
<PAGE>   1




                                  FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


(Mark One)


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

                 For the quarterly period ended September 30, 1997

                                       OR

[  ]     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)



                    Texas                                        76-0509661
(State or other jurisdiction of incorporation                 (I.R.S. Employer
              or organization)                               Identification No.)
                                                             
                                                             
   580 Westlake Park Boulevard, Suite 1100                          77079
               Houston, Texas                                    (Zip Code)
  (Address of principal executive offices)                   

                                  281/531-4214
              (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 November 7, 1997:

Common Stock: 8,168,551



<PAGE>   2
ITEM 1.  FINANCIAL STATEMENTS
                     DXP ENTERPRISES, INC. AND SUBSIDIARIES
                    (CONDENSED CONSOLIDATED BALANCE SHEETS)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        September 30,       December 31,
                                                                            1997                1996
                                                                        --------------------------------
                                                                         (Unaudited)
 <S>                                                                      <C>                 <C>
                             Assets
 Current assets:
    Cash                                                                $       556          $      876
    Trade accounts receivable, net of allowance for doubtful
       accounts of $310,000 and $210,000, respectively                       26,891              17,125
    Inventory                                                                28,027              17,175
    Prepaid expenses and other current assets                                   151                 539
    Deferred income taxes                                                       638                 511
                                                                     -----------------------------------
 Total current assets                                                        56,263              36,226
 Property and equipment, net                                                 10,552               7,818
 Other assets                                                                 3,170                 998
                                                                     -----------------------------------
 Total assets                                                           $    69,985          $   45,042
                                                                     ===================================
              Liabilities and Shareholders' Equity
 Current liabilities:
    Trade accounts payable                                              $    15,782          $    6,963
    Employee compensation                                                     1,427               1,296
    Other accrued liabilities                                                   682                 601
    Current portion of long-term debt                                           917                 609
    Current portion of subordinated debt                                         --               1,145
                                                                     -----------------------------------
 Total current liabilities                                                   18,808              10,614
 Long-term debt, less current portion                                        35,793              22,300
 Deferred compensation                                                          739                 739
 Deferred income taxes                                                          433                 330
 Equity subject to redemption: Note 9
    Series A Preferred stock--1,122 and 1,496 shares                            112                 150
    Series B convertible preferred stock -- 1,800 and 4,500 shares              180                 450
    Common Stock -- 280,428 shares                                            1,963                  --
 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; 3,366 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; 19,500 shares
    issued and outstanding                                                       18                  15

 Common stock, $.01 par value, 100,000,000 shares authorized;
    7,993,997 shares issued and outstanding (7,993,997
    outstanding at December 31, 1996)                                            80                  80

      Paid-in capital                                                           673                 368
      Retained earnings                                                      11,765               9,994
                                                                     -----------------------------------
                                                                             12,538              10,459
 Less: treasury stock, 374 shares series A preferred, 2,700 shares
        series B preferred, and 60,872 shares common stock                    (581)                  --
                                                                     -----------------------------------
 Total shareholders' equity                                                  11,957              10,459
 Total liabilities and shareholders' equity                             $    69,985          $   45,042
                                                                     ===================================
</TABLE>


           See notes to condensed consolidated financial statements.





                                       2
<PAGE>   3
                    DXP ENTERPRISES, INC.  AND SUBSIDIARIES
                 (CONDENSED CONSOLIDATED STATEMENTS OF INCOME)
                                  (Unaudited)
                    (In Thousands, except Per Share Amounts)



