vendors, the Company does not anticipate that Year 2000 issue will
pose significant operational problems. In any reasonable assessment of the risk
involved, the Company feels that it will be able to work around any disruptions
caused by Year 2000 issues.  However, failure to fully identify all Year 2000
dependencies in the Company's systems could have a material adverse effect on
the Company's business, results of operations and financial condition.  In
addition, the Company cannot be sure that systems of other companies on which
the Company relies will be converted in a timely manner.  The failure of other
companies to convert systems on which the Company relies may have a material
adverse effect on the Company's business, results of operations or financial
condition.

Certain Business Considerations
-------------------------------

The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.

Operating Losses, Working Capital Deficit and Accumulated Deficit; Uncertainty
of Future Profitability.  The Company had a net loss of approximately $3.5
million for the nine months ended September 30, 1999, working capital deficit of
$8.5 million, and an accumulated deficit of approximately $44.6 million at
September 30, 1999. Since the Company restructured its operations in 1992, it
has financed its operations primarily through private placements of equity
securities totaling approximately $26.3 million and an initial public offering
of its common stock with net proceeds totaling approximately $22.1 million.  The
Company does not expect to be profitable unless and until sales of its systems
generate sufficient revenues with an appropriate gross margin to fund its
operations.  There can be no assurance that the Company will achieve such
revenues or margins.  One result of these continued operating losses and the
going concern opinion is that customers have required letters of credit or
performance bonds prior to placing orders.  There can be no guarantee that the
Company will be able to secure such credit instruments sufficient to meet
customer requirements and this could have a serious impact on winning new
orders.

Liquidity.  As a result of the net losses incurred by the Company, the
acquisition of Wahlco and the significant cash demands required to meet ongoing
operational obligations (including certain restructuring events to be incurred
related to obtaining synergies from the Wahlco acquisition), the Company
continues to experience negative cash flow.  The Company anticipates it will
continue to experience negative cash flows from operations and will need to
issue additional equity or debt to provide funds for operations and to repay
debt obligations that will become due and payable in 1999.  There can be no
guarantee that sufficient funds will be generated to cover the negative cash
flow position.  Failure to correct the situation will directly impact the
ability to secure new orders, the ability to attract and retain quality staff
and the ability to meet all existing obligations, all of which will have serious
negative consequences for the Company's business, results of operations and
financial condition.

Ability to Compete Against Lower Cost Technologies.  To date, FTO systems have
been installed in an increasing number of industries.  There can be no assurance
that the Company's FTO technology will receive broad market acceptance as an
economically and environmentally acceptable means of destroying VOCs.  The
Company's ability to compete will depend upon the Company's ability to persuade
potential customers to adopt its FTO technology in place of certain, more
established, competing technologies, including flame-based destruction and
carbon adsorption systems. The failure of the Company to

                                       19
<PAGE>

persuade a significant number of potential customers to adopt its FTO technology
would have a material adverse effect on the growth of the Company's business,
results of operations and financial condition.

Sensitivity to Major Projects.  Although the Company is expanding the number of
its customers and installations, the average size and dollar volume of each
installation has been increasing.  As a result, the Company's results of
operations are likely to continue to be dependent on major projects.  Such a
reliance on major orders is likely to lead to fluctuations in, and to reduce the
predictability of, quarterly results.

Larger projects also pose other challenges.  The sales cycle for larger projects
tends to be longer than for smaller projects, and, when orders are received,
projects may be delayed by factors outside the Company's control, including
customer budget decisions, design changes and delays in obtaining permits.
Orders for large systems often have tight delivery schedules and the customer
will often attempt to negotiate penalties for late delivery and/or the ability
to assess liquidated damages for lost production if the delivery schedule is not
met.  Also, because the dollar volumes are larger, the costs of providing
warranty services could increase.  The Company's business, results of operations
and financial condition could be materially adversely affected if the Company
were to fail to obtain major project orders, if such orders were delayed, if
installations of such systems were delayed, or if such installations encountered
operating, warranty or other problems.

Management of Growth.  Although it relies on subcontractors to fabricate
subassemblies and to assemble and install completed systems, the Company uses
its own employees to design, test and commission systems.  The Company seeks to
maintain engineering and design staffing levels adequate for current and near-
term demand.  During periods of rapid growth, such as that experienced by the
Company during 1998, the Company's engineering and design personnel generally
operate at full capacity.  As a result, future growth, if any, is limited by the
Company's ability to recruit and train additional engineering, design and
project management personnel and by the ability and performance of the
individual employees in managing more and larger projects.  Furthermore, any
failure to maintain quality or to meet customer installation schedules could
damage relationships with important customers, damage the Company's reputation
generally and result in contractual liabilities.  There can be no assurance that
the Company will be able to effectively manage an expansion of its operations or
that the Company's systems or controls will be adequate to support the Company's
operations if expansion occurs.  In such event, any failure to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition.

Risks Associated with International Operations and Sales.  In 1998, sales to
international customers in Europe and Asia increased to 60%, up from 35% in
1997.  The Company plans to increase its revenues, in part, through an expansion
of its overseas operations.  Expansion internationally encompasses the need to
provide an infrastructure for operations, sales and administration.  The
Company's overseas growth has placed, and could continue to place, a significant
strain on its managerial, operational and financial resources.  There can be no
assurance that the Company will be able to attract, hire and train personnel or
to continue to develop the infrastructure needed on a timely basis which may
have an adverse impact on the Company's business, results of operations and
financial condition.

