<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 JANUARY 1, 2000

                                       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 January 31, 2000, the number of shares of common stock outstanding was
5,558,914.

<PAGE>   2



                               DENALI INCORPORATED
                 FORM 10-Q FOR THE QUARTER ENDED JANUARY 1, 2000

                                      INDEX


<TABLE>
<CAPTION>


                                                                             Page No.
                                                                             --------

<S>               <C>                                                        <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............................................    13


PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings .....................................    14

Item 2.           Changes in Securities and Use of Proceeds..............    14

Item 3.           Defaults Upon Senior Securities........................    14

Item 4.           Submission of Matters to a Vote of Security Holders....    14

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>
                                                                           January 1,       July 3,
                                                                             2000            1999
                                                                         ------------     ----------
                                                                          (Unaudited)       (Note)

<S>                                                                      <C>              <C>
                              ASSETS                                            (In thousands)
Current assets:
       Cash                                                              $      3,917   $      1,824
       Accounts receivable, net of allowances of
              $978,000 at January 1, 2000 and $1,419,000
              at July 3, 1999                                                  38,378         38,862
       Inventories                                                             25,671         26,175
       Prepaid expenses                                                         3,387          4,052
       Other receivables                                                           --          2,591
       Deferred tax assets                                                      1,164          1,135
                                                                         ------------   ------------
Total current assets                                                           72,517         74,639
Property, plant and equipment, net                                             47,443         46,938
Goodwill, net                                                                  52,590         50,651
Other assets                                                                    3,676          3,898
Assets held for sale                                                              249            449
                                                                         ------------   ------------
Total assets                                                             $    176,475   $    176,575
                                                                         ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                                  $     16,461   $     19,047
       Accrued liabilities                                                     12,609         15,777
       Lines of credit                                                         19,710         16,217
       Income taxes payable                                                       664          1,757
       Current maturities of long-term debt                                     4,044          4,030
       Long-term debt in technical default (Note 6)                            56,217             --
       Related party subordinated debt in technical default (Note 6)            3,999             --
                                                                         ------------   ------------
Total current liabilities                                                     113,704         56,828
Long-term debt, less current maturities                                        17,045         68,002
Related party subordinated debt                                                    --          3,980
Accrued pension costs                                                           1,958          2,109
Minority interest                                                               1,729          1,571
Deferred taxes                                                                  1,185          1,692
Other long-term liabilities                                                     2,725          3,824
Commitments and contingencies
Stockholders' equity:
       Common stock, $.01 par value
              Authorized shares - 30,000,000
              Issued and outstanding shares - 5,558,914 at
              January 1, 2000 and 5,423,215 at July 3, 1999                        56             54
       Additional paid-in capital                                              35,639         34,956
       Other accumulated comprehensive loss                                      (899)            --
       Retained earnings                                                        3,333          3,559
                                                                         ------------   ------------
Total stockholders' equity                                                     38,129         38,569
                                                                         ------------   ------------
Total liabilities and stockholders' equity                               $    176,475   $    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          Six months ended
                                                 -------------------------- --------------------------
                                                  January 1,   December 26,  January 1,   December 26,
                                                     2000          1998         2000          1998
                                                 ------------  ------------ ------------  ------------
                                                         (In thousands, except per share amounts)
<S>                                              <C>           <C>          <C>           <C>

Net revenues                                     $     49,555  $     38,353 $     97,921  $     73,888
Cost of revenues                                       37,541        28,213       73,541        54,982
                                                 ------------  ------------ ------------  ------------
Gross profit                                           12,014        10,140       24,380        18,906
Selling, general and administrative expenses           10,713         7,317       19,920        13,506
Non-recurring restructuring charge                      1,091            --        2,491            --
Non-recurring compensation expense                         --           682           --           682
                                                 ------------  ------------ ------------  ------------
Operating income                                          210         2,141        1,969         4,718
Interest expense                                        2,106           631        4,220         1,285
Interest income                                           (43)           --         (170)          (12)
Other expense (income), net                               (67)           31         (131)         (107)
Put warrant valuation adjustment                         (289)           --       (1,198)           --
                                                 ------------  ------------ ------------  ------------
Income (loss) before income taxes and
  minority interest                                    (1,497)        1,479         (752)        3,552
Income tax (benefit) expense                             (658)          563         (718)        1,351
                                                 ------------  ------------ ------------  ------------
Net income (loss) before minority interest               (839)          916          (34)        2,201
Minority interest                                         121            --          192            --
                                                 ------------  ------------ ------------  ------------
Net income (loss)                                $       (960) $        916 $       (226) $      2,201
                                                 ============  ============ ============  ============