<TABLE>
<CAPTION>
                                                             Three Months Ended         Nine Months Ended
                                                                September 30,             September 30,
                                                               1997        1996         1997         1996   
                                                          -----------  -----------  -----------   -----------
            <S>                                             <C>           <C>         <C>              <C>
            Sales                                           $ 48,806      $ 32,193    $ 118,277     $ 95,214
            Cost of sales                                     36,334        23,784       86,706       70,574
                                                          ---------------------------------------------------            
            Gross Profit                                      12,472         8,409       31,571       24,640
            Selling, general and administrative expenses      11,295         7,424       27,642       22,230
                                                          ---------------------------------------------------            
            Operating income                                   1,177           985        3,929        2,410
            Other income                                          86           129          981          643
            Interest expense                                    (793)         (548)      (1,960)      (1,556)
                                                          ---------------------------------------------------  
                                                                (707)         (419)        (979)        (913)
                                                          ---------------------------------------------------              
            Income before income taxes                           470           566        2,950        1,497
            Provision for income taxes                           182           230        1,070          607
                                                          ---------------------------------------------------              
                                                               $ 288         $ 336      $ 1,880        $ 890

            Net income                                                                                      
                                                                  38            23          109           68
            Preferred Stock Dividend
                                                          ---------------------------------------------------  
            Net Income Attributable to Common                                                               
                Shareholders                                    $250          $313      $ 1,771       $  822
                                                          ====================================================
            Primary net income per common and                                                               
               common equivalent shares                        $0.02         $0.04        $0.17        $0.10
                                                          ====================================================
            Number of shares used to compute primary
               net income per common and common
               equivalent shares                              10,251         8,580       10,251        8,580
                                                          ====================================================
            Fully diluted net income per common and
               common equivalent share                         $0.02         $0.04        $0.17        $0.09
                                                          ====================================================
            Number of shares used to compute fully
               diluted net income per common and
               common equivalent shares                       10,251         9,724       11,192        9,724
                                                          ====================================================

</TABLE>



           See notes to condensed consolidated financial statements.





                                       3
<PAGE>   4


                    DXP ENTERPRISES, INC.  AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                           Nine Months Ended September 30,
                                                                                1997              1996      
                                                                         ---------------  ------------------
          <S>                                                                    <C>                   <C>
          OPERATING ACTIVITIES
          Net cash provided by operating activities                              ($2,081)             $ 2,118
          
          INVESTING ACTIVITIES                                                                              
          Proceeds from sale of property and equipment                                --                    7
          Purchase of Austin Bearing net assets                                       --                 (550)
          Purchase of Strategic Supply net assets                                 (4,118)                  --
          Purchase of Pelican State Supply common stock                           (1,070)                  --
          Purchase of property and equipment                                        (648)                (971)
                                                                               -------------------------------
          Net cash used in investing activities                                   (5,836)              (1,514)
          
          FINANCING ACTIVITIES
          Proceeds from debt                                                     133,488               93,856
          Principal payments on revolving line of credit, long-term
            and subordinated debt, and notes payable to bank                    (125,314)             (95,884)
          Acquisition of common stock                                               (581)                 --
          Dividends paid                                                            (109)                 (68)
                                                                               -------------------------------
          Net cash used in financing activities                                    7,597               (2,095)
                                                                               -------------------------------
          INCREASE(DECREASE) IN CASH                                                (320)              (1,491)
          CASH AT BEGINNING OF PERIOD                                                876                1,492
                                                                               -------------------------------
          CASH AT END OF PERIOD                                                  $   556              $     1
                                                                               =============================== 
</TABLE>





            See notes to condensed consolidated financial statements





                                       4
<PAGE>   5
                     DXP ENTERPRISES, INC. AND SUBSIDIARIES

As used herein, references to the "Company" are to DXP Enterprises, Inc. and
its subsidiaries, unless the context otherwise indicates.

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 and
Article 10 of Regulation S-X.  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.  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 Annual Report on Form 10-K for the year ended December 31, 1996, as
amended by Amendment No. 1 to Form 10-K on Form 10-K/A.

Note 2:  The Company

The Company was incorporated on July 26, 1996 in the State of Texas.  The
Company was formed to facilitate a proposed reorganization transaction whereby
subsequent to July 31, 1996 the Company became a public holding company and
acquired 100% of the outstanding capital stock of SEPCO Industries, Inc.
("SEPCO"), a private distribution company with revenues of approximately $125
million, and Newman Communications Corporation ("Newman"), an inactive public
entity with nominal net tangible assets.

