<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

     [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

                                       OR

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

                        COMMISSION FILE NUMBER: 000-19580

                            INDUSTRIAL HOLDINGS, INC.
             (exact name of registrant as specified in its charter)

             TEXAS                                               76-0289495
  (State or other jurisdiction                                 (IRS Employer
of incorporation or organization)                            Identification No.)

                       7135 ARDMORE, HOUSTON, TEXAS 77054
          (Address of principal executive offices, including zip code)

                                 (713) 747-1025
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                               TITLE OF EACH CLASS

                          COMMON STOCK, $.01 PAR VALUE
                           CLASS B REDEEMABLE WARRANT
                           CLASS C REDEEMABLE WARRANT
                           CLASS D REDEEMABLE WARRANT

     Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes [ X ] [ ] No

     The aggregate market value of common stock held by non-affiliates of the
registrant was $15,290,399 at July 24, 2001. At that date, there were 16,979,332
shares of common stock outstanding.

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

<PAGE>   2

                            INDUSTRIAL HOLDINGS, INC.
                                      INDEX

<TABLE>
<CAPTION>
                                                                                                        Page No.
                                                                                                        --------

<S>                                                                                                     <C>
PART  I           FINANCIAL INFORMATION

                  Item 1.      Financial Statements (unaudited)

                               Consolidated Balance Sheets at June 30, 2001 and
                                 December 31, 2000..............................................             1

                               Consolidated Statements of Operations for the Three and Six
                                 Months ended June 30, 2001 and 2000 ...........................             2

                               Consolidated Statements of Cash Flows for the Six
                                 Months Ended June 30, 2001 and 2000............................             3

                               Notes to Consolidated Financial Statements.......................             5

                  Item 2.      Management's Discussion and Analysis of Financial
                                 Condition and Results of Operations............................            11

                  Item 3.      Qualitative and Quantitative Disclosures about Market Risk.......            24

PART  II          OTHER INFORMATION

                  Item 1.      Legal Proceedings................................................            24

                  Item 2.      Changes in Securities............................................            24

                  Item 3.      Defaults upon Senior Securities..................................            24

                  Item 4.      Submission of Matters to a Vote of
                                 Security Holders (no response required)

                  Item 5.      Other Information................................................            24

                  Item 6.      Exhibits and Reports on Form 8-K.................................            25
</TABLE>




                                       i
<PAGE>   3



                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements.

                            INDUSTRIAL HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        June 30,         December 31,
                                                                                          2001               2000
                                                                                      ------------       ------------
                                ASSETS                                                (unaudited)

<S>                                                                                   <C>                <C>
Current assets:
Cash and equivalents ...........................................................      $        905       $        945
Accounts receivable - trade, net ...............................................            30,785             38,155
Cost and estimated earnings in excess of billings ..............................             1,586              2,986
Inventories ....................................................................            24,071             29,654
Notes receivable, current portion ..............................................               253                278
Net assets of discontinued operations ..........................................            25,044             26,651
Prepaid and other current assets ...............................................             1,000                759
                                                                                      ------------       ------------
  Total current assets .........................................................            83,644             99,428

Property and equipment, net ....................................................            33,208             32,942
Notes receivable, less current portion .........................................               159                162
Other assets ...................................................................             1,806                 93
Intangible assets, net .........................................................             7,133             17,057
                                                                                      ------------       ------------

  Total assets .................................................................      $    125,950       $    149,682
                                                                                      ============       ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Notes payable ..................................................................      $     39,720       $     49,189
Accounts payable - trade .......................................................            18,885             24,195
Billings in excess of costs and estimated earnings .............................             3,093              6,473
Accrued expenses and other .....................................................            10,085             11,228
Current portion of long-term obligations .......................................            35,251             41,218
                                                                                      ------------       ------------
  Total current liabilities ....................................................           107,034            132,303

