<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q



(Mark One)

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1998

                                       OR

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
        EXCHANGE ACT OF 1934.

Commission File Number   000-23353
                      ----------------------------------------------------------

                               Denali Incorporated
--------------------------------------------------------------------------------
                    (Exact Name of Registrant in its Charter)

           Delaware                                     76-0454641
--------------------------------------------------------------------------------
(State or Other Jurisdiction of                     (I.R.S. Employer
Incorporation or Organization)                     Identification No.)

1360 Post Oak Blvd., Suite 2250, Houston, Texas            77056
--------------------------------------------------------------------------------
   (Address of Principal Executive Officers)             (Zip Code)

                                  713-627-0933
--------------------------------------------------------------------------------
              (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 the past 90 days.

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

As of April 30, 1998, the number of shares of common stock outstanding was
4,819,654.



<PAGE>   2






                               DENALI INCORPORATED
                 FORM 10-Q FOR THE QUARTER ENDED MARCH 28, 1998

                                      INDEX

<TABLE>
<CAPTION>


                                                                                                                            Page No.
                                                                                                                            --------

PART I.           FINANCIAL INFORMATION
<S>               <C>                                                                                                         <C>
Item 1.           Financial Statements (Unaudited)

                  Consolidated Balance Sheets - June 28, 1997 and March 28, 1998 ........................................         1

                  Consolidated Statements of Operations - Three and Nine Months Ended
                  March 29, 1997 and March 28, 1998......................................................................         2

                  Consolidated Statement of Stockholders' Equity (Deficit) -
                  March 28, 1998 ........................................................................................         3

                  Consolidated Statements of Cash Flows - Nine Months Ended
                  March 29, 1997 and March 28, 1998......................................................................         4

                  Notes to Consolidated Financial Statements - March 28, 1998............................................         5

Item 2.           Management's Discussion and Analysis of Financial Condition and
                  Results of Operations .................................................................................        10


PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings .....................................................................................        15

Item 2.           Changes in Securities..................................................................................        15

Item 3.           Defaults Upon Senior Securities .......................................................................        15

Item 4.           Submission of Matters to a Vote of Security Holders....................................................        15

Item 5.           Other Information......................................................................................        15

Item 6.           Exhibits and Reports on Form 8-K.......................................................................        15

Signatures        .......................................................................................................        17

Index to  Exhibits ......................................................................................................        18
</TABLE>

<PAGE>   3




                          PART I. FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

                               DENALI INCORPORATED
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                    March 28,   June 28,
                                                                      1998       1997
                                                                    --------    --------
                                                                  (Unaudited)    (Note)
                                    ASSETS                             (In thousands)

<S>                                                                 <C>         <C>     
Current assets:
       Cash                                                         $    369    $    330
       Investment in equity securities                                   310          --
       Accounts and notes receivable, net of allowances of
              $736,000 at March 28, 1998 and $605,000
              at June 28, 1997                                        15,161      17,376
       Inventories                                                     8,057       6,686
       Income tax receivable                                             111          40
       Prepaid expenses                                                1,819         913
       Deferred tax assets                                               769         934
                                                                    --------    --------
Total current assets                                                  26,596      26,279
Property, plant and equipment, net                                    12,637       7,695
Assets held for sale                                                     699       1,520
Notes receivable                                                         178         907
Goodwill, net                                                          5,714       1,620
Deferred tax assets                                                    1,530       1,953
Other assets                                                           1,264       1,110
                                                                    --------    --------
Total assets                                                        $ 48,618    $ 41,084
                                                                    ========    ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
       Accounts payable                                             $  9,049    $ 10,173
       Accrued liabilities                                             4,472       5,249
       Notes payable                                                      --       1,460
       Current maturities of long-term debt                              740       1,378
                                                                    --------    --------
Total current liabilities                                             14,261      18,260
Long-term debt, less current maturities                                6,421      21,186
Other long-term liabilities                                              616         979
Series A Preferred Stock, redeemable at $250 per share,
       $.01 par value:
       Authorized shares - 1,004,800
       Issued and outstanding shares - None at March 28, 1998
              and 4,800 at June 28, 1997                                  --       1,200
Commitments and contingencies
Stockholders' equity (deficit):
       Common stock, $.01 par value
              Authorized shares - 30,000,000
              Issued and outstanding shares - 4,815,109 at
              March 28, 1998 and 2,184,910 at June 28, 1997               48          22
       Additional paid-in capital                                     29,193         297
       Retained deficit                                               (1,921)       (860)
                                                                    --------    --------
Total stockholders' equity (deficit)                                  27,320        (541)
                                                                    --------    --------
Total liabilities and stockholders' equity (deficit)                $ 48,618    $ 41,084
                                                                    ========    ========
</TABLE>

                             See accompanying notes.

Note:    The balance sheet at June 28, 1997 has been derived from the audited
         financial statements at that date, but does not include all of the
         information and footnotes required by generally accepted accounting
         principles for complete financial statements.