The Company filed a registration statement on Form S-4 with the Securities and
Exchange Commission to register 9,292,200 shares of its Common Stock (on a
post-reverse stock split basis), 19,500 shares of its Series B Convertible
Preferred Stock and 3,366 shares of its Series A  Preferred Stock.  This
registration statement became effective on November 12, 1996.  Because the
Company (prior to the reorganization) and Newman were non-operating entities
with nominal tangible net assets, the transaction was accounted for as a
recapitalization of SEPCO into the Company and an issuance of shares for the
net tangible assets of Newman.  Accordingly, the historical financial
statements for the Company  prior to December 4, 1996 are those of SEPCO.

Note 3.  Per Share Amounts

Net income per common and common equivalent share has been computed for the
three- and nine-month periods ended September 30, 1996, as if the
reorganization had occurred between the Company and SEPCO on January 1, 1996.
These amounts were determined by dividing net income applicable to common stock
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.  To the extent they are dilutive,
options to purchase common stock issued by the Company within the twelve months
preceding the filing of the registration statement referenced above have been
included in the calculation of common equivalent shares outstanding (using the
treasury stock method) as if they were outstanding for all periods presented.
The computation of fully diluted net income per common and common equivalent
share assumes the Class A convertible preferred stock was converted as of the
beginning of the period, unless the results are anti-dilutive.



                                      5
<PAGE>   6

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). 
Under SFAS No. 128, primary earnings per share ("Primary EPS") will be replaced
by basic earnings per share ("Basic EPS"), and fully diluted earnings per share
("Fully Diluted EPS") will be replaced with diluted earnings per share ("Diluted
EPS").  Basic EPS differs from Primary EPS in that it only includes the weighted
average impact of outstanding shares of the Company's Common Stock (i.e., it
excludes common stock equivalents and the dilutive effect of options, etc.). 
Diluted EPS is substantially similar to Fully Diluted EPS as previously
reported.  The provisions of SFAS No. 128 will result in the retroactive
restatement of previously reported Primary EPS and Fully Diluted EPS figures,
but SFAS No. 128 prohibits such restatement prior to December 31, 1997.  Based
on the Company's computations, the adoption of SFAS 128 is not expected to
materially impact earnings per share amounts reported during the current quarter
or any recent prior period.
        
On or about April 30, 1997, a proxy statement was furnished to the holders of
the Company's Common Stock, Series A Preferred Stock and Series B Preferred
Stock, in connection with a solicitation of consents by the Board of Directors
of the Company for the adoption of an amendment to the Restated Articles of
Incorporation of the Company to effect a two-to-one reverse split of the
issued and outstanding shares of Common Stock and change the name of the
Company from Index, Inc. to DXP Enterprises, Inc.  The shareholders approved
the two-to-one reverse stock split and name change, which became effective
after the close of market on May 12, 1997.

Common stock and earnings per share have been restated to give effect to
the two-to-one reverse stock split.

Note 4:  Inventory

The Company uses the last-in, first-out ("LIFO") method of inventory valuation
for approximately 59% 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>
                                             September 30, 1997    December 31, 1996
                                            ---------------------------------------
                                                          (in thousands)

            <S>                              <C>                  <C>                  
            Finished Goods                   $           28,188   $           18,215
            
            Work in process                               3,284                2,405 
                                             ------------------   -------------------
            
            Inventories at FIFO                          31,472               20,620

            Less - LIFO allowance                        (3,445)              (3,445)
                                             -------------------  -------------------
            
            Inventories                       $          28,027    $          17,175 
                                             -------------------  -------------------
</TABLE>

Note 5:  Acquisition

Effective February 2, 1996, the Company acquired the net assets of Austin
Bearing Corporation.  The purchase price totaled approximately $578,000 and
consisted of (i) issuance of a $249,000 note, bearing interest at 9%, payable
monthly over five years and (ii) cash of $329,000.  The acquisition has been
accounted for using the purchase method of accounting.  Goodwill of $84,000 was
recorded in connection 





                                       6
<PAGE>   7

with the acquisition. 

