<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 OCTOBER 2, 1999

                                       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 October 29, 1999, the number of shares of common stock outstanding was
5,450,414.

<PAGE>   2
                               DENALI INCORPORATED
                 FORM 10-Q FOR THE QUARTER ENDED OCTOBER 2, 1999

                                      INDEX

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        -------
<S>                                                                     <C>
Part I.     FINANCIAL INFORMATION

Item 1.     Financial Statements (Unaudited)

            Consolidated Balance Sheets.................................     1

            Consolidated Statements of Operations.......................     2

            Consolidated Statements of Cash Flows.......................     3

            Notes to Consolidated Financial Statements..................     4

Item 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations ..................................     9

Item 3.     Quantitative and Qualitative Disclosure About Market Risk...    14


Part II.    OTHER INFORMATION

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

Item 2.     Changes in Securities and Use of Proceeds...................    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  ............................................................    16

Index to Exhibits ......................................................    17
</TABLE>

<PAGE>   3

                          PART I. FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS


                               DENALI INCORPORATED
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              October 2,      July 3,
                                                                1999           1999
                                                             -----------   ----------
                                                             (Unaudited)      (Note)
                                                                 (In thousands)
<S>                                                         <C>            <C>
                                     ASSETS

Current assets:
       Cash                                                  $  2,435       $  1,824
       Accounts receivable, net of allowances of
              $1,140,000 at October 2, 1999 and $1,419,000
              at July 3, 1999                                  45,435         38,862
       Inventories                                             26,050         26,175
       Prepaid expenses                                         3,855          4,052
       Other receivables                                           --          2,591
       Deferred tax assets                                      1,170          1,135
                                                             --------       --------
Total current assets                                           78,945         74,639
Property, plant and equipment, net                             48,676         46,938
Goodwill, net                                                  51,602         50,651
Other assets                                                    4,611          3,898
Assets held for sale                                              249            449
                                                             --------       --------
Total assets                                                 $184,083       $176,575
                                                             ========       ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable                                      $ 14,764       $ 19,047
       Accrued liabilities                                     16,107         15,777
       Lines of credit                                         17,851         16,217
       Income taxes payable                                       369          1,757
       Current maturities of long-term debt                     4,195          4,030
                                                             --------       --------
Total current liabilities                                      53,286         56,828
Long-term debt, less current maturities                        77,036         68,002
Related party subordinated debt                                 3,999          3,980
Accrued pension costs                                           2,197          2,109
Minority interest                                               1,726          1,571
Deferred taxes                                                  2,096          1,692
Other long-term liabilities                                     3,106          3,824
Commitments and contingencies
Stockholders' equity:
       Common stock, $.01 par value
              Authorized shares - 30,000,000
              Issued and outstanding shares - 5,450,414 at
              October 2, 1999 and 5,423,215 at July 3, 1999        55             54
       Additional paid-in capital                              35,168         34,956
       Other accumulated comprehensive income                   1,121             --
       Retained earnings                                        4,293          3,559
                                                             --------       --------
Total stockholders' equity                                     40,637         38,569
                                                             --------       --------
Total liabilities and stockholders' equity                   $184,083       $176,575
                                                             ========       ========
</TABLE>

                             See accompanying notes.

Note:    The balance sheet at July 3, 1999 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
                                               ------------------------------------
                                                 October 2,          September 26,
                                                   1999                   1998
                                               -------------         --------------
                                             (In thousands, except per share amounts)
<S>                                           <C>                  <C>
Net revenues                                      $ 48,366            $ 35,535
Cost of revenues                                    36,000              26,769
                                                  --------            --------
Gross profit                                        12,366               8,766
Selling, general and administrative expenses         9,204               6,189
Restructuring charge                                 1,400                  --
                                                  --------            --------
Operating income                                     1,762               2,577
Interest expense                                     2,114                 654
Interest income                                       (125)                (12)
Other income, net                                      (64)               (138)
Put warrant valuation adjustment                      (909)                 --
                                                  --------            --------
Income before income taxes and minority interest       746               2,073
Income tax (benefit) expense                           (59)                788
                                                  --------            --------
Income before minority interest                        805               1,285
Minority interest                                       71                  --
                                                  --------            --------
Net income                                        $    734            $  1,285
                                                  ========            ========

Net income per common share-basic and diluted     $   0.14            $   0.27
                                                  ========            ========
</TABLE>

                             See accompanying notes.