                                        1

<PAGE>   4


                               DENALI INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>



                                                                 Three months ended         Nine months ended
                                                               ----------------------    ----------------------
                                                               March 28,     March 29,   March 28,    March 29,
                                                                 1998          1997        1998          1997
                                                               ---------    ---------    ---------    ---------
                                                                 (In thousands, except per share amounts)


<S>                                                            <C>         <C>         <C>         <C>     
Net sales                                                      $ 21,587    $ 13,906    $ 68,480    $ 48,579
Cost of sales                                                    17,302      11,818      53,634      39,529
                                                               --------    --------    --------    --------
Gross profit                                                      4,285       2,088      14,846       9,050
Selling, general and administrative expenses                      3,972       2,630      12,218       7,958
Non-recurring compensation expense                                   --          --       2,312          --
                                                               --------    --------    --------    --------
Operating income (loss)                                             313        (542)        316       1,092
Interest expense                                                    209         481       1,302       1,474
Interest income                                                     (58)        (29)       (105)        (89)
Other income, net                                                   (52)        (58)       (278)       (170)
                                                               --------    --------    --------    --------
Income (loss) before income taxes                                   214        (936)       (603)       (123)
Income tax expense                                                   79        (449)        647         (59)
                                                               --------    --------    --------    --------
Net income (loss) before extraordinary item                         135        (487)     (1,250)        (64)
Extraordinary income on early extinguishment of
  debt,  net of income tax (see Note 11)                            238          --         219          --
                                                               --------    --------    --------    --------
Net income (loss)                                                   373        (487)     (1,031)        (64)
Dividends on Series A Preferred Stock                                --         (30)        (30)        (90)
                                                               --------    --------    --------    --------
Net income (loss) attributable to common stock                 $    373    $   (517)   $ (1,061)   $   (154)
                                                               ========    ========    ========    ========

Net income (loss) per common share:
  Income (loss) before extraordinary item                      $   0.03    $  (0.24)   $  (0.38)   $  (0.07)
  Extraordinary item                                               0.05          --        0.07          --
                                                               --------    --------    --------    --------
  Net income (loss) per common share                           $   0.08    $  (0.24)   $  (0.31)   $  (0.07)
                                                               ========    ========    ========    ========

Net income (loss) per common share assuming dilution:
  Income (loss) before extraordinary item                      $   0.03    $  (0.24)   $  (0.38)   $  (0.07)
  Extraordinary item                                               0.05          --        0.07          --
                                                               --------    --------    --------    --------
  Net income (loss) per common share
      assuming dilution                                        $   0.08    $  (0.24)   $  (0.31)   $  (0.07)
                                                               ========    ========    ========    ========
</TABLE>


                             See accompanying notes.






                                        2


<PAGE>   5


                               DENALI INCORPORATED
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                   (UNAUDITED)



<TABLE>
<CAPTION>

                                            Common    Common
                                            Stock      Stock     Paid-In    Retained
                                            Shares     Amount    Capital     Deficit     Total
                                           --------   --------   --------   --------    --------
                                                              (In thousands)

<S>                                        <C>        <C>        <C>        <C>         <C>      
Balance at June 28, 1997                      2,185   $     22   $    297   $   (860)   $   (541)

Exchange of employee stock options               --         --      2,312         --       2,312
Issuance of common stock                      2,276         23     25,994         --      26,017
Exercise of employee stock options              354          3        590         --         593
Dividends declared                               --         --         --        (30)        (30)
Net loss                                         --         --         --     (1,031)     (1,031)
                                           --------   --------   --------   --------    --------

Balance at March 28, 1998                     4,815   $     48   $ 29,193   $ (1,921)   $ 27,320
                                           ========   ========   ========   ========    ========
</TABLE>




                                        3


<PAGE>   6


                               DENALI INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                                      Nine months ended
                                                                  ------------------------
                                                                  March 28,      March 29,
                                                                     1998          1997
                                                                  ----------     ---------
                                                                       (In thousands)
<S>                                                               <C>            <C>      
OPERATING ACTIVITIES:
Net loss                                                           $ (1,031)   $    (64)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
       Non-recurring compensation expense                             2,312          --
       Depreciation                                                   1,027         750
       Amortization                                                     182         125
       Provision for losses on accounts receivable                       42          49
       Gain on sale of property, plant and equipment and
              assets held for sale                                       --         (52)
       Changes in operating assets and liabilities:
              Accounts receivable                                     5,327       1,058
              Inventories                                            (1,243)       (199)
              Prepaid expenses                                         (870)       (159)
              Other assets                                             (536)       (194)
              Accounts payable                                       (2,027)       (349)
              Accrued liabilities                                    (1,373)        322
              Income tax receivable/payable                             (20)        222
                                                                   --------    --------
Net cash provided by operating activities                             1,790       1,509

INVESTING ACTIVITIES:
Acquisitions, net of cash acquired                                   (9,610)     (4,825)
Purchases of property, plant and equipment                           (1,748)       (448)
Proceeds from sale of property, plant and equipment and
   assets held for sale                                                 764          60
Payments on notes receivable                                            816          20
Sale (Purchases) of equity securities                                  (310)        505
                                                                   --------    --------
Net cash used in investing activities                               (10,088)     (4,688)

FINANCING ACTIVITIES:
Proceeds from note issuance                                              --         500
Proceeds from common stock issuance                                  26,017          --
Proceeds from exercise of stock options                                 593          --
Redemption of preferred stock                                        (1,200)         --
Preferred stock dividends paid                                         (210)         --
Net borrowings (payments) under revolving lines of credit           (10,465)      1,484
Net borrowings (payments) on term notes and other long-term debt     (6,398)      1,230
                                                                   --------    --------
Net cash provided by (used in) financing activities                   8,337       3,214

Increase in cash                                                         39          35
Cash at beginning of period                                             330         124
                                                                   --------    --------
Cash at end of period                                              $    369    $    159
                                                                   ========    ========
</TABLE>

                             See accompanying notes.