Effective May 30, 1997, the Company acquired 100% of the
outstanding stock of Pelican State Supply Company ("Pelican").  The purchase
price totaled approximately $3.0 million and consisted of  280,428 shares of the
Company's Common Stock and cash of approximately $1.0 million.  The acquisition
has been accounted for using the purchase method of accounting.  Goodwill of
approximately $2.0 million was recorded in connection with the acquisition.
        
On June 2, 1997, a wholly owned subsidiary of the Company acquired
substantially all the assets of  Strategic Supply, Inc. ("Strategic").   The
purchase price, which is subject to adjustments, consisted of approximately
$4.1 million in cash, assumption of $4.7 million of trade payables and other
accrued expenses, $2.8 million in promissory notes payable to the seller and
earn-out payments (based on the earnings before interest and taxes of
Strategic) to be paid over a period of approximately six years, up to a maximum
of  $3.5 million. The acquisition has been accounted for using the purchase
method of accounting.  Goodwill of $50,000 was recorded in connection with the
acquisition.  Goodwill may be adjusted based upon the final purchase price.

The acquisitions discussed above were accounted for using the purchase method
of accounting. The results of operations of the companies acquired are included
in the consolidated statements of income from the date of acquisition of such
companies.  The Company is continuing its evaluation of the acquisitions of
Pelican and Strategic as it relates to the purchase price allocations.  The
allocation of the respective purchase prices are based on the estimates of the
Company using information currently available.  Certain adjustments relating to
these acquisitions are subject to change based upon the final determination of
the fair values of the net assets acquired.

Note 6:  Commitments and Contingencies

In September 1997 the Company reached a settlement with the Internal Revenue
Service ("IRS") which had asserted claims against one of the Company's
subsidiaries for additional taxes and penalties of approximately $1 million
plus interest of approximately $328,000.  The claims related primarily to a
challenge by the IRS of the Company's use of the LIFO method of accounting for
inventory.  The September 1997 settlement with the IRS resulted in a payment by
the Company of approximately $52,000 in additional tax plus interest of
approximately $18,000.  The Company had accrued sufficiently for this expense
at December 31, 1996 and, therefore, the payment will have no impact on current
period earnings.

Note 7:  Stock Options

Prior to and during 1995, the Company issued non-qualified, book value plan
stock options to certain officers of the Company to purchase shares of its
Class A common stock, which had exercise prices equal to the book value of the
common stock on the date of the grant.  The option agreement allowed the
employee to put the stock acquired back to the Company at the book value at
that time.  The Company recognized compensation expense for increases in the
book value of the stock while the options were outstanding.

Effective March 31, 1996, the stock option agreements were amended to become
non-qualified, market value plan stock options.  Under the amended agreement,
the employees can no longer put the acquired stock back to the Company.  In
connection with these changes, the Company recognized approximately $618,000 of
compensation expense in the three months ended March 31, 1996.

Note 8:  Long-Term Debt

In September 1996, the Company  amended its credit facility which increased the
existing balance of the term loan from $123,898 to $5.0 million upon conversion
of approximately $4.9 million of the amounts outstanding under the revolving
loan to the term loan.  In May 1997, the Company further amended its credit
facility to increase the borrowing base from $20 million to $25 million.


                                      7

<PAGE>   8

Also in May 1997, the Company secured two additional lines of credit from its
existing lender in amounts of  $3.0 million and $12.0 million for the purpose
of financing two acquisitions and  providing for working capital needs of the
newly acquired companies.  The two new subsidiaries are the borrowers under
these lines of credit and the Company has guaranteed the indebtedness
thereunder.  The interest rate on the new lines of credit
range from LIBOR plus 2.25% to prime plus .50%.  Each line of credit is secured
by accounts receivable, inventory, machinery and equipment and real estate of
the respective subsidiary and matures January 1999.