                                        2
<PAGE>   5
                              DENALI INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          Three months ended
                                                                  ------------------------------------
                                                                    October 2,          September 26,
                                                                      1999                   1998
                                                                  -------------         --------------
                                                                             (In thousands)
<S>                                                               <C>                   <C>
OPERATING ACTIVITIES:
Net income                                                          $   734                 $ 1,285
Adjustments to reconcile net income to net cash
   provided by operating activities:
       Depreciation                                                   1,174                     577
       Amortization                                                     518                     171
       Put warrant valuation adjustment                                (909)                     --
       Provision for losses on accounts receivable                       22                      67
       Gain on disposal of property, plant and equipment and
           assets held for sale                                        (280)                     --
       Deferred tax                                                     493                      --
       Changes in operating assets and liabilities:
              Accounts receivable                                    (5,386)                   (499)
              Inventories                                               791                    (580)
              Prepaid expenses                                        3,068                      59
              Other assets and liabilities                             (181)                    (74)
              Accounts payable                                       (4,621)                    771
              Accrued liabilities                                    (1,226)                 (1,413)
              Income tax receivable/payable                          (1,406)                    175
                                                                    -------                 -------
Net cash (used in) provided by operating activities                  (7,209)                    539
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired                                   (1,100)                   (542)
Purchases of property, plant and equipment                           (1,637)                   (395)
Proceeds from sale of property, plant and equipment and
   assets held for sale                                                 660                      --
                                                                    -------                 -------
Net cash used in investing activities                                (2,077)                   (937)

FINANCING ACTIVITIES:
Net borrowings under revolving lines of credit                        8,390                   1,045
Net borrowings (repayments) on term notes and other long-term debt    1,448                    (235)
                                                                    -------                 -------
Net cash provided by financing activities                             9,838                     810

Effect of exchange rate changes on cash                                  59                      --
                                                                    -------                 -------
Increase in cash                                                        611                     412
Cash at beginning of period                                           1,824                     175
                                                                    -------                 -------
Cash at end of period                                               $ 2,435                 $   587
                                                                    =======                 =======
</TABLE>

                             See accompanying notes.

                                        3
<PAGE>   6
                               DENALI INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.     GENERAL

       The consolidated financial statements of Denali Incorporated and its
majority and 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 Form 10-K filed with the Securities and Exchange Commission on
September 15, 1999.

2.     INVENTORIES

       Inventories are summarized below (in thousands):

<TABLE>
<CAPTION>
                                           October 2, 1999       July 3, 1999
                                           ---------------       ------------
       <S>                                 <C>                   <C>
       Finished goods                         $    9,792           $  10,546
       Raw materials                               8,812               8,672
       Work in process                             7,446               6,957
                                              ----------           ---------
                                              $   26,050           $  26,175
                                              ==========           =========
</TABLE>

3.     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
                                                  ------------------------------------
                                                    October 2,          September 26,
                                                      1999                   1998
                                                  -------------         --------------
                                                       (Share data in thousands)
<S>                                               <C>                   <C>
Weighted average common shares outstanding                 5,432              4,829
Dilutive securities - employee stock options                  --                  8
                                                         -------            -------
Weighted average common shares outstanding
  assuming full dilution                                   5,432              4,837
                                                         =======            =======
</TABLE>

                                        4
<PAGE>   7
4.       FOREIGN CURRENCY TRANSLATION

       The Company's foreign subsidiaries use the local currency as their
functional currency. Financial statements of these subsidiaries are translated
into U.S. dollars using the exchange rate at the balance sheet dates for assets
and liabilities and a weighted average exchange rate for each period for
revenues, expenses, gains and losses and cash flows. The impact of currency
fluctuations is recorded as comprehensive income. For the three months ended
October 2, 1999, the Company had a foreign currency translation gain of $1.1
million which is recorded as comprehensive income and is classified as a
separate component of stockholders' equity.