Additionally, the Company's business, results of operations and financial
condition may be materially adversely affected by fluctuations in currency
exchange rates and duty rates, and therefore its ability to maintain or increase
prices due to competition.  The Company denominates international sales either
in United States dollars or local currencies.  Sales in Europe have been
primarily denominated in pounds sterling.  Since some expenses in connection
with international contracts are often incurred in United States dollars, there
can be a short-term exchange risk created.  If the Company has significant
international sales in the future denominated in foreign currencies, the Company
may purchase hedging instruments to mitigate the exchange risk on these
contracts.

Risks Associated with Fixed Price Contracts.  A majority of the Company's
contracts are performed using "fixed-price" rather than "cost-plus" terms.
Under fixed-price terms, the Company quotes firm prices to

                                       20
<PAGE>

its customers and bears the full risk of cost overruns caused by estimates that
differ from actual costs incurred or manufacturing delays during the course of
the contract. Some costs, including component costs, are beyond the Company's
control and may be difficult to predict. If manufacturing or installation costs
for a particular project exceed anticipated levels, gross margins would be
materially adversely affected, and the Company could experience losses. In
addition, the manufacturing process may be subject to significant change orders.
However, in some cases the cost of these change orders may not be negotiated
until after the system is installed. The failure of the Company to recover the
full cost of these change orders could materially adversely affect gross margins
and also cause the Company to experience losses.

Dependence on Key Personnel.  The Company's success depends to a significant
extent upon its executive officers and key engineering, sales, marketing,
financial and technical personnel, both in the United States and overseas.
Employees may voluntarily terminate their employment with the Company at any
time.  The Company has limited personnel resources available to address the
different activities in its business.  The loss of the services of one or more
of the Company's key employees could have a material adverse effect on the
Company's business, results of operations and financial condition.

The Company also believes that its future success will depend in large part upon
its ability to attract and retain additional highly skilled personnel,
particularly design and process engineers.  Because of the technical
sophistication of the Company's systems and the sophisticated engineering
software utilized by the Company, design and process engineers who join the
Company generally are required to have advanced technical knowledge and
significant training to perform efficiently and productively.  The availability
of such personnel is limited, and the Company has at times experienced
difficulty in locating new employees with the requisite level of expertise and
experience.  In addition, the Company believes its ability to manage customer
orders for the Company's products in Europe will depend in a large part on its
success in attracting and retaining skilled engineers or project managers in
Europe.  There can be no assurance that the Company will be successful in
retaining its existing key personnel or in attracting and retaining the
personnel it requires in the future.

The Company maintains key employee life insurance on the life of its Chairman,
President and Chief Executive Officer, John T. Schofield, in the amount of
$2,000,000.  There can be no assurance that such amount will be sufficient to
compensate the Company for the unexpected loss of the services of Mr. Schofield.

Effective October 1, 1999 the Company entered into an employment agreement with
Daniel S. Tedone, Executive Vice President and Chief Financial Officer.  The
employment agreement provides that in the event Mr. Tedone is terminated for any
reason other than gross misconduct, the Company shall pay Mr. Tedone severance
compensation consisting of salary and fringe benefits for a period of twelve
months.  This employment agreement expires on December 31, 2000.

Dependence on the Reliability and Performance of Subcontractors.  The Company
relies on subcontractors to build system components and to assemble and install
systems, both in the United States and overseas.  The Company's ability to
deliver high quality systems on time will depend upon the reliability and
performance of its subcontractors.  The failure of a subcontractor to meet
delivery schedules could cause the Company to default on its obligations to its
customers, which could materially adversely affect the Company's reputation,
business, results of operations and financial condition.  In addition, the
Company's reliance on subcontractors for manufacturing, assembly and
installation places a significant part of the Company's quality control
responsibilities on these subcontractors.  There can be no assurance that the
Company will be able to continue to contract for the level of quality control
required by the Company's customers.  The failure to provide such quality
control could result in manufacturing and installation delays, which could have
a material adverse effect on the Company's business, results of operations and
financial condition.

The materials used in the production of the Company's product lines are
generally available through a

                                       21
<PAGE>

number of sources, and the Company does not anticipate difficulty in obtaining
the materials and components used in its operations.

Dependence on Customer Information.  The Company is highly dependent upon
information provided by its customers concerning the type, volume and flow rate
of VOC emissions to be treated by the Company's systems.  If the customer's
information is inaccurate or the customer operates the facility outside its
design parameters, a malfunction in the Company's FTO system could occur,
resulting in damage to the customer's facilities or personal injury.  In
addition, incorrect information could cause delays in the design, manufacture
and installation of the customer's system.  The Company might then be held
liable for damages resulting from such malfunction or delay beyond its control.
Any of these factors could have a material adverse effect on the Company's
business, results of operations and financial condition.

Fluctuations in Quarterly Operating Results.  The Company's quarterly revenues
and operating results have varied significantly in the past and may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside the Company's control.  Such factors include the size and timing of
individual orders, the timing and amount of project change orders, customer
delays, order cancellations, general economic and industry conditions, the
amount of first-time engineering needed, the introduction of new products or
services by the Company or its competitors or the introduction of the Company's
products to new markets, changes in the levels of operating expenses, including
development costs, and the amount and timing of other costs relating to the
expansion of the Company's operations.

Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its customers' organization.  For these and other reasons, the
sales cycle for the Company's products can be lengthy (up to two years) and
subject to a number of significant risks over which the Company has little or no
control, including customer budgetary constraints.  The Company historically has
operated with little backlog because most customer orders are placed with
relatively short lead times, usually from four to thirty weeks.  Variations in
the timing of recognition of specific revenues due to changes in project scope
and timing may adversely and disproportionately affect the Company's operating
results for a quarter because the Company establishes its expenditure levels on
the basis of expected future revenues, and a significant portion of the
Company's expenses do not vary with current revenues.

Uncertain Regulatory Environment.  The Company's customers are required to
comply with environmental laws and regulations in the United States and
elsewhere which limit the emission of VOCs and other chemicals.  The level of
enforcement activities by environmental protection agencies and changes in laws
and regulations will affect demand for the Company's systems.  To the extent
that the burden of complying with such environmental laws and regulations may be
eased, the demand for the Company's systems could be materially adversely
affected.

Although the Company believes that its FTO technology does not come under the
U.S. EPA's current definitions of incineration, there can be no assurance that
the U.S. EPA will not classify the Company's FTO technology as an incineration
technology in the future.  Classification as an incineration technology could
significantly increase the length of time and cost of the permitting process for
customers because of the requirement for a public hearing, especially where
community sentiment is opposed to incineration technology.  A lengthier
permitting process could reduce the competitive advantages of the Company's
technology and materially adversely affect the Company's business, results of
operations and financial condition.  In April 1999 the California Environmental
Protection Agency's Department of Toxic Substances Control issued a decision to
certify the FTO technology under its Environmental Technology Certification
Program.  The Program validates the performance of innovative treatment
technologies that can help address some of the world's environmental challenges,
but the certification is not available to incineration-based technologies.

                                       22
<PAGE>

Proprietary Technology and Unpredictability of Patent Protection.  The Company
relies on patents, trade secrets and proprietary know-how, which it seeks to
protect, in part, through appropriate confidentiality and proprietary
information agreements with its strategic partners, employees and consultants.
There can be no assurance that the proprietary information or confidentiality
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known to or be independently developed by others.

Possible Product Liability.  The Company's FTO systems are designed to destroy
VOCs, which are highly toxic and flammable.  If the Company's systems are
improperly designed or operated outside of design parameters and operating
instructions provided by the Company, there is a risk of system failure or
release of VOCs, which could require the Company to defend itself against a
product liability or personal injury claim.  Although the Company has product
liability and commercial general liability insurance in scope and amount that it
believes to be sufficient for the conduct of its business, there can be no
assurance that such insurance will cover or be adequate to cover such claims.
In addition, the Company's general liability insurance is subject to coverage
limits and excludes coverage for losses or liabilities relating to environmental
damage or pollution.  Accordingly, the Company's efforts to defend itself
against such claims could have a material adverse effect on the Company's
business, results of operations and financial condition.

Potential Environmental Liability.  Although the Company does not believe that
its activities would directly expose it to liabilities under local, state or
federal environmental laws and regulations, if the Company were to improperly
design, manufacture or test its systems or fail to properly train its customer's
employees in the operation of the systems, it could be exposed to possible
liability for investigation and clean-up costs under such environmental laws.

Under some environmental laws and various theories of tort and contract law, it
is also possible that the Company could be liable for damages to its customers
and third parties resulting from the actions of its customers or arising from
the failure or malfunction, or the design, construction or operation of, the
Company's FTO systems or products, even if the Company were not directly at
fault.  The Company's general liability insurance is subject to coverage limits
and generally excludes coverage for losses or liabilities relating to or arising
out of environmental damage or pollution.  The Company's business, results of
operations and financial condition could be materially adversely affected by an
uninsured or partially insured claim.

Risks Associated With the Diesel Engine Emission Control Development Program.
The engineering challenges involved in treating diesel emissions are different
in a number of respects from the conditions in which the Company's system has
been used in the past, and there can be no assurance that the Company's
technology will prove successful in this development area.  Moreover, the
Company's extensive database of test results that it uses to design systems for
industrial installations may not be relevant to diesel engine emission control.
Although pilot test results to date have been positive, the Company will need to
engage in extensive and costly applications development and engineering in order
to commercialize its system for such use, and there can be no assurance as to
the success of any such effort.

Based upon the acquisition of Wahlco, the Company's business is also subject to
the following risks and uncertainties.

Debt.  As a result of the acquisition of Wahlco, the Company agreed to become
the co-obligor for the outstanding obligations of Wahlco.  This debt is payable
to Wexford and several Lenders affiliated with Wexford.  As of September 30,
1999, the debt amounts to slightly more than $5.7 million and bears interest at
the rate of 13% per annum, payable monthly.  As a result of the payment of an
additional fee of $100,000, this debt now matures on November 22, 1999.  A
comprehensive security interest in all of the Company's existing and future
assets (to include the assets of its significant direct and indirect
subsidiaries in the U.S. and U.K.) was granted in connection with this
Agreement.  Failure to repay the

                                       23
<PAGE>

debt or to secure alternative financing would permit Wexford to assert its
rights to the underlying assets. There can be no assurance that the Company will
be successful in generating sufficient resources to repay the debt when it
becomes due, or that it will be successful in finding long-term replacement
financing.

Ability to Integrate the Two Businesses.  The Company believes that effective
integration of Wahlco's business with the Company's can yield significant
synergies.  Failure to realize the full potential of integration, or an
unanticipated delay in the integration could have a significant adverse impact
on the business, the results of operations and financial condition of the
Company.  There can be no guarantee that the potential will be fully or
partially realized or that it will be realized in a timely manner.