Net income (loss) per common share - basic
  and diluted                                    $      (0.17) $       0.19 $      (0.04) $       0.45
                                                 ============  ============ ============  ============

Comprehensive income (loss):
  Net income (loss)                              $       (960) $        916 $       (226) $      2,201
  Currency translation adjustments                     (2,020)           --         (899)           --
                                                 ------------  ------------ ------------  ------------
  Comprehensive income (loss)                    $     (2,980) $        916 $     (1,125) $      2,201
                                                 ============  ============ ============  ============
</TABLE>
                            See accompanying notes.

                                       2
<PAGE>   5


                               DENALI INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                         Six  months ended
                                                                      -----------------------
                                                                      January 1,  December 26,
                                                                         2000         1998
                                                                      ----------  ------------
                                                                           (In thousands)
OPERATING ACTIVITIES:
<S>                                                                    <C>          <C>

Net income                                                             $  (226)     $ 2,201
Adjustments to reconcile net income to net cash
   provided by operating activities:
       Depreciation                                                      2,426        1,154
       Amortization                                                      1,057          355
       Deferred tax                                                       (245)          --
       Put warrant valuation adjustment                                 (1,198)          --
       Provision for losses on accounts receivable                          50          159
       Gain on disposal of property, plant and equipment and
           assets held for sale                                           (280)          --
       Changes in operating assets and liabilities:
              Accounts receivable                                        1,624       (3,095)
              Inventories                                                1,816       (1,616)
              Prepaid expenses                                           3,409         (280)
              Other assets and liabilities                                 382         (149)
              Accounts payable                                          (2,998)       1,914
              Accrued liabilities                                       (4,641)         573
              Income tax receivable/payable                             (1,076)        (644)
                                                                       -------      -------
Net cash provided by operating activities                                  100          572
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired                                      (3,745)      (1,757)
Purchases of property, plant and equipment                              (3,045)      (1,166)
Proceeds from sale of property, plant and equipment and
   assets held for sale                                                    503           --
                                                                       -------      -------
Net cash used in investing activities                                   (6,287)      (2,923)

FINANCING ACTIVITIES:
Net borrowings under revolving lines of credit                           6,468        2,915
Net borrowings (repayments) on term notes and other long-term debt       1,955         (581)
                                                                       -------      -------
Net cash provided by financing activities                                8,423        2,334

Effect of exchange rate changes on cash                                   (143)          --
                                                                       -------      -------
Increase (decrease) in cash                                              2,093          (17)
Cash at beginning of period                                              1,824          175
                                                                       -------      -------
Cash at end of period                                                  $ 3,917      $   158
                                                                       =======      =======
</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>

                                                                              January 1, 2000        July 3, 1999
                                                                              ---------------        ------------
<S>                                                                           <C>                     <C>
       Finished goods                                                           $   10,179            $   10,546
       Raw materials                                                                 9,127                 8,672
       Work in process                                                               6,365                 6,957
                                                                                ----------            ----------
                                                                                $   25,671            $   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               Six Months Ended
                                                       ---------------------------     ----------------------------
                                                       January 1,     December 26,      January 1,     December 26,
                                                          2000            1998             2000            1998
                                                       -----------    -------------    -----------     -----------
                                                                        (Share data in thousands)
<S>                                                    <C>            <C>              <C>             <C>
Weighted average common shares outstanding                 5,520           4,853            5,476          4,841
Dilutive securities - employee stock options                   -               -                -              4
                                                         -------         -------          --------        ------
Weighted average common shares outstanding
   assuming full dilution                                  5,520           4,853            5,476          4,845
                                                         =======         =======          =======         ======
</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 six months ended
January 1, 2000, the Company had a foreign currency translation loss of $899,000
which is recorded as comprehensive loss and is classified as a separate
component of stockholders' equity.