                                        4


<PAGE>   7






                               DENALI INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)




1.     GENERAL

              The consolidated financial statements of Denali Incorporated and
its wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. In the opinion of management, the consolidated
financial statements reflect all elimination entries and adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
interim periods.

       The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes included in the
Company's registration statement on Form S-1 filed with the SEC on November 20,
1997.

2.     SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS IN EQUITY SECURITIES

       The Company determines the appropriate classification of investments in
equity securities at the time of purchase and confirms such designation as of
the balance sheet date. Marketable equity securities are classified as
available-for-sale securities and are stated at fair value, with any unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses are recognized based on the
specific-identification method for equity securities sold. The Company's
investments are in a mutual fund that invests principally in high quality,
short-term U.S. dollar denominated money market instruments. As of March 28,
1998, the fair value of investments in equity securities, using quoted market
prices, approximates their carrying value.

EARNINGS PER SHARE

       In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.


                                        5

<PAGE>   8






3.     INVENTORIES

       Inventories are summarized below (in thousands):

<TABLE>
<CAPTION>


                                                               March 28, 1998    June 28, 1997
                                                               --------------   --------------

<S>                                                            <C>              <C>           
Finished goods                                                 $        3,768   $        2,147
Raw materials                                                           3,015            2,805
Work in process                                                         1,274            1,734
                                                               --------------   --------------
                                                               $        8,057   $        6,686
                                                               ==============   ==============
</TABLE>


4.     INCOME TAXES

       The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
The Company's provision for income taxes differs from the U.S. statutory rate of
34% due primarily to the non-recurring compensation charge, discussed in Note 7,
being non-deductible for income tax purposes, state income taxes and other
permanent differences.

5.     PER SHARE INFORMATION

       The following table sets forth the weighted average shares outstanding
for the computation of basic and diluted earnings per share:


<TABLE>
<CAPTION>

                                                             Three months ended      Nine months ended
                                                          ---------------------   ---------------------
                                                          March 28,   March 29,   March 28,   March 29,
                                                            1998         1997       1998        1997
                                                          ---------   ---------   ---------   ---------
                                                                          (share data in thousands)
<S>                                                       <C>         <C>         <C>         <C>  
Weighted average common shares outstanding                    4,726       2,185       3,374       2,185
Dilutive securities - employee stock options                    113          --          --          --
                                                          ---------   ---------   ---------   ---------
Weighted average common shares outstanding
  assuming full dilution                                      4,839       2,185       3,374       2,185
                                                          =========   =========   =========   =========
</TABLE>


6.     1997 STOCK OPTION PLAN

       In September 1997, the Company adopted an incentive stock option plan
(the "1997 Plan"). The 1997 Plan permits the granting of both incentive stock
options and non-qualified stock option awards to all employees of the Company.
Awards to acquire up to an aggregate of 362,873 shares may be granted pursuant
to the 1997 Plan. The Board of Directors selects the employees who will receive
the awards, determines the type and terms of the awards to be granted and
interprets and administers the 1997 Plan.

       In September 1997, the Company awarded options to acquire 171,030 shares
of the Company's common stock. An additional option for 7,700 shares was granted
in December 1997. Options for 149,813 shares vest 40% immediately and the
remainder over a four year period. The remaining options for 28,917 shares vest
ratably over four years. All of the options were granted at fair market value.





                                        6

<PAGE>   9






7.     REORGANIZATION OF SUBSIDIARIES AND EXCHANGE OF STOCK OPTIONS

       Effective in September 1997, the Company completed a reorganization of
its subsidiaries. As part of the reorganization, one of the Company's
subsidiaries, Containment Solutions, Inc. ("CSI") was merged into the Company.
As a result, the outstanding options to purchase common stock of CSI were
exchanged for options to purchase common stock of the Company. At June 28, 1997,
the CSI stock option plan had options for 1,400 shares outstanding at an
exercise price of $259. In September 1997, the Company exchanged the CSI options
for options for 254,643 shares of the Company's common stock at an exercise
price of $1.42. In connection with the exchange, the Company recognized a
non-recurring compensation charge in the quarter ended September 27, 1997 of
approximately $2.3 million.