Potential Puerto Rican Tax Liability.  The Company has determined that there may
be a tax liability associated with Wahlco's past repatriation of capital from
the Commonwealth of Puerto Rico.  Wahlco has recorded a reserve of $1.1 million
for this potential liability.  The Company is attempting to resolve this
potential tax liability and believes it will be able to settle this matter
without additional commitment above what is currently reserved by Wahlco.

PART II        OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, the Company has been, or may become, involved in litigation
proceedings incidental to the conduct of its business.  As a result of the
acquisition and restructuring of Wahlco Environmental Systems, Inc., a number of
claims have been filed.  The Company does not believe that any single proceeding
presently pending will have a material adverse effect on the Company's financial
position or its results of operations.

In July and August 1999, the Company reached a full and final settlement of two
separate project related disputes with two separate customers.  One settlement
involved payment by the Company of approximately $185,000 to one customer and
the other settlement involved receipt by the Company of approximately $300,000
from the other customer.  The Company recorded a net credit to income in the
quarter ending September 30, 1999 as a result of these settlements.

Item 2.  Changes in Securities

Not applicable.

Item 3.  Defaults Upon Senior Securities

On September 3, 1999, the Company received a notice of default from Wexford
Management LLC declaring a default under section 9.1(a) of the 1999 Credit
Agreement for failure to pay the interest payment due on September 1, 1999.  The
Company paid the interest payment on September 3, 1999.  Wexford Management LLC
provided a written waiver of the default on September 17, 1999.

Item 4.  Submission of Matters to a Vote of Security Holders

The Annual Shareholders Meeting was held on October 12, 1999 in New York City.
At the meeting the stockholders approved the following proposals as shown:

Proposal 1 (The election of Frank R. Pope as a Class III director to serve a
three year term or until his successor is elected and qualified)

For                4,904,191
Against                1,332

                                       24
<PAGE>

Proposal 1 (The election of James M. Strock as a Class III director to serve a
three year term or until his successor is elected and qualified)

For                4,904,091
Against                1,432

Proposal 2 (To approve an amendment to the Company's 1996 Stock Plan to increase
the number of shares of Common Stock reserved thereunder by 300,000 shares)

For                4,859,451
Against               34,872
Abstain               11,200

Proposal 3 (To approve an amendment to the Company's 1996 Director Option Plan
to increase the number of shares of Common Stock reserved thereunder by 20,000
shares)

For                4,831,011
Against               51,912
Abstain               22,600

Proposal 4 (To approve an amendment to the Company's Employee Stock Purchase
Plan to increase the number of shares of Common Stock reserved thereunder by
60,000 shares)

For                4,867,522
Against               25,901
Abstain               12,100

Proposal 5, ratification of the appointment of Arthur Andersen as the Company's
independent public accountants was withdrawn by management in light of Arthur
Anderson's resignation as the Company's auditors.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits:
      3.3   Restated Certificate of Incorporation of Registrant.(**)
      3.4   Amended and Restated Bylaws of Registrant.(*)
      4.2   Amended and Restated Investor Rights Agreement.(*)
      10.1  Form of Indemnification Agreement between the Registrant and each of
            its directors and executive officers.(*)
      10.2  1987 Incentive Stock Plan, as amended and related agreements.(*)
      10.3  1996 Stock Plan and form of Stock Option Agreement thereunder.(*)
      10.4  Employee Stock Purchase Plan and forms of agreement thereunder.(*)
      10.5  1996 Director Option Plan and form of Director Stock Option
            Agreement thereunder.(*)
      10.6  Asset Purchase Agreement between the Registrant and Purus, Inc.
            dated January 4, 1996 (*)
      10.7  Lease dated June 12, 1995 between the Registrant and Spieker
            Properties, L.P., as amended. (*)
      10.8  Lease dated June 24, 1995 between the Registrant and American
            General Life Insurance Company.(*)
      10.11 Amended and Restated Loan and Security Agreement between the
            Registrant and

                                       25
<PAGE>

            Venture Banking Group, a Division of Cupertino National Bank, dated
            January 21, 1998.(***)
      10.12 1996 Stock Plan:  UK Rules for Employees.(***)
      10.13 First Amendment to the Amended and Restated Loan and Security
            Agreement between Registrant and Venture Banking Group, a Division
            of Cupertino National Bank (***)
      10.14 Sublease dated May 7, 1998 between Registrant and Clinimetrics
            Research Associates, Inc.
      10.15 Form 8K with exhibits filed January 27, 1999 regarding the
            acquisition of Wahlco Environmental Systems, Inc.

The following Exhibits to the Form 8K filed January 27, 1999 are incorporated by
reference.

      2.1   Agreement and Plan of Merger dated November 9, 1998 by and among
            Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco
            Environmental Systems, Inc.
      2.2   Security Agreement dated January 13, 1999 by and among Thermatrix
            Inc., Wexford Capital Partners II, L.P., Wexford Overseas Partners
            I, L.P., Wexford Special Situations 1996, L.P., Wexford Special
            Situations 1996 Institutional, L.P., Wexford Special Situations 1996
            Limited, Wexford-Euris Special Situations 1996, L.P. and Wexford
            Management LLC.
      2.3   Guaranty dated January 13, 1999 by and among Thermatrix Inc.,
            Wexford Capital Partners II, L.P., Wexford Overseas Partners I,
            L.P., Wexford Special Situations 1996, L.P., Wexford Special
            Situations 1996 Institutional, L.P., Wexford Special Situations 1996
            Limited, Wexford Special Situations 1996, L.P. and Wexford
            Management LLC.
      10.16 Form 8K with exhibits filed March 12, 1999 regarding the Second
            Amended and Restated Credit Agreement related to interim debt
            financing arrangements with Wexford.

