================================================================================

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 JUNE 30, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-21513

---------------

DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

<Table>

TEXAS 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

7272 PINEMONT
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
</Table>

713/996-4700
(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 [ ]

---------------

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares outstanding of each of the issuer's classes of common
stock, as of August 10, 2001:

Common Stock: 4,071,685

================================================================================

2
ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
--------------- ----------
(UNAUDITED)

ASSETS
Current assets:
Cash............................................... $ 1,433 $ 2,744
Trade accounts receivable, net of allowance for
doubtful accounts of $1,908 and $1,888,
respectively.................................... 21,868 24,377
Inventory.......................................... 23,651 23,504
Prepaid expenses and other......................... 1,080 578
Deferred income taxes.............................. 916 1,308
------- -------
Total current assets....................... 49,948 52,511
Property, plant and equipment, net................... 9,261 9,314
Goodwill, net........................................ 2,508 2,547
Receivables from officers and employees.............. 1,266 811
Deferred income taxes................................ 1,491 1,388
Other assets......................................... 428 568
------- -------
Total assets............................... 63,902 67,139
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Trade accounts payable and accrued liabilities..... 19,831 18,498
Accrued wages and benefits......................... 1,134 999
Other accrued liabilities.......................... 1,065 661
Current portion of long-term debt.................. 8,211 9,675
------- -------
Total current liabilities.................. 30,241 29,833
Long-term debt, less current portion................. 24,441 28,476
Equity subject to redemption:
Series A preferred stock -- 1,122 shares........... 112 112
Shareholders' Equity:
Series A preferred stock, 1/10th vote per share;
$1.00 par value; liquidation preference of
$100 per share; 1,000,000 shares authorized;
2,992 shares issued and outstanding:............ 2 2
Series B convertible preferred stock, 1/10th vote
per share; $1.00 par value; $100 stated value;
liquidation preference of $100 per share;
1,000,000 shares authorized; 17,700 shares
issued, 15,000 shares outstanding and 2,700
shares in treasury stock........................ 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,257,760 shares issued and
4,071,685 shares are outstanding and 186,075
shares in treasury stock........................ 41 41
Paid-in capital.................................... 2,765 2,765
Retained earnings.................................. 8,176 7,786
Treasury stock..................................... (1,894) (1,894)
-------- -------
Total shareholders' equity................. 9,108 8,718
------- -------
Total liabilities and shareholders'
equity ................................. $63,902 $67,139
======= =======
</Table>

See notes to condensed consolidated financial statements.

2
3

DXP ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
-------------- -------------- -------------- -------------

Sales........................................ $ 45,696 $ 45,057 $ 92,586 $ 90,071
Cost of sales................................ 34,081 33,734 69,416 67,796
-------- -------- -------- --------
Gross profit................................. 11,615 11,323 23,170 22,275
Selling, general and administrative expenses. 10,531 10,437 20,894 20,901
-------- -------- -------- --------
Operating income............................. 1,084 886 2,276 1,374
Other income................................. 16 352 41 2,096
Interest expense............................. (669) (918) (1,453) (1,848)
--------- -------- --------- --------

Income before income taxes................... 431 320 864 1,622
Provision for income taxes................... 191 182 430 747
-------- -------- -------- --------
Net income................................... $ 240 $ 138 $ 434 $ 875
Preferred stock dividend..................... 22 23 45 45
-------- -------- -------- --------
Net Income attributable to common shareholders $ 218 $ 115 $ 389 $ 830
======== ======== ======== ========
Basic earnings per common share.............. $ .05 $ .03 $ .10 $ .20
-------- -------- -------- --------
Common shares outstanding.................... 4,072 4,077 4,072 4,077
-------- -------- -------- --------
Diluted earnings per share................... $ .05 $ .03 $ .10 $ .19
-------- -------- -------- --------
Common and common equivalent shares outstanding 4,503 4,078 4,076 4,684
-------- -------- -------- --------

See notes to condensed consolidated financial statements.