Long-term obligations, less current portion ....................................             5,509              6,391
Other long-term liabilities ....................................................             2,570              2,004
Deferred income tax liability ..................................................               302                302
                                                                                      ------------       ------------
  Total liabilities ............................................................           115,415            141,000

Commitments and contingencies

Shareholders' equity:
  Preferred stock $.01 par value, 7,500,000 shares
     authorized, no shares issued or outstanding
  Common stock $.01 par value, 50,000,000 shares authorized, 18,565,597 and
     16,979,332 shares issued and outstanding, respectively, in 2001, and
     15,276,430 and 13,690,165 shares issued and outstanding,
     respectively, in 2000 .....................................................               185                153
  Additional paid-in capital ...................................................            58,923             55,173
  Accumulated deficit ..........................................................           (45,301)           (43,372)
  Treasury stock, at cost, 1,586,265 shares ....................................            (3,272)            (3,272)
                                                                                      ------------       ------------
     Total shareholders' equity ................................................            10,535              8,682
                                                                                      ------------       ------------

  Total liabilities and shareholders' equity ...................................      $    125,950       $    149,682
                                                                                      ============       ============
</TABLE>


           See notes to unaudited consolidated financial statements.



                                       1
<PAGE>   4



                            INDUSTRIAL HOLDINGS, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                             Three Months ended                Six Months ended
                                                                  June 30,                         June 30,
                                                        ---------------------------       ---------------------------
                                                           2001             2000             2001             2000
                                                        ----------       ----------       ----------       ----------

<S>                                                     <C>              <C>              <C>              <C>
Sales ............................................      $   53,930       $   42,692       $  114,644       $   85,956
Cost of sales ....................................          41,714           33,570           88,979           68,344
                                                        ----------       ----------       ----------       ----------

Gross profit .....................................          12,216            9,122           25,665           17,612

Selling, general and administrative expenses .....           8,578            9,447           18,576           20,833
                                                        ----------       ----------       ----------       ----------

Operating income (loss) ..........................           3,638             (325)           7,089           (3,221)

Other income (expense):
  Interest expense ...............................          (2,257)          (2,339)          (4,724)          (4,986)
  Interest income ................................               1               14                5               48
  Other income (expense), net ....................          (4,135)           3,097           (4,278)           2,768
                                                        ----------       ----------       ----------       ----------

Total other income (expense) .....................          (6,391)             772           (8,997)          (2,170)
                                                        ----------       ----------       ----------       ----------

Income (loss) from continuing operations
  before income taxes ............................          (2,753)             447           (1,908)          (5,391)
Income tax expense, state ........................               1               26               21               26
                                                        ----------       ----------       ----------       ----------

Income (loss) from continuing operations .........          (2,754)             421           (1,929)          (5,417)

Income from discontinued operations ..............                              261                               632
                                                        ----------       ----------       ----------       ----------

Net income (loss) ................................      $   (2,754)      $      682       $   (1,929)      $   (4,785)
                                                        ==========       ==========       ==========       ==========

Basic earnings (loss) per share:
  Continuing operations ..........................      $     (.20)      $      .03       $     (.14)      $     (.37)
  Discontinued operations ........................                              .02                               .04
                                                        ----------       ----------       ----------       ----------
  Net income (loss) ..............................      $     (.20)      $      .05       $     (.14)      $     (.33)
                                                        ==========       ==========       ==========       ==========
Diluted earnings (loss) per share:
  Continuing operations ..........................      $     (.20)      $      .03       $     (.14)      $     (.37)
  Discontinued operations ........................                              .02                               .04
                                                        ----------       ----------       ----------       ----------
  Net income (loss) ..............................      $     (.20)      $      .05       $     (.14)      $     (.33)
                                                        ==========       ==========       ==========       ==========

Weighted average number of common shares
  outstanding - basic ............................          13,763           13,556           13,727           14,334
Weighted average number of common shares
  outstanding - dilutive .........................          13,763           13,952           13,727           14,334
</TABLE>



           See notes to unaudited consolidated financial statements.