The following Exhibits to the Form 8K filed March 12, 1999 are incorporated by
reference:

      10.1  Second Amended and Restated Credit Agreement dated February 25, 1999
            by and among Wahlco Environmental Systems, Inc., Thermatrix Inc.,
            Wexford Capital Partners II, L.P., Wexford Overseas Partners I,
            L.P., Wexford Special Situations 1996, L.P., Wexford Special
            Situations 1996 Institutional, L.P., Wexford Special Situations 1996
            Limited, Wexford-Euris Special Situations 1996, L.P. and Wexford
            Management LLC, as agent.
      10.2  General Release dated February 25, 1999 by and among Wahlco
            Environmental Systems, Inc., Thermatrix Inc., Wexford Capital
            Partners II, L.P., Wexford Overseas Partners I, L.P., Wexford
            Special Situations 1996, L.P., Wexford Special Situations 1996
            Institutional, L.P., Wexford Special situations 1996 Limited,
            Wexford-Euris Special Situations 1996, L.P. and Wexford Management
            LLC, as Agent.
      10.3  Amended and Restated Guaranty dated February 25, 1999 by and among
            Bachmann Companies, Inc., Wahlco Engineered Products Group, LTD.,
            Wahlco, Inc., WES Property, LTD., Wahlco Engineered Products, Inc.,
            Wahlco Engineered Products, Ltd., Pentney Engineering, LTD.,
            Teddington Bellows (Holdings), LTD., Teddington Bellows, Ltd.,
            Treste Plant Hire, LTD., Thermatrix, LTD. and Wexford Management
            LLC, as Agent
      10.4  Mortgage, Security Agreement Assignment of Rents and Leases and
            Fixture Filing dated February 25, 1999 by and between Wahlco
            Engineered Products, Inc. and Wexford Management LLC, as Agent.
      10.5  Mortgage, Security Agreement Assignment of Rents and Leases and
            Fixture Filing dated February 25, 1999 by and between Wahlco, Inc.
            and Wexford Management LLC, as Agent.
      10.6  Promissory Note dated February 25, 1999 in the principal amount of
            $5,720,585.64, delivered by Thermatrix Inc. and Wahlco Environmental
            Systems, Inc. to Wexford Management LLC, as Agent.
      10.7  Registration Rights Agreement dated February 25, 1999 by and between
            Thermatrix

                                       26
<PAGE>

            Inc. and Wexford Management LLC.
      10.8  Amended and Restated Security Agreement dated February 25, 1999 by
            and among Wahlco Environmental Systems, Inc., Bachmann Companies,
            Inc., Wahlco, Inc., Wahlco Engineered Products, Inc. and Wexford
            Management LLC as Agent.
      10.9  Amended and Restated Security Agreement dated February 25, 1999 by
            and between Thermatrix Inc., Wexford Capital Partners II, L.P.,
            Wexford Overseas Partners I, L.P., Wexford Special Situations 1996
            Institutional, L.P., Wexford Special Situations 1996 Limited,
            Wexford-Euris Special Situations 1996, L.P. and Wexford Management
            LLC, as Agent.
      10.10 Form of U.K. Debenture entered into by and between Wexford
            Management LLC and each of Pentney Engineering Limited, Teddington
            Bellows (Holdings) LTD., Teddington Bellows Ltd., Thermatrix LTD.,
            Treste Plant Hire, LTD., WES Property, LTD., Wahlco Engineered
            Products Group, LTD. and Wahlco Engineered Products LTD.,
            respectively.
      10.11 Stock Pledge Agreement dated February 25, 1999 by and among
            Thermatrix Inc., Wahlco Environmental Systems, Inc., Bachmann
            Companies, Inc., Wahlco Engineered Products Group LTD., Wahlco
            Engineered Products LTD., Teddington Bellows (Holdings), LTD., and
            Wexford Management LLC, as Agent.
      10.12 Warrant to purchase up to 450,000 shares of Common Stock of
            Thermatrix Inc. issued to Wexford Management LLC on February 25,
            1999.
      10.17 Form 10-K with exhibits filed March 30, 1998 by Wahlco Environmental
            Systems, Inc.

The following exhibits to the Wahlco Environmental Systems, Inc. Form 10-K for
the year ended December 31, 1998 filed March 30, 1998 are incorporated by
reference:

      3.1   Certificate of Incorporation of the Company. (Filed as an exhibit to
            the Company's Registration Statement No. 33-33698, as amended.)
      3.2   Bylaws of the Company. (Filed as an exhibit to the Company's
            Registration Statement No. 33-33698, as amended.)
      10.1  Grant of Industrial Tax Exemption by the Commonwealth of Puerto Rico
            to Wahlco International, Inc., a Delaware corporation, dated as of
            March 10, 1982. (Filed as an exhibit to the Company's Registration
            Statement No. 33-33698, as amended.)
      10.2  Order of Conversion of Grant of Puerto Rico Industrial Tax Exemption
            to Wahlco International, Inc. dated as of October 29, 1987, and as
            amended on March 8, 1989. (Filed as an exhibit to the Company's
            Registration Statement No. 33-33698, as amended.)
      10.3  Redemption and Indemnification Agreement, dated as of October 28,
            1987, by and among Pacific Diversified Capital Company, Wahlco, Inc.
            Robert R. Wahler, as Trustee of the Wahler Family Trust, Triple R,
            John H. McDonald, Westfore, a California limited partnership. (Filed
            as an exhibit to the Company's Registration Statement No. 33-33698,
            as amended.)
      10.4  Form of Indemnity Agreement between the Company and each of its
            directors and officers. (Filed as an exhibit to the Company's
            Registration Statement No. 33-33698, as amended.)
      10.5  Standard Industrial Lease, dated as of September 3, 1991, by and
            between Triple R, a California general partnership and Wahlco Inc.,
            a California corporation. (Filed as an exhibit to the Company's
            Annual Report on Form 10-K for the year ended December 31, 1991.)
      10.6  First Addendum to Standard Industrial Lease, dated as of September
            3, 1991 between Triple R and Wahlco, Inc. (Filed as an exhibit to
            the Company's Annual Report on Form 10-K for the year ended December
            31, 1991.)
      10.7  Second amendment to Office Lease, dated as of December 16, 1991, by
            and between BCG and the Company. (Filed as an exhibit to the
            Company's Annual Report on