5.   INCOME TAXES

     The Company's provision for income taxes for the three months and six
months ended January 1, 2000 differs from the U.S. statutory rate primarily due
to the put warrant valuation adjustment which is not taxable, non-deductible
goodwill amortization and other permanent differences.

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 January 1, 2000, the Company
had outstanding indebtedness of $18.0 million under the term loan, $13.5 million
under the revolving lines of credit and $18.3 million under the acquisition term
loan. 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 January 1, 2000, the Company had $1.7 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 senior credit facility is secured by
substantially all of the assets of the Company's subsidiaries.

     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 January 1, 2000, the liability had been reduced by $1,198,000 to
$535,000. 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.

                                       5
<PAGE>   8

6.   LONG-TERM DEBT (CONTINUED)

     As a result of the lower than expected operating results during the first
six months of fiscal 2000, the Company was not in compliance with certain of the
financial covenants in both its senior credit facility and its senior
subordinated notes as of January 1, 2000. The Company has requested that its
lenders provide waivers or amendments of the applicable covenants as of January
1, 2000, but has not yet obtained such waivers. In addition, the Company
anticipates that it will not be in compliance with certain of its financial
covenants as of March 31, 2000. Because of the existing technical defaults and
because of the anticipated technical defaults in March, the Company has
classified $56,217,000 of its long-term debt as current liabilities at January
1, 2000. The Company expects to resolve this situation by raising additional
equity to reduce its current borrowings. The Company does not anticipate that
its lenders will accelerate the maturity of the loans or discontinue the current
revolving credit facility. However, if these events were to occur or if the
Company is not successful in raising additional equity, the Company may be
required to seek alternative financing or other remedies.

     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 January 1, 2000,
the Company had outstanding indebtedness of NLG 24.3 million, or approximately
$11.1 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 January 1, 2000. The
facility is secured by substantially all of Welna's assets.

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 $2.8 million in cash, assumption of $1.4 million of debt,
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 formerly 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 750,000 or approximately
$350,000 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 manufacturing facility. In
connection with this restructuring plan, the Company accrued and recorded as
expense $2,276,000 of involuntary termination benefits covering 96 employees.
These costs, incurred during the first six months of fiscal 2000, are included
in the non-recurring restructuring charge totaling $2,491,000 which is recorded
as a separate line item on the consolidated statement of operations. These
termination benefits are related to employee terminations associated with the
Conroe manufacturing facility closure and workforce reductions associated with
the consolidation and reduction of selling, general and administrative support
in the U.S. and European operations. As of January 1, 2000, termination benefits
totaling $1,965,000 for 70 employees had been paid and charged against this
liability. Certain costs associated with this plan had not yet been incurred as
of January 1, 2000 and will result in additional charges in the remaining months
of fiscal 2000.

                                       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, operating income
and working capital efficiencies.

     In fiscal year 1999, the Company operated 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 above ground 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 six months
ended December 26, 1998 and January 1, 2000 (in thousands):

<TABLE>
<CAPTION>

                                                             Net      Operating
                                                          Revenues     Income
                                                          ---------   ---------
<S>                                                       <C>         <C>
Six months ended December 26, 1998:

Containment Solutions .............................       $48,570       $ 4,801
Specialty Solutions ...............................        25,318         1,559
Corporate .........................................            --          (960)
Non-recurring compensation charge .................            --          (682)
                                                          -------       -------
Consolidated ......................................       $73,888       $ 4,718
                                                          =======       =======

Six months ended January 1, 2000:

Containment Solutions .............................       $34,007       $ 2,809
Specialty Solutions ...............................        30,496         1,366
International .....................................        33,418         1,589
Corporate .........................................            --        (1,304)
Restructuring charge - Containment Solutions ......            --          (500)
Restructuring charge - International ..............            --        (1,390)
Restructuring charge - Corporate ..................            --          (601)
                                                          -------       -------
Consolidated ......................................       $97,921       $ 1,969
                                                          =======       =======
</TABLE>

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

<TABLE>
<CAPTION>

                                                   December 26,     January 1,
                                                       1998            2000
                                                   ------------     ----------
<S>                                                <C>              <C>
Total segment operating income                       $ 4,718          $ 1,969
Interest expense                                       1,285            4,220
Interest income                                          (12)            (170)
Other income, net                                       (107)            (131)
Put warrant valuation adjustment                          --           (1,198)
                                                     -------          -------
Income (loss) before income taxes                    $ 3,552          $  (752)
                                                     =======          =======
</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 twelve 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.

     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 $2.8 million in cash, assumption of $1.4 million of debt, and
108,500 shares of common stock valued at $472,000.

RESULTS OF OPERATIONS

Three months ended January 1, 2000 compared with three months ended December 26,
1998

     Net revenues increased $11.2 million, or 29.2%, to $49.6 million in the
second quarter of fiscal 2000 from $38.4 million in the same quarter of fiscal
1999. Net revenues increased a total of $20.9 million in the fiscal 2000 period
from the inclusion of the new acquisitions (Welna, Manantial, HP Valves, Belco
and Plasti-Fab). The remaining $9.7 million decrease in revenues resulted
primarily from a decrease in revenues at Containment Solutions from $25.0
million in the fiscal 1999 period to $15.2 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 1998 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.

     Gross profit increased $1.9 million, or 18.5%, to $12.0 million in the
fiscal 2000 period from $10.1 million in the fiscal 1999 period. $5.7 million of
the increase was related to the addition of the international operations, Belco
and Plasti-Fab. This increase was offset by a $3.2 million decrease in gross
profit at Containment Solutions and a $0.6 million decrease at Specialty
Solutions. Gross margin for the Company decreased to 24.2% from 26.4% in the
prior year quarter primarily due to the decrease in sales volume at Containment
Solutions, partially offset by the inclusion of Welna with gross margins of
28.3%.

     Selling, general and administrative expenses increased $3.4 million to
$10.7 million in the first quarter of fiscal 2000 from $7.3 million in the same
period last year. The increase is primarily attributable to additional expenses
associated with the new acquisitions, offset by decreases in sales and marketing
expenses at Containment Solutions. Selling, general and administrative expenses
as a percentage of net revenues increased to 21.6% from 19.1% in the prior
fiscal period, primarily due to the new acquisitions.

     The Company recognized a $682,000 non-recurring compensation charge in the
second quarter of fiscal 1999 related to a salary continuation agreement.

     The Company recognized a $1.1 million restructuring charge in the second
quarter of fiscal 2000 in connection with its restructuring plan. See Note 8 of
the Notes to the Consolidated Financial Statements for further discussion.

                                       10
<PAGE>   13

     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 decreased from $916,000 in the prior
fiscal year period to a loss of $(960,000) in the current fiscal year period.
Excluding the impact of the restructuring charge and warrant valuation
adjustments in fiscal year 2000, the net loss was $556,000, or $0.10 loss per
share, versus $0.28 earnings per share in fiscal year 1999, excluding the
non-recurring compensation charge.

Six months ended January 1, 2000 compared with six months ended December 26,
1998

     Net sales increased $24.0 million, or 32.5%, to $97.9 million in the first
six months of fiscal 2000 from $73.9 million in the same period of fiscal 1999.
A total of $39.3 million of the increase resulted from the inclusion of the new
acquisitions (Welna, Manantial, HP Valves, Belco and Plasti-Fab). The remaining
$15.3 million decrease in sales primarily resulted from a $16.3 million decrease
in sales at Containment Solutions from $48.2 million in the fiscal 1999 period
to $31.9 million in the fiscal 2000 period due to less demand in the petroleum
equipment industry. The decrease at Containment Solutions was offset by an
increase at Specialty Solutions of approximately $1.0 million.