                                       2
<PAGE>   5



                            INDUSTRIAL HOLDINGS, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      Six Months ended June 30,
                                                                         2001           2000
                                                                       --------       --------

<S>                                                                    <C>            <C>
Cash flows from operating activities:
Net loss ........................................................      $ (1,929)      $ (4,785)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
     Income from discontinued operations ........................                         (631)
     Depreciation and amortization ..............................         2,559          2,518
     Loss (gain) on sale of subsidiary ..........................         4,168         (2,551)
     Issuance of common stock and warrants under bonus plans ....             6            261
  Changes in assets and liabilities, net of effect of
     purchase acquisitions and divestitures:
       Accounts receivable ......................................        (1,065)         1,074
       Inventories ..............................................        (2,321)          (962)
       Notes receivable .........................................            29          2,044
       Prepaid and other assets .................................          (657)         2,163
       Accounts payable and accrued liabilities .................        (2,386)         4,778
       Other long-term liabilities ..............................           566            319
                                                                       --------       --------
Net cash provided by (used in) operating activities of
  continuing operations .........................................        (1,030)         4,228
Net cash provided by operating activities of
  discontinued operations .......................................         1,697          1,792
                                                                       --------       --------

Net cash provided by operating activities .......................           667          6,020

Cash flows from investing activities:
Purchase of property and equipment ..............................        (2,735)        (2,151)
Proceeds from disposals of property and equipment ...............            46            561
Proceeds from sale of subsidiary ................................        14,921          2,000
Investments in unconsolidated affiliates ........................                       (1,446)
                                                                       --------       --------
Net cash provided by (used in) investing activities of
  continuing operations .........................................        12,232         (1,036)
Net cash used in investing activities of
  discontinued operations .......................................           (95)          (179)
                                                                       --------       --------

Net cash provided by (used in) investing activities .............        12,137         (1,215)
</TABLE>


           See notes to unaudited consolidated financial statements.



                                       3
<PAGE>   6
                            INDUSTRIAL HOLDINGS, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (DOLLARS IN THOUSANDS)
                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                 Six Months ended June 30,
                                                                                    2001           2000
                                                                                  --------       --------

<S>                                                                               <C>            <C>
Cash flows from financing activities:
Net repayments under revolving line of credit ..............................        (9,469)        (2,326)
Proceeds from the issuance of long-term obligations ........................            77          1,997
Principal payments on notes payable and
  long-term obligations ....................................................        (3,452)        (5,205)
                                                                                  --------       --------
Net cash used in financing activities
  of continuing operations .................................................       (12,844)        (5,534)
Net cash provided by (used in) financing activities
  of discontinued operations ...............................................
                                                                                  --------       --------

Net cash used in financing activities ......................................       (12,844)        (5,534)
                                                                                  --------       --------

Net decrease in cash and cash equivalents ..................................           (40)          (729)
Cash and cash equivalents, beginning of period .............................           945          1,738
                                                                                  --------       --------
Cash and cash equivalents, end of period ...................................      $    905       $  1,009
                                                                                  ========       ========


Supplemental disclosure of non-cash investing and financing activities:
Issuance of warrants .......................................................      $              $    407
Property acquired with debt or capital leases ..............................            77          1,997
Conversion of debt and accrued interest to equity ..........................         3,777

Supplemental disclosures of cash flow information:
  Cash paid for:
     Interest ..............................................................      $  4,314       $  3,220
     Income taxes ..........................................................             5
</TABLE>


           See notes to unaudited consolidated financial statements.





                                       4
<PAGE>   7



                            INDUSTRIAL HOLDINGS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                  JUNE 30, 2001


1.   BASIS OF PRESENTATION AND MANAGEMENT PLANS

     The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. These financial statements
include the accounts of Industrial Holdings, Inc. and subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. Operating results for the three and six months
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
Certain amounts have been reclassified from previous periods to conform to the
current presentation.