                                       27
<PAGE>

            Form 10-K for the year ended December 31, 1991.)
      10.8  Installment Note, dated as of July 20, 1992, by and between Wahlco,
            Inc. and Sanwa Business Credit Corporation, a Delaware corporation.
            (Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
            for the Quarter ended September 30, 1992.)
      10.9  Guaranty Agreement, dated as of July 20, 1992, by and between the
            Company and Sanwa. (Filed as an exhibit to the Company's Quarterly
            Report on Form 10-Q for the Quarter ended September 30, 1992.)
      10.10 Security Agreement, dated as of July 20, 1992, by and between
            Wahlco, Inc. and Sanwa, with accompanying Consent and
            Acknowledgement of the Company, as Guarantor. (Filed as an exhibit
            to the Company's Quarterly Report on Form 10-Q for the Quarter ended
            September 30, 1992.)
      10.11 First Amended and Restated 1990 Incentive Award Plan. (Filed as an
            exhibit to the Company's Quarterly Report on Form 10-Q for the
            Quarter ended September 30, 1992.)
      10.12 Letter Agreement dated August 31, 1993, by and between the Company,
            Wahlco, Inc., Wahlco Power Products, Inc., a Delaware corporation,
            Bachmann Companies, Inc., and Sanwa. (Filed as an exhibit to the
            Company's Quarterly Report on Form 10-Q for the Quarter ended
            September 30, 1993.)
      10.13 Settlement Agreement, dated as of October 7, 1994, by and between
            Wahlco Power Products, Inc. and ABB Air Preheater, Inc. (Filed as an
            exhibit to the Company's Quarterly Report on Form 10-Q for the
            Quarter ended September 30, 1994.)
      10.14 Mutual Release, dated as of October 6, 1994, between Wahlco Power
            Products, Inc. and ABB Air Preheater, Inc. (Filed as an exhibit to
            the Company's Quarterly Report on Form 10-Q for the Quarter ended
            September 30, 1994.)
      10.15 Assignment of Note, Loan Agreement and Collateral Documents. (Filed
            as an exhibit to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1994.)
      10.16 Promissory Note, dated as of May 15, 1995, between the Company and
            WES Acquisition Corp. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1994.)
      10.17 Commitment Letter, dated as of May 15, 1995, from WES Acquisition
            Corp. to the Company for a secured term loan in the principal amount
            of $2 million. (Filed as an exhibit to the Company's Annual Report
            on Form 10-K for the year ended December 31, 1994.)
      10.18 Employment Agreement between the Company and C. Stephen Beal dated
            as of May 5, 1995. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1995.)
      10.19 Employment Agreement between the Company and A. Noel DeWinter dated
            as of May 16, 1995. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1995.)
      10.20 Employment Agreement between the Company and Barry J. Southam dated
            June 1, 1995. (Filed as an exhibit to the Company's Annual Report on
            Form 10-K for the year ended December 31, 1995.)
      10.21 Loan and Security Agreement between Wahlco, Inc. and Silicon Valley
            Bank. (Filed as an exhibit to the Company's Annual Report on Form
            10-K for the year ended December 31, 1995.)
      10.22 Amendment and Forbearance Agreement, dated as of May 9, 1996, by and
            between Silicon Valley Bank and Wahlco, Inc. (Filed as an exhibit to
            the Company's Quarterly Report on Form 10-Q for the Quarter ended
            June 30, 1996.)
      10.23 Term Loan Agreement and Warrant Agreement and Form of Warrant
            between the Company and WES Acquisition Corp. dated August 28, 1996.
            (Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
            for the Quarter ended September 30, 1996.)