The borrowings available under the Company's credit facilities at September 30,
1997 approximated $3.5 million.

Note 9:  Equity Subject to Redemption

The Company is obligated to repurchase certain of its Series A and Series B
preferred stock owned by certain employees upon the occurrence of certain
events which would result in the employee no longer being employed by the
Company.  Additionally, the shares of Common Stock issued pursuant to the
purchase of Pelican are subject to a put option whereby any time  between
November 30, 1998 and November 30, 2000 the Company may be required to purchase
all or part of such shares  at a price of $7.00 per share.  The shares issued
for the purchase of Pelican are subject to certain rights of offset pursuant to
terms of the purchase agreement.





                                       8
<PAGE>   9

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

The following discussion of operations and financial condition of the Company
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Quarterly Report on Form 10-Q.  Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended.  See "Special Note
Regarding Forward- Looking Statements" and "Cautionary Statements".

RESULTS OF OPERATIONS

Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996

Revenues for the three months ended September 30, 1997 increased 51.6% to $48.8
million from the three months ended September 30, 1996.  The Company's
acquisitions during the period accounted for $13.8 million of the increase in
revenues. Sales of bearings and power transmission equipment for the quarter
ended September 30, 1997 increased 3.3%, or $430,000 over the comparable period
in 1996, accounting for $1.3% of the revenue increase. Sales of valve and valve
automation equipment declined by $128,000 over the comparable period in 1996
due primarily to increased competition.  During the three months ended
September 30, 1997, sales of pumps and pump products increased 15.0%, or $2.5
million, over the comparable period in 1996, accounting for 7.8% of the revenue
increase.

Gross margins decreased .5% for the third quarter of 1997 as compared to the
third quarter of 1996, from 26.1% of sales to 25.6%.  The decrease in gross
margin is attributable to lower margins associated with the two acquisitions in
May 1997.  The Company currently expects some increase in manufacturers' prices
to continue due to increased raw material costs and strong market conditions.
Although the Company intends to attempt to pass on these price increases to its
customers to maintain current gross margins, there can be no assurance that the
Company will be successful in this regard.

Selling, general and administrative expense were consistent as a percentage of
revenues for the third quarter of 1997 as compared to the third quarter of
1996.

Operating income for the three month period ended September 30, 1997 decreased
as a percentage of revenues  from 3.0% to 2.4%, due to the various factors
discussed above and absorption of the acquisition of Pelican and Strategic.

Interest expense during the third quarter of 1997 increased by $245,000 to
$793,000 compared to the third quarter of 1996.  Long-term debt at September
30, 1997 increased by $14.0 million as a result of the financing of two
acquisitions during the second quarter of 1997, resulting in greater interest
costs.  Excluding the increased debt incurred in connection with these
acquisitions, long-term debt levels were substantially unchanged. Average
interest rates were slightly lower during the three months ended September 30,
1997 as compared to 1996.

The Company's provision for income taxes for the three months ended September
30, 1997 decreased by $48,000 compared to the same period of 1996, as a result
of a decrease in pre-tax income.

Net income for the three month period ended September 30, 1997 decreased
$48,000, or 14.3%,  from the three month period ended September 30, 1996, due
primarily to the factors discussed above.


Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996

Revenues for the nine months ended September 30, 1997 increased 24.2% to $118.3
million from the nine  





                                       9
<PAGE>   10

months ended September 30, 1996. The Company's acquisitions during the period
accounted for $18.5 million or 19.4% of this increase in revenues.   Sales of
bearings and power transmission equipment for the nine months ended September
30, 1997 increased 5.0%, or $1.9 million over the comparable period in 1996
accounting for 2.0% of the overall revenue increase. Sales of valve and valve
automation equipment declined by $1.6 million over the comparable period in 1996
due primarily to increased competition.  During the nine months ended September
30, 1997, sales of pumps and pump products increased 8.6%, or $4.3 million over
the comparable period in 1996, accounting for 4.5% of the overall revenue
increase.
        