8.     INITIAL PUBLIC OFFERING

       The Company filed a final registration statement with the SEC on November
20, 1997 to register the sale of shares of its common stock. In connection with
this initial public offering, the Company issued 2,276,000 shares and received
net proceeds of $26 million. The Company used the net proceeds of the sale to
repay a portion of the outstanding indebtedness under its credit facilities, to
repay $195,000 for a bank note payable, to repay $6.7 million of a subordinated
unsecured note payable to a supplier, to repay the $1.1 million unsecured note
payable (including interest) to a seller, to redeem the outstanding shares of
preferred stock totaling approximately $1.4 million, including accrued and
unpaid dividends, and to fund general working capital purposes.

9.     COMMON STOCK

       On September 23, 1997, the Company effected a 1,715-for-1 stock split.
All stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.

10.    ACQUISITIONS

       Effective February 28, 1997, the Company acquired all of the issued and
outstanding stock of Ershigs, Inc. ("Ershigs"), a manufacturer of
fiberglass-reinforced plastic composites for corrosion-resistant applications.
The acquisition was accounted for under the purchase method of accounting
whereby the assets and liabilities of Ershigs were adjusted to their estimated
fair values at the acquisition date, which exceeded the purchase price by
approximately $1.3 million. Accordingly, the excess amount was allocated to
reduce the basis of property, plant, and equipment (except for assets held for
sale).

       Effective October 1997, the Company acquired all of the issued and
outstanding stock of SEFCO, Inc. ("SEFCO"), a manufacturer of engineered
field-erected steel tanks and accessories for use in the municipal, agrochemical
and petroleum industries. The acquisition was accounted for under the purchase
method of accounting whereby the assets and liabilities of the acquired company
were adjusted to their estimated fair values at the acquisition date. Under the
purchase agreement, the Company acquired net assets of $2.4 million in exchange
for $5.1 million in cash, which is net of $700,000 cash acquired, and incurred
approximately $100,000 in acquisition costs resulting in the recording of
goodwill of approximately $2.8 million. The consolidated financial statements
reflect all operations for the acquired company since the date of acquisition.







                                        7


<PAGE>   10






       Effective October 1997, the Company acquired all of the issued and
outstanding stock of GL&V/LaValley Construction, Inc. ("LaValley"), a
manufacturer and installer of fiberglass-reinforced plastic products. The
acquisition was accounted for under the purchase method of accounting whereby
the assets and liabilities of the acquired company were adjusted to their
estimated fair values at the acquisition date. Under the purchase agreement, the
Company acquired net assets of $3.0 million, subject to finalization, in
exchange for $4.3 million in cash and incurred approximately $100,000 in
acquisition costs resulting in the recording of goodwill of approximately $1.4
million. The consolidated financial statements reflect all operations for the
acquired company since the date of acquisition.

       The following unaudited results of operations have been prepared assuming
the acquisitions had occurred as of the beginning of the periods presented.
These results are not necessarily indicative of results of future operations nor
of results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented.


<TABLE>
<CAPTION>
                                                          Nine months ended
                                                       ------------------------
                                                        March 28,     March 29,
                                                          1998          1997
                                                       ----------    ----------
                                                       (In thousands, except per
                                                             share amounts)

<S>                                                    <C>           <C>
Net sales                                              $   74,512    $   77,892
Net loss                                               $     (848)   $   (1,440)
Net loss per common share assuming dilution            $    (0.26)   $    (0.70)
</TABLE>

11.    LONG-TERM DEBT

       On October 24, 1997, the Company's subsidiaries entered into a senior
credit facility, as amended, with a new bank to refinance its revolving and term
credit arrangements at its wholly-owned subsidiaries, Fluid Containment, Inc.,
Hoover Containment, Inc. and Ershigs, and to finance the acquisitions of
LaValley and SEFCO. This credit facility was amended and restated on March 23,
1998. The amended and restated credit facility provides for a maximum of $23.0
million revolving credit notes due in October 2002, and a maximum of $6.2
million in term loans with equal monthly payments of $51,816 plus interest due
in October 2002 or upon the termination of the revolving credit notes. The new
revolving credit notes provide for borrowings, at the Company's option, at
either the Bank's prime rate or varying rates of LIBOR plus a margin ranging
from 1.25% to 2%. Borrowings under the new revolving credit notes will be based
on accounts receivable and inventory as specified in the agreement's borrowing
base formula. The term loans provide for borrowings, at the Company's option, at
either the Bank's prime rate or varying rates of LIBOR plus a margin ranging
from 1.25% to 2%. The new senior credit facility provides availability for
letters of credit up to $5.0 million subject to availability of borrowing
capacity under the revolving credit notes. The new senior credit facility
requires the Company's subsidiaries to maintain certain financial covenants and
requires an annual fee of 0.250% on the unused portion of the revolving credit
notes. The new senior credit facility is secured by accounts receivable,
property, equipment and general intangible assets of the Company's subsidiaries.

       Also, in connection with the extinguishment of its old revolving and term
credit arrangements upon funding of the new senior credit facility in October
1997, the Company paid prepayment penalties of $323,000 and charged to expense
unamortized debt origination costs of $299,000. In addition, the Company
realized gains of $591,000 and $384,000 in November 1997 and March 1998,
respectively, from the prepayment of a supplier note. As a result of these
transactions, the Company incurred a net extraordinary gain of $353,000
($219,000 net of tax) for the nine months ended March 28, 1998.