     Gross profit increased $5.5 million, or 29.0%, to $24.4 million in the
fiscal 2000 period from $18.9 million in the fiscal 1999 period. $10.8 million
of the increase was related to the new acquisitions. This increase was offset by
a $4.7 million decrease in gross profit at Containment Solutions and a $0.6
million decrease at Specialty Solutions. Gross margin for the Company decreased
to 24.9% from 25.6% in the prior year period primarily due to the decrease in
sales volume at Containment Solutions, partially offset by the inclusion of
Welna with gross margins of 28.8%.

     Selling, general and administrative expenses increased $6.4 million to
$19.9 million for the first six months of fiscal 2000 from $13.5 million in the
same period last year. The increase is primarily attributable to additional
expenses associated with the new acquisitions, offset by decreased sales and
marketing expenses at Containment Solutions and Specialty Solutions.

     The Company recognized a $682,000 non-recurring compensation charge in the
second quarter of fiscal 1999 related to a salary continuation agreement.

     The Company recognized a $2.5 million restructuring charge during the first
six months 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 loss in the first six months of fiscal 2000
was $(226,000), or $(0.04) per share, compared with net income of $2,201,000, or
$0.45 per share, in the prior year six month period. Excluding the impact of the
restructuring charge and warrant valuation adjustments, net income was $158,000,
or $0.03 earnings per share for the first six months of fiscal 2000 compared to
$2,624,000, or $0.54 earnings per share for the same period last year.

                                       11
<PAGE>   14

LIQUIDITY AND CAPITAL RESOURCES

     During the first six months of fiscal 2000, exclusive of acquisitions, the
Company's operating activities used $8.7 million of cash to reduce accounts
payable ($3.0 million), accrued liabilities ($4.6 million) and income taxes
($1.1 million). Decreases in accounts receivable, inventories and prepaid
expenses provided $6.8 million of cash. The Company borrowed $8.4 million with
the cash used primarily to conclude the purchase of HP Valves and Manantial and
for payments associated with restructuring operations and working capital
additions.

     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 January 1, 2000,
the Company had outstanding indebtedness of $36.3 million under the term loans
and $13.5 million 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 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 January 1, 2000, the Company had $1.7 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.

     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 January 1, 2000, the liability was reduced by
$1,198,000 to $535,000. 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.

     As a result of the lower than expected operating results during the first
six months of fiscal 2000, the Company was not in compliance with certain of the
financial covenants in both its senior credit facility and its senior
subordinated notes as of January 1, 2000. The Company has requested that its
lenders provide waivers or amendments of the applicable covenants as of January
1, 2000, but has not yet obtained such waivers. In addition, the Company
anticipates that it will not be in compliance with certain of its financial
covenants as of March 31, 2000. Because of the existing technical defaults and
because of the anticipated technical defaults in March, the Company has
classified $56,217,000 of its long-term debt as current liabilities at January
1, 2000. The Company expects to resolve this situation by raising additional
equity to reduce its current borrowings. The Company does not anticipate that
its lenders will accelerate the maturity of the loans or discontinue the current
revolving credit facility. However, if these events were to occur or if the
Company is not successful in raising additional equity, the Company may be
required to seek alternative financing or other remedies.

                                       12
<PAGE>   15

     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 January 1, 2000,
the Company had outstanding indebtedness of NLG 24.3 million, or approximately
$11.1 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 January 1, 2000. The
facility is secured by substantially all of Welna's assets.

     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 that 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 $98.1
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.

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.

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.