3
4
DXP ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
---------- ---------

OPERATING ACTIVITIES:
Net income......................................... $ 434 $ 875
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities
Depreciation and amortization.................. 707 1,029
Provision (benefit) for deferred income taxes.. 289 (62)
(Gain) on sale of property and equipment....... -- (1,976)
Changes in operating assets and liabilities:
Trade accounts receivable......... .......... 2,509 (1,310)
Inventories.................................. (147) (526)
Prepaid expenses and other................... (818) (80)
Accounts payable and accrued liabilities..... 1,870 2,648
---------- ----------
Net cash provided by operating activities.... 4,844 598

INVESTING ACTIVITIES:
Purchase of property and equipment............. (611) (667)
Net proceeds on the sale of assets............. -- 3,233
---------- ----------
Net cash provided by/(used in) investing
activities.................................... (611) 2,566

FINANCING ACTIVITIES:
Proceeds from debt.................................. 89,116 90,450
Principal payments on revolving line of credit,
long-term and subordinated debt, and notes
payable to bank.................................. (94,615) (95,169)
Dividends paid...................................... (45) (45)
---------- ----------
Net cash used in financing activities........ (5,544) (4,764)
---------- -----------

DECREASE IN CASH.................................... (1,311) (1.600)
CASH AT BEGINNING OF PERIOD......................... 2,744 2,991
========== ==========
CASH AT END OF PERIOD............................... $ 1,433 $ 1,391
========== ==========
</Table>

See notes to condensed consolidated financial statements.

DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. DXP Enterprises, Inc. (the "Company") believes
that the presentations and disclosures herein are adequate to make the
information not misleading. The condensed 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
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 2000, filed with
the Securities and Exchange Commission.

NOTE 2: THE COMPANY

DXP Enterprises, Inc. and subsidiaries (DXP or the Company), a Texas
corporation, was incorporated on July 26, 1996, to be the successor to SEPCO
Industries, Inc. (SEPCO). The Company is organized into two segments:
Maintenance, Repair and Operating (MRO) and Electrical Contractor.

NOTE 3: RECENT OPERATIONS AND LIQUIDITY

The Company sustained a net loss of approximately $7.4 million during
fiscal year 2000 primarily from non-recurring operating charges of $10.8
million. This operating loss coupled with a default on a subordinated note
payable caused the Company to be in violation of covenants under the Credit
Facility with its bank lender; consequently, the Company reclassified the
subordinated note and a portion of its debt under the Credit Facility to a
current liability in 2000, as well as at June 30, 2001 (see Note 6 below for
further discussion).

For first six months of 2001, the Company generated $864,000 in income
before taxes. Revenues and gross profit increased from the comparable period in
2000, resulting from improved sales and margins in its MRO segment (see
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" for further information). The Company was in compliance with its
financial covenants for the second quarter of 2001. In addition to $1.4 million
of cash on hand, the Company has approximately $4.3 million available for
additional borrowings under its Credit Facility at June 30, 2001.

NOTE 4: INVENTORY

The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 62 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:

<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(IN THOUSANDS)

Finished goods........... $ 25,779 $25,770
Work in process.......... 1,200 985
-------- -------
Inventories at FIFO...... 26,979 26,755
Less - LIFO allowance.... (3,328) (3,251)
--------- -------
Inventories.............. $ 23,651 $23,504
======== =======
</Table>

NOTE 5: DIVESTITURES

During the first six months of 2000, the Company sold two warehouse
facilities for approximately $3.5 million in cash. Gains of approximately $2.0
million were recorded as other income as a result of the sales.

NOTE 6: LONG-TERM DEBT

Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the Credit Facility.
The Credit Facility consists of three secured lines of credit with various
subsidiaries of the Company and a term loan.

Under the terms of the asset purchase agreement associated with the
acquisition of a MRO business in 1997, the Company can require the seller to
adjust the purchase price for certain inventory remaining unsold as of July 1,
2000. The Company notified the seller that the adjustment of the purchase price
exceeds the outstanding $2.0 million balance of the associated subordinated note
payable. As of July 1, 2000, the Company suspended principal and interest
payments on the note. The seller has notified the Company's bank lender that the
Company is in default on the subordinated note. The Company's bank lender
notified the Company that the default on the subordinated note caused the
Company to be in default on one of its secured lines of credit with an
outstanding balance of $3.9 million at June 30, 2001. However, the bank lender
agreed to forebear taking any action on defaults under the secured line of
credit. The bank lender can terminate this forbearance at anytime. The $3.9
million balance of the secured line of credit and the $2.0 million balance of
the subordinated note have been included in current maturities of long-term debt
at June 30, 2001.