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<PAGE>

      10.24 Letter Agreement dated March 12, 1997 between the Company and WES
            Acquisition Corp. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1996.)
      10.25 Letter Agreement dated April 12, 1996 made by the Company and WES
            Acquisition Corp. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1996.)
      10.26 Promissory Note dated as of May 9, 1996 made by the Company to WES
            Acquisition Corp. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1996.)
      10.27 Promissory Note dated as of November 15, 1996 made by the Company to
            WES Acquisition Corp. (Filed as an exhibit to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1996.)
      10.28 Warrant dated as of November 15, 1996 issued by the Company to
            Wexford Special Situations 1996, L.P. (Filed as an exhibit to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1996.)
      10.29 Warrant dated as of November 15, 1996 issued by the Company to
            Wexford Special Situations 1996 Institutional, L.P. (Filed as an
            exhibit to the Company's Annual Report on Form 10-K for the year
            ended December 31, 1996.)
      10.30 Warrant dated as of November 15, 1996 issued by the Company to
            Wexford Special Situations 1996 Limited. (Filed as an exhibit to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1996.)
      10.31 Warrant dated as of November 15, 1996 issued by the Company to
            Wexford-Euris Special Situations 1996, L.P. (Filed as an exhibit to
            the Company's Annual Report on Form 10-K for the year ended December
            31, 1996.)
      10.32 Term Loan Agreement, dated as of July 28, 1995, between WES
            Acquisition Corp. and the Company for a secured term loan in the
            principal amount of $2.0 million. (Filed as an exhibit to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1996.)
      10.33 Restructuring Agreement dated as of January 30, 1998 among the
            Company, WES Acquisition Corp., the other parties named therein and
            Wexford Management LLC, as Agent. (Filed as an exhibit to the
            Company's Registration Statement No. 333-42805.)
      10.34 Amended and Restated Credit Agreement dated as of January 30, 1998
            among the Company, as Borrower, the Lenders and the Individual
            Parties thereto and Wexford Management LLC, as agent. (Filed as an
            exhibit to the Company's Registration Statement No. 333-42805.)
      10.35 Agreement between the Company and ChaseMellon Shareholder Services,
            Inc. re: Subscription Agency. (Filed as an exhibit to the Company's
            Registration Statement No. 333-42805.)
      10.36 $750,000 Promissory Note dated as of July 2, 1997 between the
            Company and the Chase Manhattan Bank. (Filed as an exhibit to the
            Company's Registration Statement No. 333-42805.)
      10.37 $1,000,000 Promissory Note dated as of October 13, 1997 between the
            Company and the Chase Manhattan Bank. (Filed as an exhibit to the
            Company's Registration Statement No. 333-42805.)
      10.38 $400,000 Promissory Note dated as of November 17, 1997 between the
            Company and the Chase Manhattan Bank. (Filed as an exhibit to the
            Company's Registration Statement No. 333-42805.)
      10.39 Waiver Letter of Silicon Valley Bank dated as of December 19, 1997
            re: extension of maturity and waiver of covenants. (Filed as an
            exhibit to the Company's Registration Statement No. 333-42805.)
      10.40 Wahlco Environmental Systems, Inc. 1996 Employee Stock Option Plan.
            (Filed as an exhibit to the Company's Registration Statement
            No. 333-42805.)
      21    Subsidiaries of the Company. (Filed as an exhibit to the Company's
            Annual Report

                                       29
<PAGE>

            on Form 10-K for the year ended December 31, 1995.)
      27*   Financial Data Schedule (EDGAR filing only)
      10.18 Form 8K/A filed March 27, 1999 regarding the acquisition of Wahlco
            Environmental Systems, Inc.

The following Exhibits to Form 8K/A, filed March 29, 1999 are incorporated by
reference:

      2.1   Agreement and Plan of Merger dated November 9, 1998 by and among
            Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco
            Environmental Systems, Inc. (Incorporated by reference herein to
            Registrant's current Report on Form 8-K filed on January 28, 1999,
            File No. 000-20819.)
      2.2   Security Agreement dated January 13 1999 by and among Thermatrix,
            Inc., Wexford Capital Partners II L.P., Wexford Overseas Partners I,
            L.P., Wexford Special Situations 1996, L.P., Wexford Special
            Situations 1996 Institutional L.P., Wexford Special Situations 1996
            Limited, Wexford-Euris Special Situations 1996, L.P. and Wexford
            Management LLC. (Incorporated herein by reference to Registrant's
            Current Report on Form 8-K filed on January 28, 1999, File
            No. 000-20819.)
      2.3   Guaranty dated January 13, 1999 by and among Thermatrix Inc.,
            Wexford Capital Partners II, L.P., Wexford Overseas Partners I,
            L.P., Wexford Special Situations 1996, L.P., Wexford Special
            Situations 1996 Institutional, L.P., Wexford Special Situations 1996
            Limited, Wexford Special Situations 1996, L.P. and Wexford
            Management LLC. (Incorporated herein by reference to Registrant's
            Current Report on Form 8-K filed on January 28, 1999, File
            No. 000-20819.)
10.19 Employment Agreement with Mr. Tedone dated October 1, 1999

10.20 Sublease Agreement with TrueLink, Inc. dated October 22, 1999

10.21 Form 10K/A filed September 30, 1999 for the year ended December 31, 1998

10.22 Form S3 filed August 30, 1999

The following exhibits to Form S3 filed August 30, 1999 are incorporated by
reference:

      5.1     Opinion of Wilson Sonsini Goodrich & Rosati, Professional
              Corporation.
      10.1(1) Securities Purchase Agreement dated as of June 30, 1999, by and
              between Thermatrix Inc., and each of The Shaar Fund Ltd.,
              Technology Funding Venture Partners III, L.P. and CIBC WBV Inc.
      10.2(1) Registration Rights Agreement dated as of June 30, 1999, by and
              between Thermatrix Inc., and each of The Shaar Fund Ltd.,
              Technology Funding Venture Partners III, L.P. and CIBC WBV Inc.
      10.3(1) Certificate of Designations, Preferences and Rights of Series E 8%
              Convertible Preferred Stock of Thermatrix Inc., filed with the
              Office of the Secretary of State of the State of Delaware on July
              1, 1999.
      10.4(1) Common Stock Purchase Warrant issued to each of the Shaar Fund
              Ltd., Technology Funding Venture Partners III , and CIBC WMV Inc.
      23.1(2) Consent of Independent Accountants. 23.2 Consent of Counsel
      24.1    Power of Attorney