5.     INCOME TAXES

       For the three months ended October 2, 1999, the Company's provision for
income taxes differs from the U.S. statutory rate due primarily to the put
warrant valuation adjustment which is not taxable.

6.     LONG-TERM DEBT

       On January 12, 1999, the Company entered into a new senior credit
facility with a group of lenders to refinance its revolving and term credit
arrangements, as amended, to provide working capital and an acquisition line of
credit. This senior credit facility provides for a maximum of $20.0 million in a
revolving credit facility due in January 2004, and a term loan up to $20.0
million with equal quarterly payments plus interest of $500,000 the first year,
$750,000 the second year, $1.0 million the third year, $1.25 million the fourth
year, and $1.5 million the fifth year. The credit facility also provides for up
to a $35.0 million acquisition term loan with the first principal installment
due 21 months following the closing of the credit facility. As of October 2,
1999, the Company had outstanding indebtedness of $18.5 million under the term
loan, $18.5 million under the revolving lines of credit and $18.3 million under
the acquisition term loan. As of November 10, 1999, the balance of the revolving
line of credit had been reduced by $3.3 million to $15.2 million. The revolving
credit notes and term loans provide for borrowings, at the Company's option, at
either the lender's prime rate plus a margin of 1.75% or varying rates of LIBOR
plus 3.0%. The acquisition term loans provide for borrowing, at the Company's
option, at either the lender's prime rate plus a margin of 2.25% or at varying
rates of LIBOR plus 3.5%.

       This senior credit facility provides availability for letters of credit
up to $10.0 million subject to availability of borrowing capacity under the
revolving credit notes. As of October 2, 1999, the Company had $1.5 million of
letters of credit outstanding. The senior credit facility requires the Company
to maintain certain financial covenants and requires an annual fee of .50% on
the unused portion of the revolving credit notes and .75% on the unused portion
of the acquisition term loan. The Company was not in compliance with certain
financial covenants at October 2, 1999 and has obtained a waiver through the
first quarter. The Company anticipates that it may be necessary to obtain a
similar waiver for the second quarter. The Company is in discussions with its
lenders to amend the current facility's future financial covenants. These
negotiations are expected to be finalized by January 2000. The senior credit
facility is secured by substantially all of the assets of the Company's
subsidiaries.

       In June 1999, the Company entered into a new senior credit facility
("Senior Dutch Facility") with two Netherland financial institutions to finance
the acquisition of Welna. The new Senior Dutch Facility provides for two term
loans for a total facility of Dutch guilders (NLG) 25 million. Term Loan A
provides for borrowings of NLG 15 million with quarterly payments of NLG 625,000
beginning October 1, 1999. Term Loan B provides for borrowings of NLG 10 million
with principal due at date of maturity (August 1, 2001). As of October 2, 1999,
the Company had outstanding indebtedness of NLG 24.1 million, or approximately
$11.8 million. The term loans bear interest at Euribor plus 1.75%. The Senior
Dutch Facility requires the Company to maintain certain financial covenants. The
Company is in compliance with all financial covenants as of October 2, 1999. The
facility is secured by substantially all of Welna's assets.


                                        5
<PAGE>   8
6.   LONG-TERM DEBT (CONTINUED)