Gross margin increased $6.9 million, or 28.1% in the first nine months of 1997
as compared to the same period in 1996, from 25.9% of sales to 26.7%.  The
increase in gross margin is attributable to the Company's avoidance of
low-margin sales, the ability to pass on manufacturer price increases and
reductions in cost-of-sales overhead expenses. Gross margins for the first nine
months of 1997 as compared to the same period in 1996 were affected by lower
average margins associated with the acquisition of Pelican and Strategic.

Selling, general and administrative expenses as a percentage of revenues
remained consistent at 23.3% in the first nine months of 1997 compared to the
same period in 1996.  However, both nine month periods experienced substantial
expenditures unique to each period.  For the nine month period ended September
30, 1996, the Company recognized $618,000 in compensation expense as a result
of amending its stock option agreements from being book value to market value
options.   For the nine month period ended September 30, 1997, selling,
general, and administrative costs were increased by administrative costs
related to the Company's expansion of its administrative personnel in an effort
to provide expanded services to its customers.

Operating income for the nine month period ended September 30, 1997 increased
63.0% from the corresponding period in 1996, from $2.4 million to $3.9
million.  As a percentage of revenues, operating income increased from 2.5% of
sales to 3.3%, due to the various  factors discussed above.

Interest expense for the first nine months of 1997 increased by $404,000, or
26.0%, from the first nine months of 1996 as a result of increased debt levels
associated with the Company's acquisitions during 1997, and due to greater
investments in working capital components during the period.  Average interest
rates were slightly lower during the nine months ended September 30, 1997 as
compared to 1996.

The Company's provision for income taxes for the nine months ended September
30, 1997 increased by $463,000 compared to the same period of 1996 as a result
of an increase of approximately $1.5 million in pre-tax income.  Results
attributable to the Company's acquisitions during the first nine months of 1997
reduced pre-tax income by approximately $796,000, resulting in a decrease in
taxes of approximately $271,000.

Net income for the nine month period ended September 30, 1997 increased
$990,000, or 111%,  from the nine month period ended September 30, 1996.
Increased net income for the first nine months of 1997 as compared to the same
period in 1996 can be primarily attributed to an increase in gross margins.
These increases in gross profits were slightly offset by increased
administrative costs associated with the Company's expansion of its corporate
administrative expenses, expenses associated with its expansion program, and
higher interest costs and losses associated with the absorption of two
acquisitions made in June 1997.


LIQUIDITY AND CAPITAL RESOURCES

Under the Company's credit facilities, all available cash generally is applied
to reduce outstanding borrowings, with operations funded through borrowings
under the credit facilities.  The Company's policy is to maintain low levels of
cash and cash equivalents and to use borrowings under its lines of credit for
working capital.  The Company had $3.5 million available for borrowings under
its working capital line of credit at September 30, 1997.  Working capital at
September 30, 1997 and December 31, 1996 was $37 million and $26 million,
respectively.  During the first nine months of 1997 and the year ended December





                                       10
<PAGE>   11



31, 1996, the Company collected its trade receivables in approximately 55 and
48 days, respectively, and turned its inventory approximately five times on an
annualized basis.

The Company currently has $40.0 million in secured lines of credit with an
institutional lender.  The lines of credit provided for interest rates ranging 
from LIBOR plus 2.25% to prime plus .5% (9.0% at September 30, 1997).  The lines
of credit are secured by receivables, inventory and machinery and equipment and
mature in January 1999. The facilities contain customary affirmative and
negative covenants as well as financial covenants that require the Company to
maintain a positive cash flow and other financial ratios, such as aggregate
indebtedness to tangible net worth less than five to one and current assets to
current liabilities greater than two to one.  The Company currently expects to
renew the lines of credit at their maturity.
        