                                       13
<PAGE>   16

                           PART II. OTHER INFORMATION


ITEM 1.           LEGAL PROCEEDINGS

         Not applicable

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

     On September 3, 1999, the Company issued and sold 27,199 shares of its
common stock in a private transaction exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof as a transaction not
involving a public offering. These shares were issued to four persons who were
the owners of certain shares of stock of Manantial Chile S.A. The Company issued
these shares of common stock as partial consideration for the acquisition by the
Company of 67.5% of the issued and outstanding shares of Manantial Chile S.A.
These four persons were the only offerees in these transactions, and no public
solicitation was made. All offerees were provided access to relevant information
regarding the Company, and the share certificates issued to each of them contain
a restrictive legend prohibiting transfer of the shares in violation of federal
securities laws.

     On November 11, 1999, the Company issued and sold 108,500 shares of its
common stock in a private transaction exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof as a transaction not
involving a public offering. These shares were issued to one person who was the
owner of certain shares of stock of HP Valves. The Company issued these shares
of common stock as partial consideration for the acquisition by the Company of
all of the issued and outstanding shares of HP Valves. This one person was the
only offeree in these transactions, and no public solicitation was made. The
offeree was provided access to relevant information regarding the Company, and
the share certificate issued contained a restrictive legend prohibiting transfer
of the shares in violation of federal securities laws.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

     As of January 1, 2000, the Company was in default on the Total Leverage
Ratio, Maximum Senior Leverage Ratio, Total Minimum Interest Coverage, Maximum
Domestic Leverage Ratio and Maximum Senior Domestic Leverage Ratio covenants
with both its U.S. senior credit facility and senior subordinated note holders.

     In addition, as of January 1, 2000, the Company was in default on the
Minimum Domestic Interest Coverage covenant with its U.S. senior credit
facility, but not the senior subordinated note holders.

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

     The Company's Annual Meeting of Stockholders was held on October 25, 1999.
Matters voted upon at the Annual Meeting, and the results of the votes, are as
follows:

         1.       The election of three Class B directors to serve until the
                  2002 Annual Meeting.

<TABLE>
<CAPTION>
                                             No. of            No. of
                      Name                  Votes For      Votes Withheld
                  ------------              ---------      --------------
                  <S>                       <C>            <C>
                  Ernest H. Cockrell        4,554,343         4,900
                  Thomas D. Simmons, Jr.    4,554,843         4,400
                  Joel V. Staff             4,554,843         4,400
</TABLE>

                                       14
<PAGE>   17

         2.       To approve the 1999 Stock Incentive Plan.

<TABLE>
<CAPTION>

                   No. of            No. of          No. of           No. of
                  Votes For       Votes Against  Votes Abstaining   Non-Votes
                  ---------       -------------  ----------------   ----------
                  <S>             <C>            <C>                <C>
                  2,787,760           61,476         8,415          2,565,564
</TABLE>

         3.       To approve the appointment of Ernst & Young LLP as independent
                  certified public accountants for the Company for the fiscal
                  year ending July 1, 2000.

<TABLE>
<CAPTION>

                   No. of       No. of           No. of             No. of
                  Votes For  Votes Against  Votes Abstaining      Non-Votes
                  ---------  -------------  ----------------     ----------
                  <S>        <C>            <C>                  <C>
                  4,508,913      8,500          41,830             863,972
</TABLE>

ITEM 5.           OTHER INFORMATION

         Not applicable

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

         A.       Exhibits

                  10.70        Letter of  severance  agreement  between  Henk A.
                               Kroes and Welna N.V. dated October 4, 1999

                  10.71        Severance  Agreement  and  Release  and Waiver of
                               All  Claims  between Denali Incorporated and
                               Melford S. Carter, Jr. dated December 3, 1999

                  27           Financial Data Schedule

         B.       Reports on Form 8-K

                  None

                                       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:              February 15, 2000          /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 of Exhibit
------     ----------------------


<S>      <C>
10.70    Letter of severance agreement between Henk A. Kroes and Welna N.V.
         dated October 4, 1999

10.71    Severance   Agreement  and  Release  and  Waiver  of  All  Claims
         Between  Denali Incorporated and Melford S. Carter, Jr. dated
         December 3, 1999

27       Financial Data Schedule
</TABLE>

                                       17