In management's opinion, should payment of the $3.9 million balance of
the secured line of credit be demanded, the Company would be able to refinance
the obligation or liquidate it through the proceeds from asset sales or property
refinancing. During January, 2001, the Company filed suit against the seller to
collect the purchase price adjustment. In February, 2001, the seller filed a
counterclaim against the Company to collect the balance of the subordinated note
and accrued interest. The Company expects to attend a court mandated mediation
meeting during the third quarter of 2001. The Company intends to aggressively
pursue the Company's claims against the seller under the provisions of the asset
purchase agreement. The subordinated note provides for an interest rate of prime
plus 4% if the note is in default. The Company did not accrue interest or
penalty interest on the subordinated note for the six months ended June 30,
2001. Management believes the subordinated note will either be paid off using
funds obtained from the seller in settlement of the Company's claims or the
subordinated note will be offset against its claims. However, there can be no
assurance that the Company will be successful in collecting the funds due under
its claims or in offsetting the subordinated note against its claims.

During August of 2001, the Company and its bank amended the Credit
Facility effective August 14, 2001, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $35.0 million, and matures April 1, 2004,
except for the $3.9 million balance of the $5.8 million secured line of credit
which is in default and callable at anytime. Interest accrues at prime plus 1/2%
on approximately $19 million of the Credit Facility, prime plus 1 1/2% on the
$5.8 line of credit which is in default, and prime plus 1 1/2 % on the term
portion ($9.3 million at June 30, 2001) of the Credit Facility. The prime rate
at June 30, 2001, was 6.75%. The Credit Facility is secured by receivables,
inventory, real estate and machinery and equipment. The Credit Facility contains
customary affirmative and negative covenants as well as financial covenants that
are measured monthly and require the Company to maintain a certain cash flow and
other financial ratios. The Company from time to time has not been in compliance
with certain covenants under the Credit Facility including the minimum earnings
requirement and the fixed charge coverage ratio. At June 30, 2001, the Company
was in compliance with these covenants. In addition to the $1.4 million of cash
on hand at June 30, 2001 the Company had $4.3 million available for borrowings
under the amended credit facility at June 30, 2001. Although the Company expects
to be able to comply with the covenants, including the financial covenants, of
the Credit Facility, there can be no assurance that in the future the Company
will be able to do so or that the lender will be willing to waive such
non-compliance or further amend such covenants.

NOTE 7: EARNINGS PER SHARE DATA

The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
-------------- -------------- ------------- ------------

Basic:
Average shares outstanding 4,071,685 4,076,618 4,071,685 4,076,618
Net income attributable to common shareholders $ 218,000 $ 115,000 $ 389,000 $ 830,000
Per share amount $ .05 $ .03 $ .10 $ .20

Diluted:
Average shares outstanding 4,071,685 4,076,618 4,071,685 4,076,618
Net effect of dilutive stock options--
Based on the treasury stock method 11,235 1,219 4,485 187,797
Assumed conversion of Class B convertible
Preferred stock 420,000 -- -- 420,000
----------- -------------- ------------ -----------
Total 4,502,920 4,077,837 4,076,170 4,684,415
Net income for diluted earnings per share $ 240,000 $ 115,000 $ 389,000 $ 875,000
Per share amount $ .05 $ .03 $ .10 $ .19

</Table>

For the three months ended June 30, 2000, and the six months ended June 30,
2001, the Class B convertible preferred stock is anti-dilutive and is excluded
from the computation of diluted earnings per share.

NOTE 8: SEGMENT REPORTING

The MRO Segment is engaged in providing maintenance, repair and
operating products, equipment and integrated services, including engineering
expertise and logistics capabilities, to industrial customers. The Company
provides a wide range of MRO products in the fluid handling equipment, bearings,
power transmission equipment, general mill, safety supply and electrical
products categories. The Electrical Contractor segment sells a broad range of
electrical products, such as wire conduit, wiring devices, electrical fittings
and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps,
tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors. The
Company began offering electrical products to electrical contractors following
its acquisition of the assets of two electrical supply businesses in 1998.

All business segments operate primarily in the United States.

The high degree of integration of the Company's operations necessitates
the use of a substantial number of allocations and apportionments in the
determination of business segment information. Sales are shown net of
intersegment eliminations.