The Company utilized cash from operating activities of $2.1 million in the
first nine months of 1997 as compared to generating cash from operating
activities of $2.1 million during the first nine months of 1996, due primarily
to a greater investment in the net working capital components for the first
nine months of 1997 as compared to the first nine months of 1996. Investment in
working capital components such as inventory and receivables resulting in a use
of cash from operating activities does not result in a violation of any of the
loan covenants.  The cash flow covenant is computed by increasing earnings for
depreciation and amortization and subtracting acquisition of fixed assets,
principal payments and dividends.

The Company had capital expenditures of approximately $648,000 for the first
nine months of 1997 as compared to $971,000 during the same period of 1996.
Capital expenditures in the first nine months of 1997 were predominantly for
the expansion of a facility in Laporte, Texas ($144,000), and for computers and
related equipment($131,000).  Capital expenditures for 1996 were primarily for
office and shop equipment and computer automation.

In the second quarter of 1997, the Company acquired the common stock of
Pelican, with the cash portion of the purchase price totaling approximately
$1.1 million.  Also in the second quarter of 1997, the Company acquired certain
assets of Strategic for cash of  approximately $4.1 million.

In September 1997 the Company reached a settlement with the Internal Revenue
Service ("IRS") which had asserted claims against one of the Company's
subsidiaries for additional taxes and penalties of approximately $1 million
plus interest of approximately $328,000.  The claims related primarily to a
challenge by the IRS of the Company's use of the LIFO method of accounting for
inventory.  The September 1997 settlement with the IRS resulted in a payment by
the Company of approximately $52,000 in additional tax plus interest of
approximately $18,000.  The Company had accrued sufficiently for this expense
at December 31, 1996 and, therefore, the payment will have no impact on current
period earnings.

The Company's software will be Year 2000 compliant by the end of the first
quarter of 1998. These compliance issues and associated costs are being handled
through new releases of current software. Such costs are part of normal software
upgrades and normal operating costs. The Company expects that any costs related
to ensuring Year 2000 compliance will not be material to the financial condition
or results of operations of the Company.

The Company believes that cash generated from operations and available under
its credit facility will meet its future ongoing operational and liquidity
needs and capital requirements.  Funding of the Company's acquisition program
and integrated supply strategy will require capital in the form of the issuance
of additional equity or debt financing.  There can be no assurance that such
financing will be available to the Company or as to the terms thereof.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE

         Not Applicable





                                       11
<PAGE>   12
                          PART II:  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In September  1997 the Company reached a settlement with the Internal Revenue
Service ("IRS") which had asserted claims against one of the Company's
subsidiaries for additional taxes and penalties of approximately $1 million
plus interest of approximately $328,000.  The claims related primarily to a
challenge by the IRS of the Company's use of the LIFO method of accounting for
inventory.  The September  1997 settlement with the IRS resulted in a payment
by the Company of approximately $52,000 in additional tax plus interest of
approximately $18,000.  The Company had accrued sufficiently for this expense
at December 31, 1996 and, therefore, the payment will have no impact on current
period earnings.

From time to time, the Company is a party to legal proceedings arising in the
ordinary course of business.  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

         None


ITEM 5.  OTHER INFORMATION

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.  All statements
other than statements of historical facts included in this Report, including
without limitation, statements regarding the Company's financial position,
business strategy, products, products under development, markets, budgets and
plans and objectives of management for future operations, are forward-looking
statements.  Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct.  Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Cautionary Statements" and
elsewhere in this Report, including, without limitation, in conjunction with
the forward-looking statements included in this Report.  All subsequent written
and oral forward-looking statements attributable to the Company, or persons on
its behalf, are expressly qualified in their entirety by the Cautionary
Statements.





                                       12
<PAGE>   13
Cautionary Statements

See "Special Note Regarding Forward-Looking Statements".