                                        8

<PAGE>   11


12.    COMMITMENTS AND CONTINGENCIES

       The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
that the supplier provide and the Company purchase at least 90% of the Company's
fiberglass requirements from the supplier. The contract expires on December 31,
2000. In addition, the Company continues to negotiate with other vendors to
ensure a continued supply of fiberglass to meet the Company's production needs.
The Company is also a significant purchaser of resin and steel. The Company does
not depend upon any single supplier or source for steel or resin requirements.

       The Company has not encountered any significant difficulty to date in
obtaining raw materials in sufficient quantities to support its operations at
current or expected near-term future levels. However, any disruption in raw
material supply or abrupt increases in raw material prices could have an adverse
effect on the Company's operations.

       The Company and its subsidiaries are, from time to time, subject to
various lawsuits and claims and other actions arising out of the normal course
of business. The Company is also subject to contingencies pursuant to
environmental laws and regulations that in the future may require the Company to
take action to correct the effects on the environment of prior manufacturing and
waste disposal practices. In management's opinion, recorded accruals for
environmental liabilities are appropriate based on existing facts and
circumstances. Under more adverse circumstances, however, this potential
liability could be higher. Current year expenditures were not material.

       While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management, the ultimate liabilities resulting from such claims will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.

13.    SEASONALITY

       The Company's operating results are affected by the annual construction
season slowdown resulting from winter weather especially in the period December
through March. The underground fiberglass tank products are especially impacted
during the winter months. The Company believes that the effects of seasonality
will be less severe in the future, as the Company continues to expand and
diversify its product offerings.

14.    SUBSEQUENT EVENTS

        On April 16, 1998, Denali Incorporated announced the signing of a
definitive agreement to purchase 100 percent of the outstanding stock of
CC&E/RPS Inc. ("CC&E") from Reinforced Plastics Systems Inc. of Mahone Bay,
Nova Scotia, Canada. CC&E is a leading North American field constructor of
fiberglass-reinforced plastic products. The stock purchase excludes the
European assets of CC&E.


                                        9

<PAGE>   12






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

OVERVIEW

       Denali Incorporated is a provider of products and services for handling
critical fluids, which are liquids, liquid mixtures, and slurries that are
economically valuable or potentially hazardous to the environment. The company
is a manufacturer of fiberglass-composite, underground storage tanks; steel,
aboveground storage tanks; and engineered, fiberglass-reinforced
plastic-composite products for corrosion-resistant applications.

       Since inception in 1994, the Company has acquired five businesses. Due to
the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of current or
future periods. Each of the acquisitions has been accounted for under the
purchase method of accounting. Accordingly, the acquired businesses have been
included in the Company's results of operations from the date of acquisition.

       The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite underground storage tanks
("USTs") business of Owens Corning, including five manufacturing facilities. The
purchase price was $16.6 million consisting of $5.6 million in cash, $9.3
million in notes payable and approximately $1.7 million in acquisition costs.
The Company significantly restructured the operations of this business at the
time of purchase. Two of the five manufacturing facilities of the business were
closed, resulting in a significant reduction in fixed manufacturing overhead.
Operating costs were significantly reduced throughout the Company, in part
through the elimination of approximately 20 management positions. The Company
sold the two closed and idle manufacturing facilities in fiscal 1996.

       In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover Containment, Inc., a manufacturer of steel rectangular
aboveground storage tanks ("ASTs"). The purchase price of $5.5 million consisted
of $5.4 million in cash and acquisition costs of approximately $100,000. The
addition of the steel rectangular AST product line enabled the Company to offer
a broader line of containment products and to expand its customer base. These
two businesses form the Company's Containment Products Group.

       In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered fiberglass reinforced products ("FRP"), as the first
of the Company's Engineered Products Group. The $6.1 million purchase price
consisted of $5.0 million in cash, $1.0 million in a note payable and
acquisition costs of approximately $80,000. Substantial operational changes were
made upon the purchase of Ershigs, including the closing of one of Ershigs'
three manufacturing plants and the restructuring of most of Ershigs' sales,
general and administrative functions, which enabled the Company to enhance
profitability.

       In October 1997, the Company acquired SEFCO, Inc. ("SEFCO") for
approximately $5.1 million in net cash and $100,000 in direct acquisition costs.
SEFCO is a manufacturer of engineered field-erected aboveground steel tanks. In
October 1997, the Company also acquired GL&V LaValley Construction, Inc.
("LaValley") for $4.3 million in cash and $100,000 in direct acquisition costs.
LaValley manufactures engineered FRP products. LaValley and SEFCO, together with
Ershigs, form the Company's Engineered Products Group.








                                       10

<PAGE>   13






RESULTS OF OPERATIONS

Three months ended March 28, 1998 compared with three months ended March 29,
1997

         Net sales increased $7.7 million, or 55%, to $21.6 million in the third
quarter of fiscal 1998 from $13.9 million in the same quarter of fiscal 1997.
$5.9 million of the increase resulted from the inclusion of the Ershigs,
LaValley and SEFCO companies acquired in February 1997 (Ershigs) and October
1997 (LaValley and SEFCO). The three acquired companies form the Company's
Engineered Products Group. The remaining $1.8 million increase in sales resulted
from a 14% increase in sales at the Company's Containment Products Group from
$12.6 million in the fiscal 1997 period to $14.4 million in the fiscal 1998
period due to strong demand for the Company's petroleum storage tank products.