Financial information relating the Company's segments is as follows:

<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------
ELECTRICAL ELECTRICAL
MRO CONTRACTOR TOTAL MRO CONTRACTOR TOTAL
--- ----------- ----- --- ---------- -----

2001
Sales $ 42,964 $ 2,732 $ 45,696 $ 86,922 5,664 $ 92,586
Operating income (loss) 1,276 (192) 1,084 2,593 (317) 2,276

2000
Sales $ 41,949 $ 3,108 $ 45,057 $ 84,172 5,899 $ 90,071
Operating income (loss) 1,025 (139) 886 1,575 (201) 1,374
</Table>

7
8

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

RESULTS OF OPERATIONS

Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000

SALES. Revenues for the quarter ended June 30, 2001, increased $0.6
million, or 1.4%, to approximately $45.7 million from $45.1 million in 2000.
Sales for the MRO Segment increased $1.0 million, or 2.4%, primarily due to an
improvement in the oil and gas industry. Sales for the Electrical Contractor
segment decreased by $0.4 million, or 12.1%, for the current quarter when
compared to same period in 2000. This decrease in sales is the result of a slow
down in the construction business for electrical contractors.

GROSS PROFIT. Gross profit as a percentage of sales increased by
approximately 0.3% for the second quarter of 2001, when compared to the same
period in 2000. This increase can be primarily attributed to increased margins
in fluid handling equipment sold by the MRO segment. Gross profit as a
percentage of sales for the Electrical Contractor segment decreased to 21.4% in
the three months ended June 30, 2001, down from 23.1% in the comparable period
of 2000. This decline resulted from lower margin sales associated with a slow
down in the construction business for electrical contractors.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the quarter ended June 30, 2001, increased by
approximately $0.1 million when compared to the same period in 2000. This 0.9%
increase is consistent with the 1.4% increase in sales between the two periods.
As a percentage of revenue, the 2001 expense declined by approximately 0.1% to
23.1% from 23.2% for 2000. This decrease is primarily attributable to sales
increasing by a greater percentage than expenses increased.

OPERATING INCOME. Operating income for the second quarter of 2001
increased $0.2 million when compared to the same period in 2000. This increase
is the net of a $0.3 million increase in operating income for the MRO Segment
and a $0.1 million increase in the operating loss for the Electrical Contractor
Segment. The improved operating income for the MRO segment is the result of
increased sales and gross profit combined with reduced selling, general and
administrative expenses. The increased loss for the Electrical Contractor
Segment is the result of lower gross margins, partially offset by reduced
amortization expense due to the write-off of intangibles in the fourth quarter
of 2000.

INTEREST EXPENSE. Interest expense for the quarter ended June 30, 2001
decreased by $0.2 million to $0.7 million from $0.9 million during the same
period in 2000. This decline results from lower interest rates as well as a
lower average debt balance for the second quarter of 2001 when compared to the
second quarter of 2000.

OTHER INCOME. Other income was approximately $0.3 million lower in 2001
than in 2000 due to a $0.3 million gain on the sale of a warehouse facility
during 2000.

INCOME TAXES. The effective tax rate for the quarter ended June 30,
2001, of 44% decreased from 57% for the same period in 2000 because of the
higher 2001 income before tax. The amount of permanent differences between tax
and book income for the two periods was approximately the same. Additionally,
state income taxes decreased because profitability improved in operations in
certain states which incurred losses in 2000 for which a state tax benefit was
not realized in 2000.

NET INCOME. Excluding the gain on the sale of the warehouse facility in
2000, net income increased to $0.2 million in 2001 from approximately breakeven
in 2000.

Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2001

SALES. Revenues for the six months ended June 30, 2001, increased $2.5
million, or 2.8% to approximately $92.6 million from $90.1 million in 2000.
Sales for the MRO Segment increased $2.7 million, or 3.3% primarily due to an
improvement in the oil and gas industry. Sales for the Electrical Contractor
segment

decreased by $0.2 million, or 4%, for the current six months when compared to
same period in 2000. This decrease is the result of a slow down in the
construction business for electrical contractors..