Substantial Competition

The Company's business is highly competitive.  The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company.  Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger
distributors that provide integrated supply programs such as those offered
through the iPower Consortium and outsourcing services similar to those that
are being offered by American MRO, Inc. ("AMRO"), a wholly owned subsidiary of
the Company.  Some of these large distributors may be able to supply their
products in a more timely and cost-efficient manner than the Company.  The
Company's competitors include direct mail suppliers, large warehouse stores
and, to a lesser extent, certain manufacturers.


Risks Associated with Implementation of Corporate Strategy

Future results for the Company also will be dependent on the success of the
Company in implementing its acquisition and growth strategy.  This strategy
includes taking advantage of a consolidation in the industry and effecting
acquisitions of distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations.  The Company's strategy also includes expanding its product lines,
adding new product lines and establishing alliances and joint ventures with
other suppliers in order to provide the Company's customers with a source of
integrated supply.  The ability of the Company to implement this strategy will
depend on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as that being pursued by AMRO.  Although the Company is actively seeking
acquisitions and integrated supply arrangements that would meet its strategic
objectives, there can be no assurance that the Company will be successful in
these efforts.  Further, the ability of the Company to effect its strategic
plans will depend on obtaining financing for its planned expansions and
acquisitions.  There can be no assurance that such financing will be available
on a timely basis or on terms satisfactory to the Company.  The Company plans
to examine appropriate methods of financing any such acquisition, including
issuance of additional capital stock, debt or other securities or a combination
of both.  If the Company were to issue shares of its capital stock in any
acquisition, such issuance could be dilutive to existing shareholders.

Dependence on Key Personnel

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

Risks Associated with Hazardous Materials

Certain of the Company's activities involve the controlled use of hazardous
materials and chemicals.  Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely.
In the event of such an accident, the 
        
        



                                       13
<PAGE>   14

Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company.

Limitations on Ability to Pay Dividends

The Company anticipates that future earnings, except for dividends payable on
the Series B Convertible Preferred Stock, will be retained to finance the
continuing development of its business.  Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.





                                       14
<PAGE>   15
Item 6.  Exhibits and Reports on Form 8-K

         (a)     Exhibits

                 10.1*    Employment Agreement dated dated effective as of July
                          1, 1996, by and between Sepco Industries, Inc. and
                          Gary A. Allcorn, as amended.
                 10.2*    Employment Agreement dated effective as of July 1,
                          1996, by and between Sepco Industries, Inc.  and
                          Jerry J. Jones, as amended.
                 11.1*    Statement re:  Computation of Per Share Earnings 
                 27.1*    Financial Data Schedule

________________

 * Filed herewith.


         (b) Reports on Form 8-K

                 Current Report on Form 8-K dated June 2, 1997, as amended by
                 Amendment No. 1 to Current Report on Form 8-K on Form 8-K/A
                 and Amendment No. 2 to Current Report on Form 8-K on Form
                 8-K/A, reporting the acquisition by the Company of Strategic
                 Supply, Inc., the audited historical financial statements of
                 Strategic Supply, Inc. and the pro forma financial statements
                 of the Company including Strategic Supply, Inc.


 .





                                       15
<PAGE>   16

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 hereunto duly authorized.


                                        DXP Enterprises, Inc.



Date: November 14, 1997                 By: /s/ GARY A. ALLCORN         
                                           -----------------------------------
                                                Gary A. Allcorn
                                                Senior Vice President/Finance
                                                (Duly authorized officer and
                                                principal  financial  officer)


<PAGE>   17
                                 EXHIBIT INDEX



         Exhibit
           No.                          Description
           --                           -----------
 
         10.1*   Employment Agreement dated effective as of July 1, 1996, by
                 and between Sepco Industries, Inc. and Gary A. Allcorn, as
                 amended.
         10.2*   Employment Agreement dated effective as of July 1, 1996, by
                 and between Sepco Industries, Inc. and Jerry J. Jones, as
                 amended.
         11.1*   Statement re:  Computation of Per Share Earnings
         27.1*   Financial Data Schedule  
         ____________________

         * Filed herewith.