         Gross profit increased $2.2 million, or 105%, to $4.3 million in the
fiscal 1998 period from $2.1 million in the fiscal 1997 period. $1.5 million of
the increase was related to the addition of the Engineered Products Group with
the remaining $700,000 derived from increased gross profit in the Containment
Products Group. Gross margin for the Company increased to 19.8% from 15% in the
prior year quarter due in part to an increase in the Containment Products Group
gross margins from 14.7% in the prior fiscal period to 17.6% in the current
fiscal period. The margins at the Containment Products Group increased as a
result of better volume through the Group's facilities and better raw material
pricing. Also favorably impacting margins in the quarter was the inclusion of
the higher margin Engineered Products Group in the fiscal 1998 period. The
margins at the Engineered Products Group were 24.3% for the quarter.

         Selling, general and administrative expenses for the fiscal 1998 third
quarter totaled $4 million (18.4% of revenues), compared with $2.6 million
(18.9% of revenues) in the prior year fiscal period. $1 million of the increase
was due to the inclusion of the Engineered Products Group in the fiscal 1998
period with the balance of the increase resulting from both higher corporate
expenses associated with the Company's growth and increased sales and
administrative expenses at the Containment Products Group.

         Interest expense decreased $272,000 from $481,000 in the 1997 fiscal
quarter to $209,000 in the 1998 fiscal quarter due to the use of proceeds from
the initial public offering to reduce the Company's indebtedness as described in
Note 8 of the Notes to the Consolidated Financial Statements.

         The Company realized a gain of $384,000 in the 1998 fiscal quarter from
the prepayment of a supplier note. This transaction was recorded as an
extraordinary gain of $238,000 net of tax in the third quarter of fiscal 1998.

         The Company's provision for income taxes differs from the U.S.
statutory rate due to state income taxes and other permanent differences.

         Due to the above factors, net income (loss) before extraordinary item
increased from $(487,000) in the prior fiscal year period to $135,000 in the
current fiscal year period. Net income (loss) per diluted share before
extraordinary item increased from $(0.24) to $0.03. Net income after
extraordinary item and earnings per diluted share for the third quarter of
fiscal 1998 were $373,000 and $0.08, respectively.

Nine months ended March 28, 1998 compared with nine  months ended March 29, 1997

         Net sales increased $19.9 million, or 41%, to $68.5 million in the
first nine months of fiscal 1998 from $48.6 million in the same period of fiscal
1997. $16.1 million of the increase resulted from the inclusion in the fiscal
1998 period of the Company's Engineered Products Group. The remaining $3.8
million increase in sales resulted from an 8% increase in sales at the Company's
Containment Products Group from $47.3 million in the fiscal 1997 period to $51.1
million in the fiscal 1998 period due to strong demand for the Company's
petroleum storage tank products.

                                       11

<PAGE>   14




         Gross profit increased $5.8 million, or 64%, to $14.8 million in the
fiscal 1998 period from $9 million in the fiscal 1997 period. $4.3 million of
the increase was related to the addition of the Engineered Products Group with
the remaining $1.5 million derived from increased gross profit in the
Containment Products Group. Gross margin for the Company increased to 21.7% from
18.6% in the prior year period due in part to an increase in the Containment
Products Group gross margins from 18.7% in the prior fiscal period to 20.2% in
the current fiscal period. The margins at the Containment Products Group
increased as a result of better volume through the Group's facilities and better
raw material pricing. Also favorably impacting margins in the nine months was
the inclusion of the higher margin Engineered Products Group in the fiscal 1998
period. The margins at the Engineered Products Group were 26% for the period.

         Selling, general and administrative expenses for the first nine months
of fiscal 1998 totaled $12.2 million (17.8% of revenues) compared to $8 million
(16.4% of revenues) in the prior fiscal period. $2.9 million of the increase was
due to the inclusion of the Engineered Products Group in the fiscal 1998 period
with the remaining increase resulting from both higher corporate expenses
associated with the Company's growth and increased sales and administrative
expenses at the Containment Products Group.

         The Company recognized a $2.3 million non-recurring compensation charge
in the first quarter of fiscal 1998 due to the exchange of subsidiary stock
options for Denali stock options.

         Interest expense decreased $172,000 from $1.5 million in the first nine
months of the prior year to $1.3 million in the current year period due to the
use of proceeds from the initial public offering to reduce the Company's
indebtedness as discussed in Note 8 of Notes to the Consolidated Financial
Statements.

         The Company's provision for income taxes differs from the U.S.
statutory rate due to the non-recurring compensation charge, state income taxes
and other permanent differences.

         As a result of the Company refinancing its credit facilities in October
1997, the Company paid prepayment penalties of $323,000 and charged to expense
unamortized debt organization costs of $299,000. In addition, the Company
realized gains of $591,000 and $384,000 in November 1997 and March 1998,
respectively, from the prepayment of a supplier note. As a result of these
transactions, the Company incurred a net extraordinary gain of $353,000
($219,000 net of tax) in the first nine months of fiscal 1998.