     On July 1, 1999, the Company issued $15 million, or $13.3 million net of
discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes"), bearing interest at 12% and
maturing in 2006. The subordinated notes were issued with detachable warrants
that enable the holder to purchase up to 534,873 common shares at $7.54 per
share. The warrants are exercisable immediately and expire in 2006. The warrants
or warrant shares also feature a put option that allows the holder to put up to
1/3 of the warrants or warrant shares each year at fair market value beginning
in year five and expiring in year ten. The Company has an option to terminate
the obligation to repurchase the warrants or warrant shares for a total fee not
to exceed $2.46 million. The warrants were recorded at fair value of $1,733,000
based on the Black-Scholes valuation model, which has been recorded as a
liability, and a related discount on the senior subordinated debt was recorded
for the same amount. This discount will be amortized over the seven-year term of
the subordinated notes as additional interest expense. The liability will be
adjusted to the fair value of the warrants in future periods not to exceed $2.46
million. At October 2, 1999, the liability was reduced by $909,000 to $824,000.
This change has been recorded as a separate line item on the consolidated
statement of operations. The proceeds from the subordinated notes issuance were
used in the funding of the acquisition of Welna. The subordinated notes require
the Company to maintain certain financial covenants. As of October 2, 1999, the
Company is in compliance with all covenants.

7.     ACQUISITIONS

       On September 3, 1999, the Company acquired 67.5% of the issued and
outstanding stock of Manantial Chile S.A. ("Manantial"), a company that designs,
equips, installs and commissions industrial and municipal water and wastewater
treatment plants and systems for approximately $1.1 million in cash and 27,199
shares of common stock valued at $213,000.

       In addition, on November 11, 1999, the Company acquired all of the issued
and outstanding stock of HP Valves, a valve manufacturer located in Oldenzaal,
The Netherlands for NLG 6 million, or approximately $2.8 million in cash, and
108,500 shares of common stock valued at $472,000.

       Both of the acquisitions described above were accounted for under the
purchase method of accounting whereby the assets and liabilities were adjusted
to their estimated fair value at the acquisition date.

       In connection with the July 1, 1999 acquisition of Welna N.V., a Dutch
company listed on the Official Market of the Amsterdam Stock Exchange, the
Company has adjusted the preliminary estimates of the fair market value of the
purchased assets and liabilities resulting in a NLG 1.5 million or $715,000
decrease in goodwill.

8.     RESTRUCTURING OF OPERATIONS

       On October 11, 1999, the Company announced the restructuring of certain
operations, including the closure of the Conroe plant facility. In connection
with this restructuring plan, the Company recognized a $1.4 million charge in
the first quarter relating primarily to severance. The restructuring plan should
be fully implemented by January 2000 and will result in approximately $1.6
million of additional second quarter charges.


                                        6
<PAGE>   9
9.     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
two of the Company's subsidiaries, Containment Solutions, Inc. and Ershigs, Inc.
to purchase at least 90% of their fiberglass requirements from the supplier. The
contract expired on December 31, 1998. Effective January 1, 1999, the contract
was modified to obtain more favorable pricing levels based on certain minimum
volume purchases for the calendar years ending December 31, 1999 and 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.

10.    SEGMENT DATA

       The Company has adopted Statement of Financial Accounting Standards No.
131 - "Disclosures About Segments of an Enterprise and Related Information" that
requires disclosure of financial and descriptive information about the Company's
reportable operating segments. The operating segments presented are the segments
of the Company for which separate financial information is available and
operating performance is evaluated regularly by senior management in deciding
how to allocate resources and in assessing performance. The Company evaluates
the performance of its operating segments based on revenues and operating
income.

       The Company operates in two industry segments: Containment Solutions and
Specialty Solutions. The Containment Solutions segment specializes in the
manufacture of fiberglass underground storage tanks and steel reinforced
aboveground storage tanks for fluids handling. The Specialty Solutions segment
provides engineered solutions for the containment of fluids, specializes in
fiberglass reinforced plastic products for corrosion resistant applications and
engineered metal products for the municipal and industrial markets. For fiscal
1999, except for certain revenues with respect to license agreements with
manufacturers located outside of the United States, which revenues are not
material as considered in relation to the Company's total net revenues, the
Company operated in only one geographic segment, the United States. Beginning in
fiscal year 2000, the Company, through its Welna and Manantial subsidiaries, has
global operations, with a primary concentration in Europe. These subsidiaries
are reported as an additional segment for segment reporting. All intersegment
net revenues and expenses are immaterial and have been eliminated in computing
net revenues and operating income.