GROSS PROFIT. Gross profit as a percentage of sales increased by
approximately 0.3% for the first half of 2001, when compared to the same period
in 2000. This increase can be primarily attributed to increased margins in fluid
handling equipment sold by the MRO segment. Gross profit as a percentage of
sales for the Electrical Contractor segment decreased to 20.7% in the six months
ended June 30, 2001, down from 25.1% in the comparable period of 2000. This
decline resulted from lower margin sales associated with a slowdown in the
construction business for electrical contractors.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the six months ended June 30, 2001 and 2000, were
$20.9 million for both periods. As a percentage of revenue, the 2001 expense
declined by approximately 0.6% to 22.6% from 23.2% for 2000. This decrease is
primarily attributable to the increase in sales compared to the same level of
expenses.

OPERATING INCOME. Operating income for the first half of 2001 increased
$0.9 million when compared to the same period in 2000. This increase is the net
of a $1.0 million increase in operating income for the MRO Segment and a $0.1
million increase in the operating loss for the Electrical Contractor Segment.
The improved operating income for the MRO segment is the result of increased
sales and gross profit combined with reduced selling, general and administrative
expenses. The increased loss for the Electrical Contractor Segment is the result
of reduced sales and gross margins, partially offset by reduced amortization
expense due to the write-off of intangibles in the fourth quarter of 2000.

INTEREST EXPENSE. Interest expense for the six months ended June 30,
2001 decreased by $0.4 million to $1.4 million from $1.8 million during the same
period in 2000. This decline results from lower interest rates as well as lower
average debt balance for the first half of 2001 when compared to the first half
of 2000.

OTHER INCOME. Other income was approximately $2.0 million lower in 2001
than in 2000 due to $2.0 million of gains on the sale of two warehouse
facilities during 2000.

INCOME TAXES. The effective tax rate for the six months ended June 30,
2001, of 50% increased from 46% for the same period in 2000 because of the
higher 2000 income before tax resulting from the $2.0 million of gains on the
sale of two warehouse facilities. The amount of permanent differences between
tax and book income for the two periods was approximately the same.

NET INCOME. Excluding the gains on the sale of two warehouse facilities
in 2000, net income increased by approximately $0.8 million in 2001 from a loss
of approximately $0.4 million in 2000.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

As a distributor of MRO and Electrical products, we require significant
amounts of working capital to fund inventories and accounts receivable.
Additional cash is required for capital items such as information technology and
warehouse equipment. We also require cash to pay our lease obligations and to
service our debt.

Under the loan agreements with our bank lender, all available cash is
generally applied to reduce outstanding borrowings, with operations funded
through borrowings under the Credit Facility. Our policy is to maintain low
levels of cash and cash equivalents and to use borrowings under our line of
credit for working capital. We had approximately $4.3 million available for
borrowings under the revolving portion of the Credit Facility at June 30, 2001.
Working capital at June 30, 2001 and December 31, 2000 was approximately $19.7
million and $22.7 million, respectively. During the six months of 2001 and 2000,
we collected trade receivables in approximately 47 and 49 days, respectively.
For the six months ended June 30, 2001 and 2000, we turned our inventory
approximately six and five times, respectively, on an annualized basis.

9
10

Under the terms of the asset purchase agreement associated with the
acquisition of a MRO business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the
outstanding $2.0 million balance of the associated subordinated note payable. As
of July 1, 2000, we suspended principal and interest payments on the note. The
seller has notified our bank lender that we were in default on the subordinated
note. Our bank lender notified us that the default on the subordinated note
caused us to be in default on one of our secured lines of credit with an
outstanding balance of $3.9 million at June 30, 2001. However, our bank lender
agreed to forebear taking any action on defaults under the secured line of
credit. The bank lender can terminate the forbearance at anytime. The $3.9
million balance of the secured line of credit and the $2.0 million balance of
the subordinated note have been included in current maturities of long-term debt
at June 30, 2001.

In our opinion, should payment of the $3.9 million balance of the
secured line of credit be demanded, we would be able to refinance the obligation
or liquidate it through the proceeds from asset sales or property refinancing.
During January, 2001, we filed suit against the seller to collect the purchase
price adjustment. In February, 2001, the seller filed a counterclaim against us
to collect the balance of the subordinated note and accrued interest. The
Company expects to attend a court mandated mediation meeting during the third
quarter of 2001. We intend to aggressively pursue our claims against the seller
under the provisions of the asset purchase agreement. The subordinated note
provides for an interest rate of prime plus 4% if the note is in default. We did
not accrue interest or penalty interest on the subordinated note for the six
months ended June 30, 2001. We believe the subordinated note will either be paid
off using funds obtained from the seller in settlement of our claims or the
subordinated note will be offset against our claims. However, there can be no
assurance that we will be successful in collecting the funds due under our
claims or in offsetting the subordinated note against our claims.