         Due to the above factors, net loss before extraordinary charges in the
first nine months of fiscal 1998 was $(1,250,000), or $(0.38) per diluted share,
compared with a net loss of $(64,000), or $(0.07) per diluted share, in the
prior year nine month period. Net income and earnings per diluted share for the
first nine months of fiscal 1998 before the $2.3 million non-recurring
compensation charge were $1,062,000 and $0.31, respectively, before
extraordinary item. Net loss after extraordinary item and loss per diluted share
for the nine months of fiscal 1998 were $(1,031,000) and $(0.31), respectively.

LIQUIDITY AND CAPITAL RESOURCES

         As further described in Note 8 to the Denali Incorporated Consolidated
Financial Statements, the Company received net proceeds of $26 million, after
expenses, from its initial public offering completed in the second quarter.

         Working capital at March 28, 1998 was $12.3 million, as compared to
$8.0 million at June 28, 1997. The increase in working capital is primarily due
to the October 1997 acquisitions, excess proceeds from the initial public
offering and improved operating cash flow. Cash provided by operating activities
for the nine months ended March 28, 1998 was $1.8 million compared to $1.5
million for the same period last year. The improvement in cash provided by
operating activities is primarily a result of a $1.3 million increase in net
income, before an adjustment of $2.3 million for a non-recurring compensation
charge, along with increased collections of accounts receivable, offset by an
increase in inventories and reduction in payables.

                                       12

<PAGE>   15


         The principal uses of cash for the nine months ended March 28, 1998
were to fund acquisitions (net of cash acquired) of $9.6 million, net repayment
of bank debt of $14.4 million, redemption of Series A Preferred Stock totaling
$1.4 million, including accrued and unpaid dividends, and capital expenditures
of $1.7 million.

         The Company's acquisition program may require significant additional
capital. The Company intends to seek additional capital as necessary to fund
such acquisitions through one or more funding sources that may include
borrowings under the Credit Facility, or offerings of debt and/or equity
securities of the Company. Cash provided by operating activities may also be
used to fund a portion of future acquisitions. Although management believes that
the Company will be able to obtain sufficient capital to fund acquisitions,
there can be no assurances that such capital will be available to the Company
at the time it is required or on terms acceptable to the Company.

         The Company's credit facility with its principal lender provides for
revolving lines of credit and secured term loans of up to an aggregate of $29.2
million. As of March 28, 1998, the Company had outstanding indebtedness of $6.2
million under the term loans and no borrowings under the revolving lines of
credit. Borrowings under this credit facility are secured by liens on
substantially all of the Company's assets. See Note 11 of Notes to the
Consolidated Financial Statements for certain information regarding the credit
facility. The credit facility bears interest per annum at varying rates of LIBOR
plus a margin ranging from 1.25% to 2% or the prime rate. The credit facility
has a five year term.

         The Company also has $1.0 million in Industrial Revenue Bonds ("IRBs")
assumed in connection with its acquisition of the Owens Corning fiberglass
composite UST business. The IRBs bear interest at 9.9% per annum, mature in
February 2001 and are secured by the Company's Conroe, Texas manufacturing
facility.

         The Company anticipates that its operating cash flows and available
line of credit will be adequate to fund future capital commitments and working
capital requirements for the next 12 months.

IMPACT OF  YEAR 2000 ISSUES

         Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

         The Company is currently assessing the impact of the year 2000 on its
computer software, hardware and other systems, including those of vendors,
customers and other third parties. The Company anticipates completing its
assessment no later than June 1998. Also, the Company believes that with
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for its computer
systems. The potential expense to ensure that all of the computer and other
systems are year 2000 compliant cannot be determined until such an assessment is
completed.

                                       13

<PAGE>   16

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

         This Form 10-Q contains certain forward-looking statements as such term
is defined in the Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words, "anticipate", "believe", "estimate", "expect" and "intend"
and words or phrases of similar import, as they relate to the Company or its
subsidiaries or Company management, are intended to identify forward-looking
statements. Such statements reflect the current risks, uncertainties and
assumptions related to certain factors including, without limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.




                                       14
<PAGE>   17

                           PART II. OTHER INFORMATION



ITEM 1.           LEGAL PROCEEDINGS

         Not applicable

ITEM 2.           CHANGES IN SECURITIES

         On November 20, 1997, the Securities and Exchange Commission declared
the Company's registration statement on Form S-1, File No. 333-36857, effective.
Item 2 of Part II of the Company's 10-Q for the quarter ending December 27, 1997
set forth information regarding the Company's proceeds from the offering
pursuant to such registration statement and the Company's use of such proceeds.
The following information has changed since such disclosure.