10.23  Form 8K filed August 31, 1999 regarding the private placement of 6,000
       shares of Convertible, Redeemable Preferred Stock

The following exhibits to Form 8K filed August 31, 1999 are incorporated by
reference:

      4.1(a)  Securities Purchase Agreement dated June 30, 1999, by and between
              the Registrant and

                                       30
<PAGE>

              the Shaar Fund Ltd.
      4.1(b)  Securities Purchase Agreement dated June 30, 1999 by and between
              Registrant and Technology Funding Venture Partners III, L.P.
      4.1(c)  Securities Purchase Agreement dated June 30, 1999 by and between
              Registrant and CIBC WMV Inc.
      4.2(a)  Registration Rights Agreement dated June 30, 1999, by and between
              the Registrant and the Shaar Fund.
      4.2(b)  Registration Rights Agreement dated June 30, 1999, by and between
              the Registrant and Technology Funding Venture Partners III, L.P.
      4.2(c)  Registration Rights Agreement dated June 30, 1999, by and between
              the Registrant and CIBC WMV Inc.
      4.3     Certificate of Designation, Preferences and Rights of Series E 8%
              Convertible Preferred Stock of Thermatrix Inc. filed with the
              Office of the Secretary of State of the State of Delaware on July
              1, 1999.
      4.4(a)  Common Stock Purchase Warrant dated June 30, 1999 by and between
              Registrant and the Shaar Fund Ltd.
      4.4(b)  Common Stock Purchase Warrant dated June 30, 1999 by and between
              Registrant and Technology Funding Venture Partners III, L.P.
      4.4(c)  Common Stock Purchase Warrant dated June 30, 1999 by and between
              Registrant and CIBC WBV Inc.
      99.1    Press Release, issued July 8, 1999, announcing the closing of the
              sale of shares of Series E Convertible Preferred Stock of the
              Registrant pursuant to the Securities Purchase Agreement.

10.24 Form S3/A filed September 30, 1999

      5.1     Opinion of Wilson Sonsini Goodrich & Rosati, Professional
              Corporation.
      10.1(1) Securities Purchase Agreement dated as of June 30, 1999, by and
              between Thermatrix Inc., and each of The Shaar Fund Ltd.,
              Technology Funding Venture Partners III, L.P. and CIBC WBV Inc.
      10.2(1) Registration Rights Agreement dated as of June 30, 1999, by and
              between Thermatrix Inc., and each of The Shaar Fund Ltd.,
              Technology Funding Venture Partners III, L.P. and CIBC WBV Inc.
      10.3(1) Certificate of Designations, Preferences and Rights of Series E 8%
              Convertible Preferred Stock of Thermatrix Inc., filed with the
              Office of the Secretary of State of the State of Delaware on July
              1, 1999.
      10.4(1) Common Stock Purchase Warrant issued to each of the Shaar Fund
              Ltd., Technology Funding Venture Partners III , and CIBC WMV Inc.
      10.5(2) Warrant to purchase up to 450,000 shares of Common Stock of
              Thermatrix Inc. issued to Wexford Management LLC on February 25,
              1999.
      10.6(2) Registration Rights Agreement dated February 25, 1999 between
              Thermatrix Inc. and Wexford Management LLC.
      23.1    Consent of Independent Public Accountants.
      23.2    Consent of Counsel
      24.1    Power of Attorney.

10.25 Form 8K filed October 7, 1999 regarding the resignation of Arthur
      Andersen and the Company's independent public accountants.

The following exhibits to Form 8K filed October 7, 1999 are incorporated by
reference:

      4-1     Letter from Arthur Andersen LLP dated October 7, 1999.

10.26 Form 8K/A filed October 15, 1999 regarding the resignation of Arthur
      Andersen and the

                                       31
<PAGE>

Company's independent public accountants.

The following exhibits to Form 8K filed October 7, 1999 are incorporated by
reference:

      4-1     Letter from Arthur Andersen LLP dated October 7, 1999.

      27.1    Financial Data Schedule.
      ------------
        (*) Incorporated by reference to exhibits filed with the Registrant's
            Registration Statement on Form S-1 (No. 333-4370) which became
            effective June 19, 1996.
       (**) Incorporated by reference to exhibits filed with the Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1997.
      (***) Incorporated by reference to exhibits filed with the Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1997.

(b)   Reports on Form 8-K

      Form 8-K with exhibits filed January 28, 1999 regarding the acquisition
      of Wahlco Environmental Systems, Inc.

      Form 8-K with exhibits filed March 12, 1999 regarding the Second and
      Amended Restated Credit Agreement related to interim debt financing
      arrangements with Wexford.

      Form 8-K/A dated March 29, 1999 Pro Forma Financial Statements related to
      Acquisition of Wahlco Environmental Systems, Inc.

      Form 8K with exhibits filed August 31, 1999 regarding the private
      placement of 6,000 shares of convertible redeemable preferred stock.

      Form 8K with exhibit filed October 7, 1999 regarding the resignation of
      Arthur Andersen LLC as the Company's independent public accountants.

      Form 8K/A with exhibit filed October 15, 1999 regarding the designation of
      Arthur Andersen LLC as the Company's independent public accountants.

Trademark Acknowledgments

 .  Thermatrix and PADRE(R) are registered trademarks of the Company.

                                       32

<PAGE>

                                   SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       THERMATRIX INC.



Date: November 15, 1999                By: /s/ Daniel S. Tedone
                                           -------------------------------------
                                           Daniel S. Tedone
                                           Executive Vice President and
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)

                                       33