                                        7
<PAGE>   10
10.    SEGMENT DATA (CONTINUED)

       The following is a summary of the industry segment data for the three
months ended September 26, 1998 and October 2, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                Net        Operating
                                              Revenues      Income
                                            -----------   ------------
<S>                                           <C>         <C>
Three months ended September 26, 1998:

Containment Solutions ......................  $23,233       $ 2,267
Specialty Solutions ........................   12,302           747
Corporate ..................................       --          (437)
                                              -------       -------
Consolidated ...............................  $35,535       $ 2,577
                                              =======       =======

Three months ended October 2, 1999:

Containment Solutions ......................  $17,753       $ 1,730
Specialty Solutions ........................   15,410         1,058
International ..............................   15,203           894
Corporate ..................................       --          (520)
Restructuring charge - International .......       --          (900)
Restructuring charge - Containment Solutions       --          (500)
                                              -------       -------
Consolidated ...............................  $48,366       $ 1,762
                                              =======       =======
</TABLE>

       Operating income reconciles to income before income taxes as shown on
the consolidated statements of operations as follows (in thousands):

<TABLE>
<CAPTION>
                                September 26,    October 2,
                                    1998           1999
                                -------------   ----------
<S>                            <C>              <C>
Total segment operating income    $ 2,577         $ 1,762
Interest expense                      654           2,114
Interest income                       (12)           (125)
Other income, net                    (138)            (64)
Put warrant valuation adjustment       --            (909)
                                  -------         -------
Income before income taxes        $ 2,073         $   746
                                  =======         =======
</TABLE>

11.    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.


                                       8
<PAGE>   11

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 eleven 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.

Containment Products Group - "Containment Solutions"

       The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite UST business of Owens
Corning.

       In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover Containment, Inc. ("Hoover"), a manufacturer of steel
rectangular ASTs. 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.

       In November 1998, the Company acquired Plasti-Fab, Inc., a leader in
providing fiberglass-reinforced flumes and metering stations to the water and
wastewater industries. These three businesses form the Company's Containment
Products Group known as Containment Solutions.

Engineered Products Group - "Specialty Solutions"

       In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered FRP products, as the first of the Company's
Engineered Products Group.

       In October 1997, the Company acquired SEFCO Inc. ("SEFCO"), a
manufacturer of engineered field-erected aboveground steel tanks, and also
acquired GL&V/LaValley Industries, Inc. ("LaValley") (subsequently named
"Ershigs Biloxi"), a manufacturer of engineered FRP products.

       In May 1998, the Company acquired CC&E, a leading North American field
constructor of fiberglass-reinforced plastic products and integrated the
operations into Ershigs.

       In June 1998, the Company acquired Fibercast Company, a leading
manufacturer of fiberglass-reinforced plastic piping systems specializing in
highly corrosive environments.

       In February 1999, the Company acquired Belco Manufacturing Company, Inc.
and certain assets and assumed certain liabilities of S. Jones Limited
Partnership (collectively "Belco"). Belco manufactures engineered
fiberglass-reinforced plastic tanks, vessels and piping systems. Belco's
products are sold primarily into the water/wastewater and oil and gas industries
where corrosion-resistant products are needed. Belco, Fibercast, Ershigs and
SEFCO form the Company's Engineered Products Group known as Specialty Solutions.


                                        9
<PAGE>   12
       On July 1, 1999, the Company acquired Welna, N.V., a company which
operates through two divisions. Welna Synthetics designs, manufactures, and
installs all forms of FRP pipe systems, vessels and other related equipment
requiring high levels of corrosion resistance. Welna Trade is a distribution
operation that specializes in high quality products and engineered systems for
power generation, water treatment, and paper and chemical processing industries.
Welna's operations had no effect on the Company's operating results for fiscal
year 1999. Welna's balance sheet has been consolidated as of July 3, 1999.