     The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As
disclosed in the financial statements, the Company had current liabilities in
excess of current assets of $32.9 million and $23.4 million and debt in default
at December 31, 2000 and June 30, 2001, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements do not
include any adjustments that may result from the outcome of this uncertainty.

     In December 2000, the Company made the decision to actively seek a
purchaser for the Engineered Products Group ("EPG") segment and adopted a plan
of disposal. The Company has accounted for the planned divestiture as
discontinued operations. EPG's customer base is comprised of various consumer
product industries, including automotive and home furnishings. The Company
believes that divesting of EPG will allow it to strategically focus on the
energy market. The Company believes the ability to concentrate both management
and financial resources on a single market will allow it to successfully
capitalize on the opportunities in that market. Additionally, the proceeds from
the sale of EPG will be used to reduce debt and provide working capital.

     On April 26, 2001, the Company reached the strategic decision to market the
Heavy Fabrication Group segment subsidiary, Beaird Industries, Inc. ("Beaird"),
for sale. Beaird manufactures and distributes medium and thick-walled pressure
vessels, wind towers, gas turbine casings, heat exchangers, heat panels and
other large machined weldments. Much of Beaird's customer base is outside the
traditional oil and gas services industry and is more focused on alternative
energy industries, such as wind energy and cogeneration. As was the case with
the Company's decision with respect to EPG, the Company believes that divesting
of Beaird will allow it to strategically focus on the oil and gas services
market. The proceeds from the sale of Beaird will be used to reduce debt.

     Effective May 7, 2001, the Company executed an Agreement and Plan of Merger
(the "Merger Agreement") among the Company, T-3 Energy Services, Inc. ("T-3"),
and First Reserve Fund VIII, L.P. ("First Reserve") whereby IHI and T-3 will be
merged in a stock for stock transaction. Upon completion of the merger, the
Company will be the surviving entity and the current stockholders of T-3 will
own a majority of the combined company. As a part of the transaction, T-3's
largest shareholder, First Reserve, will contribute up to an estimated $9.6
million of equity to the business and will assist the Company to refinance the
combined company's debt into a long-term credit facility. Among other
conditions, the merger is contingent upon obtaining the approval of the
shareholders of the Company and T-3, and customary regulatory approvals. The
transaction is expected to close in the third quarter of this year.

     Effective May 7, 2001, in connection with the execution of the Merger
Agreement and to improve the liquidity of the Company during the approval
period, T-3 purchased the Company's subsidiary, A&B Bolt & Supply, Inc. ("A&B
Bolt"), for a cash purchase price of $15.0 million. Approximately $8.8 million
of the proceeds were used to repay secured bank indebtedness with the remaining
proceeds utilized to pay a $1 million consent fee to EnSerCo



                                       5
<PAGE>   8

under the agreed injunction and for working capital purposes. The Company
recognized a loss of approximately $4.2 million in connection with this
disposition.

     Effective January 31, 2001, the Company entered into a fourth amendment to
its senior credit agreement. This amendment required that the outstanding
borrowings under the credit agreement be paid in full by August 31, 2001 and
required the Company to implement a plan to accomplish this repayment. The
amendment further modified the financial covenants to require maintenance of a
minimum tangible net worth and to limit capital expenditures. On December 31,
2000 and March 31, 2001, the Company was in violation of the financial covenants
under the credit agreement in effect as of those dates. On May 4, 2001, the
Company entered into a fifth amendment to its credit agreement. This amendment
provided the consent of the lenders to the execution of the merger agreement
between the Company and T-3 and the sale of A&B Bolt to T-3. The fifth amendment
required a permanent reduction in the maximum borrowings under the revolving
line of credit to the lesser of $43 million or a defined borrowing base and
further modified the financial covenants to require maintenance of minimum
consolidated tangible net worth and an EBITDA-to-debt-service ratio. In
addition, the lenders waived all prior covenant violations under the previous
agreement. The Company is currently in discussions with its senior lenders
concerning a proposed sixth amendment that would (i) extend the maturity date of
the credit agreement from August 31, 2001 to October 31, 2001 and (ii) modify
the financial covenants to accommodate the impact of the sale of A&B Bolt.