         As of April 30, 1998, the Company has utilized all of the $26.0 million
net proceeds from the offering as follows. The Company repaid approximately
$15.6 million of the outstanding indebtedness under its credit facilities,
repaid $195,000 for a bank note payable, repaid $6.7 million of the subordinated
unsecured note payable to a supplier, repaid a $1.1 million unsecured note
(including interest) to a seller and redeemed the outstanding shares of
preferred stock of the Company totaling approximately $1.4 million, including
accrued and unpaid dividends. The remaining $1.0 million of net proceeds have
been used for general working capital purposes.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

         Not applicable

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

         Not applicable

ITEM 5.           OTHER INFORMATION

         Not applicable

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

         A.       Exhibits

                  10.1   Amended and Restated Credit Agreement dated March 23,
                         1998 among Denali Incorporated, Ershigs Biloxi, Inc.,
                         Ershigs, Inc., Fluid Containment, Inc., and SEFCO,
                         Inc., and NationsBank of Texas, N.A., as agent, and the
                         financial institutions named therein

                  10.2   Form of Revolving Note of Denali Incorporated pursuant
                         to Amended and Restated Credit Agreement dated March
                         23, 1998

                  10.3   Guaranty dated March 23, 1998 of Denali Incorporated

                  10.4   Subsidiary Guaranty dated March 23, 1998 of Containment
                         Solutions, Inc., Denali Management, Inc., Ershigs
                         Biloxi, Inc., Ershigs, Inc., Fluid Containment
                         Property, Inc., Instrumentation Solutions, Inc.,
                         Specialty Solutions, Inc., Fluid Containment, Inc.,
                         SEFCO, Inc. and Hoover Containment, Inc.

                                       15


<PAGE>   18





                  10.5   Security Agreement dated March 23, 1998 between Denali
                         Incorporated and NationsBank of Texas, N.A., as agent

                  10.6   Security Agreement dated March 23, 1998 among
                         Containment Solutions, Inc., Denali Management, Inc.,
                         Ershigs Biloxi, Inc., Ershigs, Inc., Fluid Containment
                         Property, Inc., Instrumentation Solutions, Inc.,
                         Specialty Solutions, Inc., Fluid Containment, Inc.,
                         SEFCO, Inc., Hoover Containment, Inc. and NationsBank
                         of Texas, N.A., as agent

                  10.7   Pledge Agreement dated March 23, 1998 between Denali
                         Incorporated and NationsBank of Texas, N.A., as agent

                  10.8   Form of Pledge Agreement dated March 23, 1998 between
                         NationsBank of Texas, N.A., as agent, and each of
                         Specialty Solutions, Inc., Fluid Containment, Inc., and
                         Ershigs, Inc.

                  27     Financial Data Schedule

         B.       Reports on Form 8-K

                  The Company filed no reports on Form 8-K during the quarter
                  ended March 28, 1998.




                                       16

<PAGE>   19


                                   SIGNATURES




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


                                              DENALI INCORPORATED
                                              -------------------
                                                  (Registrant)




Date:   May 8, 1998                           /s/ R. Kevin Andrews
                                              -----------------------
                                              R. Kevin Andrews
                                              Chief Financial Officer
                                                (Principal Financial Officer and
                                                Principal Accounting Officer)




                                       17
<PAGE>   20






                  INDEX  TO EXHIBITS

<TABLE>
<CAPTION>


Exhibit
Number                   Description of Exhibit
-------                  ----------------------

<S>          <C>       
 10.1        Amended and Restated Credit Agreement dated March 23,
             1998 among Denali Incorporated, Ershigs Biloxi, Inc.,
             Ershigs, Inc., Fluid Containment, Inc., and SEFCO,
             Inc., and NationsBank of Texas, N.A., as agent, and the
             financial institutions named therein
          
 10.2        Form of Revolving Note of Denali Incorporated pursuant
             to Amended and Restated Credit Agreement dated March
             23, 1998
          
 10.3        Guaranty dated March 23, 1998 of Denali Incorporated
          
 10.4        Subsidiary Guaranty dated March 23, 1998 of Containment
             Solutions, Inc., Denali Management, Inc., Ershigs
             Biloxi, Inc., Ershigs, Inc., Fluid Containment
             Property, Inc., Instrumentation Solutions, Inc.,
             Specialty Solutions, Inc., Fluid Containment, Inc.,
             SEFCO, Inc. and Hoover Containment, Inc.
          
 10.5        Security Agreement dated March 23, 1998 between Denali
             Incorporated and NationsBank of Texas, N.A., as agent
          
 10.6        Security Agreement dated March 23, 1998 among
             Containment Solutions, Inc., Denali Management, Inc.,
             Ershigs Biloxi, Inc., Ershigs, Inc., Fluid Containment
             Property, Inc., Instrumentation Solutions, Inc.,
             Specialty Solutions, Inc., Fluid Containment, Inc.,
             SEFCO, Inc., Hoover Containment, Inc. and NationsBank
             of Texas, N.A., as agent
          
 10.7        Pledge Agreement dated March 23, 1998 between Denali
             Incorporated and NationsBank of Texas, N.A., as agent
          
 10.8        Form of Pledge Agreement dated March 23, 1998 between
             NationsBank of Texas, N.A., as agent, and each of
             Specialty Solutions, Inc., Fluid Containment, Inc., and
             Ershigs, Inc.
          
 27          Financial Data Schedule
 </TABLE>




                                       18