     On September 3, 1999, the Company acquired 67.5% of the issued and
outstanding stock of Manantial Chile S.A., a company that designs, equips,
installs and commissions industrial and municipal water and wastewater treatment
plants and systems for approximately $1.1 million in cash and 27,199 shares of
common stock valued at $213,000.

RESULTS OF OPERATIONS

Three months ended October 2, 1999 compared with three months ended
September 26, 1998

       Net revenues increased $12.9 million, or 36%, to $48.4 million in the
first quarter of fiscal 2000 from $35.5 million in the same quarter of fiscal
1999. Net revenues increased a total of $18.4 million in the fiscal 2000 period
from the inclusion of Welna (acquired on July 1, 1999), Belco (acquired in
February 1999), and Plasti-Fab (acquired in November 1998). The remaining $5.5
million decrease in revenues resulted primarily from a $6.5 million decrease in
revenues at Containment Solutions from $23.3 million in the fiscal 1999 period
to $16.8 million in the fiscal 2000 period due to less demand in the petroleum
equipment industry. The decrease in demand is the result of the majority of tank
owners having met the 1999 Environmental Protection Agency deadline mandating
upgrades or replacement of all underground storage tanks. Due to this market
shift, the Company on October 11, 1999 announced a cost reduction plan designed
to reduce operating expenses by $4.5 million annually. The plan includes the
closure of a domestic manufacturing facility and the elimination of related
personnel and overhead costs and the integration of other businesses to improve
operating and administrative efficiencies. This decrease at Containment
Solutions was offset by increased revenues at Specialty Solutions of
approximately $1.0 million.

       Gross profit increased $3.6 million, or 41%, to $12.4 million in the
fiscal 2000 period from $8.8 million in the fiscal 1999 period. $5.0 million of
the increase was related to the addition of Welna, Belco and Plasti-Fab. This
increase was offset by a $1.4 million decrease in gross profit at Containment
Solutions. Gross margin for the Company increased to 25.6% from 24.7% in the
prior year quarter due to the inclusion of Welna with gross margins of 29.4%.

       Selling, general and administrative expenses increased $3.0 million to
$9.2 million in the first quarter of fiscal 2000 from $6.2 million in the same
period last year. The increase is primarily attributable to additional expenses
associated with Welna, offset by decreases in sales and marketing expenses at
Containment Solutions. Selling, general and administrative expenses as a
percentage of net revenues increased to 19.0% from 17.4% in the prior fiscal
period.

       The Company recognized a $1.4 million restructuring charge in the first
quarter of fiscal 2000 in connection with its restructuring plan. See Note 8 of
the Notes to the Consolidated Financial Statements for further discussion.

       The Company's fiscal 2000 provision for income taxes differs from the
U.S. statutory rate due to the put warrant valuation adjustment, state income
taxes and other permanent differences. The Company's fiscal 1999 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 attributable to common stock
decreased from $1,285,000 in the prior fiscal year period to $734,000 in the
current fiscal year period. Earnings per share decreased 52%, excluding the
restructuring charge and put warrant valuation adjustment, from $.27 in the
fiscal 1999 period to $.13 in the fiscal 2000 period on a diluted basis.


                                       10
<PAGE>   13
LIQUIDITY AND CAPITAL RESOURCES

       Working capital at October 2, 1999 was $25.7 million, as compared to
$17.8 million at July 3, 1999. Cash used by operating activities for the three
months ended October 2, 1999 was $7.2 million compared to cash provided by
operating activities of $539,000 for the same period last year. The decrease in
cash provided by operating activities is primarily a result of an increase in
accounts receivable due to a delay in collection of several major customers into
October and a decrease in accounts payable due to timing of vendor payments
along with a decrease in volume at Containment Solutions. Capital expenditures
were $1.6 million and $395,000 for the three months ended October 2, 1999 and
September 26, 1998, respectively.