     The Company has a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo")
that matured on November 15, 1999. The Company was granted an extension of the
due date through January 31, 2000. On January 31, 2000, the Company was unable
to repay the amounts borrowed and defaulted on the note payable. On March 6,
2001, EnSerCo made demand for immediate payment of the outstanding principal and
interest totaling $18 million and initiated an arbitration proceeding as
required under the loan document. On April 12, 2001, EnSerCo and the Company
signed an agreement, so long as the definitive merger agreement between the
Company and T-3 is in effect, that: (i) suspended the arbitration proceeding
until October 31, 2001, extendable to December 31, 2001 under certain
circumstances; (ii) provided for a consent fee of $1 million payable to EnSerCo
at the time of the execution of the definitive merger agreement; and (iii)
obtained EnSerCo's consent to the Merger transaction, the disposition of the
Company's EPG and the disposition of the Company's subsidiaries, A&B Bolt and
Beaird.

     The Company has a $5.8 million term note with Heller Financial, Inc.
("Heller"), which matures on September 30, 2004. The Company was not in
compliance with certain financial covenants at each of the required quarterly
reporting dates during 1999 through 2001. The Company requested and received
waivers from Heller through the September 30, 2000 reporting period; however, it
did not seek waivers for the reporting dates of December 31, 2000, March 31,
2001 or June 30, 2001. The Company is in violation of the credit agreement, and
although Heller has not expressed the intent to call this obligation, it retains
the right to do so.

     The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
continued forbearance by certain of the Company's lenders pending modifications
to these obligations or the attainment of new financing.



                                       6
<PAGE>   9




2.   INVENTORY

Inventories consist of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                      June 30,               December 31,
                                                                        2001                     2000
                                                                   --------------            -------------

<S>                                                                <C>                       <C>
               Raw materials.............................          $       12,006            $      13,189
               Finished goods............................                   9,173                   14,506
               Other.....................................                   2,892                    1,959
                                                                   --------------            -------------

                                                                   $       24,071            $      29,654
                                                                   ==============            =============
</TABLE>

3.   REPORTABLE SEGMENTS

     The Company's determination of reportable segments considers the strategic
operating units under which the Company sells various types of products and
services to various customers. Financial information for purchase transactions
is included in the segment disclosures only for periods subsequent to the dates
of acquisition.

     The Company has reclassified the results of operations of the Engineered
Products Group ("EPG") as discontinued operations. This business was previously
disclosed as a separate operating segment. The segment data included below has
been restated to exclude amounts related to discontinued operations. In July
2000, the Company reorganized its operating segments to more closely reflect the
markets into which the subsidiaries sell their products and services. Prior to
the reorganization, EPG and the Stud Bolt and Gasket Group were combined in the
fastener manufacturing and distribution segment. The Energy Group also includes
what was formerly known as the machine tool distribution segment. Additionally,
one of our subsidiaries that was previously included in the fastener
manufacturing and distribution segment is now part of the Energy Group. The
Company evaluates performance based on income from operations excluding certain
corporate costs not allocated to the segments. Intersegment sales are
eliminated. Substantially all sales are from domestic sources and all assets are
held in the United States.