During August of 2001, we amended the Credit Facility with our bank
lender effective August 14, 2001, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $35.0 million, and matures April 1, 2004,
except for the $3.9 million balance of the $5.8 million secured line of credit
which is in default and callable at anytime. Interest accrues at prime plus 1/2%
on approximately $19 million of the Credit Facility, and prime plus 1 1/2 % on
the $5.8 line of credit which is in default, and prime plus 1 1/2 % on the term
portion ($9.3 million at June 30, 2001) of the Credit Facility. The prime rate
at June 30, 2001, was 6.75%. The Credit Facility is secured by receivables,
inventory, real estate and machinery and equipment. The Credit Facility contains
customary affirmative and negative covenants as well as financial covenants that
are measured monthly and require that we maintain certain cash flow and other
financial ratios. We have, from time to time, not been in compliance with
certain covenants under the Credit Facility including the minimum earnings
requirement and the fixed charge coverage ratio. At June 30, 2001, we are in
compliance with these covenants. In addition to the $1.4 million of cash on hand
at June 30, 2001, we had $4.3 million available for borrowings under the amended
credit facility at June 30, 2001. Although we expect to be able to comply with
the covenants, including the financial covenants, of the Credit Facility, there
can be no assurance that in the future we will be able to do so or that our
lender will be willing to waive such non-compliance or further amend such
covenants

We generated cash through operating activities of approximately $4.8
million in the first six months of 2001 as compared to $0.6 million during the
first six months of 2000. This increase is primarily attributable to improved
operating income and to a decrease in accounts receivable in 2001 compared to an
increase in accounts receivable in 2000. In the second quarter of 2001, sales
decreased approximately $0.8 million from the fourth quarter of 2000; for the
comparable period in 2000, sales increased approximately $3.1 million from the
fourth quarter of 1999.

We used cash in investing activities of approximately $0.6 million in
the first six months of 2001 as compared to generating $2.6 million in cash
during the first six months of 2000. This change results from the sales of two
warehouse facilities in 2000 for approximately $3.5 million in cash. Capital
expenditures of $0.6 million during the first half of 2001 related primarily to
computer software. Capital expenditures of $0.7 million during the first half of
2000 were related primarily to computer equipment and developing an e-commerce
website, which we subsequently wrote-off during the fourth quarter of 2000.

Our internal cash flow projections indicate our cash generated from
operations and available under our Credit Facility will meet our normal working
capital needs during the next twelve months. However, we will

require additional debt or equity financing to meet our future debt service
obligations. Such financing may include additional bank debt or the public or
private sale of equity or debt securities. In connection with such financing, we
may be required to issue securities that substantially dilute the interest of
our shareholders. As described above, all of our Credit Facility matures on or
before April 1, 2004. We will need to extend the maturity of, or replace, our
Credit Facility before April 1, 2004. However, we may not be able to renew and
extend or replace the Credit Facility. Any extended or replacement facility may
have higher interest costs, less borrowing capacity, more restrictive conditions
and could involve equity dilution. Our ability to obtain a satisfactory credit
facility may depend, in part, upon the level of our asset base for collateral
purposes, our future financial performance and our ability to obtain additional
equity.

We would require additional capital to fund any future acquisitions. At
this time, we do not plan to grow through acquisitions unless the market price
of our common stock rises to levels that will make acquisitions accretive to our
earnings or we generate excess cash flow. We may also pursue additional equity
or debt financing to fund future acquisitions, although we may not be able to
obtain additional financing on attractive terms.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities (SFAS No. 133)". This statement
requires the fair value of derivatives be recorded as assets or liabilities.
Gains or losses resulting from changes in the fair values of derivatives are
accounted for currently in earnings or comprehensive income depending on the
purpose of the derivatives and whether they qualify for hedge accounting
treatment. SFAS No. 133, as amended, is effective for us beginning January 1,
2001. We adopted the statement effective January 1, 2001; there was no impact on
our financial results as we were not a party to any derivative instruments.