       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 $75
million, including a $35 million acquisition term loan. As of October 2, 1999,
the Company had outstanding indebtedness of $36.8 million under the term loans
and $18.5 million under the revolving lines of credit. As of November 10, 1999,
the balance of the revolving credit line had been reduced by $3.3 million to
$15.2 million, primarily as a result of increased collections of accounts
receivable in October. Borrowings under this Credit Facility are secured by
liens on substantially all of the Company's assets. See Note 6 of Notes to the
Consolidated Financial Statements for certain information regarding the Credit
Facility. The revolving credit facility and term loan provide for borrowings, at
the Company's option, at either the bank's prime rate plus a margin of 1.75% or
varying rates of LIBOR plus 3.0%. The acquisition term loan provides for
borrowings, at the Company's option, at either the bank's prime rate plus a
margin of 2.25%, or at varying rates of LIBOR plus 3.5%. The Credit Facility has
a five-year term expiring in January 2004.

       This senior credit facility provides availability for letters of credit
up to $10.0 million subject to availability of borrowing capacity under the
revolving credit notes. As of October 2, 1999, the Company had $1.5 million of
letters of credit outstanding. The senior credit facility requires the Company
to maintain certain financial covenants and requires an annual fee of .50% on
the unused portion of the revolving credit notes and .75% on the unused portion
of the acquisition term loan. The Company was not in compliance with certain
financial covenants at October 2, 1999 and has obtained a waiver through the
first quarter. The Company anticipates that it may be necessary to obtain a
similar waiver for the second quarter. The Company is in discussions with its
lenders to amend the current facility's future financial covenants. These
negotiations are expected to be finalized by January 2000.

       In June 1999, the Company entered into a new senior credit facility with
two Netherlands financial institutions ("Senior Dutch Facility") to finance the
acquisition of Welna. The new Senior Dutch Facility provides for two term loans
for a total facility of Dutch guilders (NLG) 25 million. Term Loan A provides
for borrowings of NLG 15 million with quarterly payments of NLG 625,000
beginning October 1, 1999. Term Loan B provides for borrowings of NLG 10 million
with principal due at date of maturity (August 1, 2001). As of October 2, 1999,
the Company had outstanding indebtedness of NLG 24.1 million, or approximately
$11.8 million. The term loans bear interest at Euribor plus 1.75%. The Senior
Dutch Facility requires the Company to maintain certain financial covenants. The
Company is in compliance with all financial covenants as of October 2, 1999. The
facility is secured by substantially all of Welna's assets.


                                       11
<PAGE>   14
     On July 1, 1999, the Company issued $15 million or $13.3 million net of
discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes") bearing interest at 12% and
maturing in 2006. The subordinated notes were issued with detachable warrants
that enable the holder to purchase up to 534,873 common shares at $7.54 per
share. The warrants are exercisable immediately and expire in 2006. The warrants
or warrant shares also feature a put option that allows the holder to put up to
1/3 of the warrants or warrant shares each year at fair market value beginning
in year five and expiring in year ten. The Company has an option to terminate
the obligation to repurchase the warrants or warrant shares for a total fee not
to exceed $2.46 million. The warrants were recorded at fair value of $1,733,000
based on the Black-Scholes valuation model, which has been recorded as a
liability, and a related discount on the senior subordinated debt was recorded
for the same amount. This discount will be amortized over the seven-year term of
the note as additional interest expense. The liability will be adjusted to the
fair value of the warrants in future periods not to exceed $2.46 million. The
proceeds from the subordinated debt issuance were used in the funding of the
acquisition of Welna. At October 2, 1999, the liability was reduced by $909,000
to $824,000. This change has been recorded as a separate line item on the
consolidated statement of operations. The subordinated notes require the Company
to maintain certain financial covenants. The Company is in compliance with all
financial covenants as of October 2, 1999.

       The Company also assumed approximately $15 million in debt, net of cash
acquired, with the acquisition of Welna on July 1, 1999. The debt bears interest
at an average of approximately 4.2% and consists primarily of lines of credit
facilities which are due on demand with various financial institutions.

       The Company's capital requirements have primarily related to acquisitions
of businesses in the critical fluids handling industry. The Company has made
cash payments net of cash acquired for acquisitions of approximately $95.5
million in the aggregate since inception in December 1994. The source of this
cash primarily has been bank debt along with proceeds from the sale of idle
assets and use of cash provided by operations. The Company intends to focus on
debt reduction and the integration of its prior and recent acquisitions for the
remainder of fiscal year 2000.

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 has completed the assessment of its computer software,
hardware and other systems, including embedded technology, relative to year 2000
compliance. The Company's domestic operations have completed the updating of
their software and hardware systems to improve the efficiency of their business
information systems. The Company's foreign subsidiaries are currently updating
their software and hardware in order to improve the timeliness and quality of
their business information systems. A byproduct of these improvements includes
year 2000 compliance software in certain operating subsidiaries that otherwise
are not year 2000 compliant today. Software selection at these subsidiaries has
been completed and implementation has begun with anticipated completion ranging
from October 1999 to December 1999. With this schedule, the year 2000 issue is
not expected to pose significant operational problems for the Company's computer
systems. Because conversions for business reasons are leading to year 2000
compliance, the Company does not expect incremental expense for year 2000
compliance.

       The Company has completed its assessment of key vendors, customers and
other third parties and based on this assessment, the Company does not
anticipate that year 2000 issues will have a material impact on the Company's
operations or financial results. With respect to suppliers, the Company relies
on several key suppliers for resin and fiberglass used in its operations, and
interruptions in these suppliers' operations resulting from year 2000 problems
could impact the Company's operations and financial results. However, there are
alternative suppliers for these materials, and the Company anticipates that it
would be able to obtain sufficient raw materials to continue to conduct its
business.


                                       12
<PAGE>   15
       Because the Company anticipates that it will complete its year 2000
remediation efforts in advance of December 31, 1999, it has not made any
contingency plans with respect to its operations and systems. However, if the
software changes and modifications of existing software are not made, or are not
completed timely, the year 2000 issue could have a material impact on the
operations of the Company. With respect to key suppliers, the Company has begun
to identify potential alternative suppliers of raw materials in the event that
its key suppliers suffer business interruptions as a result of year 2000
problems.

EURO CONVERSION

       On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Company is
currently evaluating issues raised by the introduction and initial
implementation of the Euro on January 1, 2002. The Company does not expect costs
of system modifications to be material, nor does it expect the introduction and
use of the Euro to materially and adversely affect its financial condition or
results of operations. The Company will continue to evaluate the impact of the
Euro introduction.


                                       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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates. Refer to
the Company's Form 10-K for the fiscal year ended July 3, 1999 for a detailed
discussion of these risks.


                                       14
<PAGE>   17
                           PART II. OTHER INFORMATION



ITEM 1.           LEGAL PROCEEDINGS

         Not applicable

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

         Not applicable

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

         A shareholder who wishes to make a proposal at the 2000 Annual Meeting
of Shareholders without complying with the requirements of Rule 14a-8 (and
therefore without including the proposal in the Company's proxy materials) under
the Securities Exchange Act of 1934, as amended, should notify the Company's
Secretary, at the Company's principal executive offices, of that proposal by
August 6, 2000. If a shareholder fails to give notice by that date, then the
persons named as proxies in the proxy cards solicited by the Company's Board of
Directors for that meeting will be entitled to vote the proxy cards held by them
regarding that proposal, if properly raised at the meeting, in their discretion.

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

         A.       Exhibits

                  27           Financial Data Schedule

         B.       Reports on Form 8-K

                  A Form 8-K/A was filed with the Commission on September 14,
                  1999. The Form 8-K/A reported the acquisition of Welna, N.V.
                  on July 1, 1999.


                                       15
<PAGE>   18

                                   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:             November 16, 1999        /s/ R. KEVIN ANDREWS
                                           -----------------------------------
                                           R. Kevin Andrews
                                           Chief Financial Officer
                                               (Principal Financial Officer and
                                                Principal Accounting Officer)


                                       16
<PAGE>   19

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit
Number                        Description
-------                       -----------
<S>               <C>
   27             Financial Data Schedule
</TABLE>




                                       17