In 2000, the Emerging Issues Task Force of the FASB reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue
00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues").
We adopted the Issues in the fourth quarter of 2000 and have restated our
quarterly and annual financial statements to conform to the requirements of the
Issues. There was no effect on net income as a result of the adoption of the
Issues. The net effect of the adoption of the Issues was an increase in net
sales of $1.3 million and $2.5 million, an increase in cost of sales of $1.3
million and $2.5 million, a decrease in selling, general and administrative
expenses of $0.2 million and $0.5 million, and a decrease in other income of
$0.2 million and $0.5 million, for the quarter and six months ended June 30,
2000, respectively.

In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" was issued. SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only acceptable method. The statement was
effective beginning June 30, 2001. Management has reviewed the requirements of
the statement and does not believe it will have a material impact on the
financial position or results of operations of the Company.

In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, and instead requiring, at least annually, an assessment for impairment
by applying a fair-value based test. However, other identifiable intangible
assets are to be separately recognized and amortized. The statement is effective
for fiscal years beginning after December 15, 2001. The adoption of the
statement will result in the elimination of approximately $79,000 of goodwill
amortization, annually, subsequent to December 31, 2001. Additionally, adoption
could result in an impairment of goodwill, based on the new fair-value based
test, which would be reflected as a cumulative effect of change in accounting
principle on January 1, 2002.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our market risk results from volatility in interest rates. This risk is
monitored and managed.

Our exposure to interest rate risk relates primarily to our debt portfolio.
To limit interest rate risk on borrowings, we target a portfolio within certain
parameters for fixed and floating rate loans taking into consideration the
interest rate environment and our forecasted cash flow. This policy limits
exposure to rising interest rates and allows us to

benefit during periods of falling interest rates. Our interest rate exposure is
generally limited to our Credit Facility. See "Liquidity and Capital Resources."

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. Other than the previously disclosed legal
proceedings with the seller of an MRO business to the Company in 1997, the
Company is not currently a party to any litigation that it believes could have a
material adverse effect on the results of operations or financial condition of
the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

On June 5, 2001, at the Company's annual meeting of shareholders, the
individuals listed below were elected directors by the holders of Common Stock,
Series A Preferred Stock and Series B Preferred Stock, voting together as a
class. Set forth opposite each director's name is the tabulation of votes cast.

<Table>
<Caption>
NOMINEE VOTES FOR VOTES AGAINST VOTES WITHHELD
- ------------------------------ --------------------- ------------------- -------------------

David R. Little............... 3,835,590 --0-- 990
Cletus Davis.................. 3,835,727 --0-- 859
Kenneth H. Miller........... 8,835,821 --0-- 759
</Table>

ITEM 5. OTHER INFORMATION.

CAUTIONARY STATEMENTS

Our expectations with respect to future results of operations that may
be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of our realization of such expectations. Our actual
results could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below.

Ability to Comply with Financial Covenants of Credit Facility

Our loan agreements with our bank lender (the "Credit Facility")
requires that we comply with certain specified covenants, restrictions,
financial ratios and other financial and operating tests. Our ability to comply
with any of the foregoing restrictions will depend on our future performance,
which will be subject to prevailing economic conditions and other factors,
including factors beyond our control. A failure to comply with any of these
obligations could result in an event of default under the Credit Facility, which
could permit acceleration of our indebtedness under the Credit Facility. From
time to time we have been unable to comply with some of the financial covenants
contained in the Credit Facility (relating to, among other things, the
maintenance of prescribed financial ratios) and have, when necessary, obtained
waivers or amendments to the covenants from our lender. Although we expect to be
able to comply with the covenants, including the financial covenants, of the
Credit Facility, there can be

no assurance that in the future we will be able to do so or that our lender will
be willing to waive such non-compliance or further amend such covenants.

Risks Related to Internal Growth Strategy

Future results for us will depend in part on our success in
implementing our internal growth strategy, which includes expanding existing
product lines and adding new product lines. Our ability to implement this
strategy will depend on our success in acquiring and integrating new product
lines and marketing integrated supply arrangements such as those being pursued
by us through our SmartSource program. Although we intend to increase sales and
product offerings to existing customers, improve our business to business
e-commerce capability through outsourcing our website and reduce costs through
consolidating certain administrative and sales functions, there can be no
assurance that we will be successful in these efforts.

Substantial Competition

Our business is highly competitive. We compete with a variety of
industrial supply distributors, some of which may have greater financial and
other resources than us. Although many of our traditional distribution
competitors are small enterprises selling to customers in a limited geographic
area, we also compete with larger distributors that provide integrated supply
programs such as those offered through outsourcing services similar to those
that are offered by our SmartSource program. Some of these large distributors
may be able to supply their products in a more timely and cost-efficient manner
than us. Our competitors include direct mail suppliers, large warehouse stores
and, to a lesser extent, certain manufacturers.

Risk Associated with Default on Subordinated Note Payable

Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the
outstanding $2.0 million balance of the associated subordinated note payable. As
of July 1, 2000, we suspended principal and interest payments on the note. The
seller has notified our bank lender that we were in default on the subordinated
note. Our bank lender notified us that the default on the subordinated note
caused us to be in default on one of our secured lines of credit with an
outstanding balance of $3.9 million at June 30, 2001. However, our bank lender
agreed to forebear taking any action on defaults under the secured line of
credit. The bank lender can terminate the forbearance at any time. The $3.9
million balance of the secured line of credit and the $2.0 million balance of
the subordinated note have been included in current maturities of long-term debt
at June 30, 2001.

In our opinion, should the $3.9 million balance of the secured line of
credit be demanded, we would be able to refinance the obligation or liquidate it
through the proceeds from asset sales or property refinancing. In January, 2001,
we filed suit against the seller to collect the purchase price adjustment. In
February, 2001, the seller filed a counterclaim against us to collect the
balance of the subordinated note and accrued interest. We intend to aggressively
pursue our claims against the seller under the provisions of the asset purchase
agreement. The subordinated note provides for an interest rate of prime plus 4%
if the note is in default. The Company did not accrue interest or penalty
interest on the subordinated note for the six months ended June 30, 2001. We
believe the subordinated note will either be paid off using funds obtained from
the seller in settlement of our claims or the subordinated note will be offset
against our claims. However, there can be no assurance that we will be
successful in collecting the funds due under our claims or in offsetting the
subordinated note against our claims.

Risks of Economic Trends

Demand for our products is subject to changes in the United States
economy in general and economic trends affecting our customers and the
industries in which they compete in particular. Many of these industries, such
as the oil and gas industry, are subject to volatility while others, such as the
petrochemical industry, are cyclical and materially affected by changes in the
economy. As a result, we may experience changes in demand for our products as
changes occur in the markets of our customers.

Dependence on Key Personnel

We will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, our Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Little or any other
executive officer of our company could have a material adverse effect on our
financial condition and results of operations. We do not maintain key-man life
insurance on the life of Mr. Little or on the lives of our other executive
officers. In addition, our ability to grow successfully will be dependent upon
our ability to attract and retain qualified management and technical and
operational personnel. The failure to attract and retain such persons could
materially adversely affect our financial condition and results of operations.

Dependence on Supplier Relationships

We have distribution rights for certain product lines and depend on
these distribution rights for a substantial portion of our business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. Although we believe that we could
obtain alternate distribution rights in the event of such a cancellation, the
termination or limitation by any key supplier of its relationship with our
company could result in a temporary disruption on our business and, in turn,
could adversely affect results of operations and financial condition. See
"Business--Suppliers".

Risks Associated With Hazardous Materials

Certain of our operations are subject to federal, state and local laws
and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although we believe that we have
adequate procedures to comply with applicable discharge and other environmental
laws, the risks of accidental contamination or injury from the discharge of
controlled or hazardous materials and chemicals cannot be eliminated completely.
In the event of such an accident, we could be held liable for any damages that
result and any such liability could have a material adverse effect on our
financial condition and results of operations.

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

(a) Exhibits.

3.1 Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with Commission on August 20, 1998)

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12, 1996).

(b) Reports on Form 8-K.

None.

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.

DXP ENTERPRISES, INC.
(Registrant)

By: /s/ MAC McCONNELL
--------------------------------------
Mac McConnell
Senior Vice-President/Finance and
Chief Financial Officer

Dated: August 14, 2001