<TABLE>
<CAPTION>
                                                                        (DOLLARS IN THOUSANDS)
                                                             STUD BOLT         HEAVY
                                            ENERGY          AND GASKET       FABRICATION         CORPORATE         CONSOLIDATED
                                         ------------      ------------      ------------       ------------       ------------

<S>                                      <C>               <C>               <C>                <C>                <C>
FOR THE THREE MONTHS ENDED:

JUNE 30, 2001
Sales .............................      $     21,812      $     13,154      $     18,964       $                   $    53,930
Operating income (loss) ...........             3,055               625               790               (832)             3,638

JUNE 30, 2000
Sales .............................      $     22,993      $     12,617      $      7,082       $                   $    42,692
Operating income (loss) ...........             2,041               620            (1,378)            (1,608)              (325)

FOR THE SIX MONTHS ENDED:

JUNE 30, 2001
Sales .............................      $     49,217      $     27,910      $     37,517       $                  $    114,644
Operating income (loss) ...........             6,048             1,963               645             (1,567)             7,089

JUNE 30, 2000
Sales .............................      $     45,599      $     25,311      $     15,046       $                  $     85,956
Operating income (loss) ...........             2,085             1,436            (2,860)            (3,882)            (3,221)

AS OF JUNE 30, 2001:
Total assets ......................      $     29,400      $     24,351      $     44,953       $     27,246       $    125,950

AS OF DECEMBER 31, 2000:
Total assets ......................      $     52,193      $     24,784      $     44,821       $     27,884       $    149,682
</TABLE>





                                       7
<PAGE>   10

4.   EARNINGS (LOSS) PER SHARE

     The following table presents information necessary to calculate basic and
diluted earnings (loss) per share for the periods indicated:

<TABLE>
<CAPTION>
                                                                                     Three months ended
                                                                                          June 30,
                                                                                    2001                2000
                                                                                 ----------       ----------
<S>                                                                              <C>              <C>
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
     Numerator for income (loss) from continuing operations per share .....      $   (2,754)      $      421
     Numerator for income from discontinued operations per share ..........                              261
                                                                                 ----------       ----------
     Numerator for net income (loss) per share ............................      $   (2,754)      $      682
                                                                                 ==========       ==========
Denominator:
     Weighted average common shares outstanding - Basic ...................          13,763           13,556
                                                                                 ==========       ==========

Income (loss) from continuing operations per share - Basic ................      $     (.20)      $      .03
Income from discontinued operations per share - Basic .....................                              .02
                                                                                 ----------       ----------
Net income (loss) per share - Basic .......................................      $     (.20)      $      .05
                                                                                 ==========       ==========

DILUTED EARNINGS (LOSS) PER SHARE:
Numerator:
     Numerator for income (loss) from continuing operations per share .....      $   (2,754)      $      421
     Numerator for income from discontinued operations per share ..........                              261
                                                                                 ----------       ----------
     Numerator for net income (loss) per share ............................      $   (2,754)      $      682
                                                                                 ==========       ==========
Denominator:
     Weighted average common shares outstanding - Basic ...................          13,763           13,556
     Shares issuable from assumed conversion of common share options,
          warrants granted and debt conversion ............................                              396
                                                                                 ----------       ----------
     Weighted average common shares outstanding - Diluted .................          13,763           13,952
                                                                                 ==========       ==========

Income (loss) from continuing operations per share - Diluted ..............      $     (.20)      $      .03
Income from discontinued operations per share - Diluted ...................                              .02
                                                                                 ----------       ----------
Net income (loss) per share - Diluted .....................................      $     (.20)      $      .05
                                                                                 ==========       ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                                      Six months ended
                                                                                          June 30,
                                                                                    2001             2000
                                                                                 ----------       ----------
<S>                                                                              <C>              <C>
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
     Numerator for loss from continuing operations per share ..............      $   (1,929)      $   (5,417)
     Numerator for income from discontinued operations per share ..........                              632
                                                                                 ----------       ----------
     Numerator for net loss per share .....................................      $   (1,929)      $   (4,785)
                                                                                 ==========       ==========
Denominator:
     Weighted average common shares outstanding - Basic ...................          13,727           14,334
                                                                                 ==========       ==========

Loss from continuing operations per share - Basic .........................      $     (.14)      $     (.37)
Income from discontinued operations per share - Basic .....................                              .04
                                                                                 ----------       ----------
Net loss per share - Basic ................................................      $     (.14)      $     (.33)
                                                                                 ==========       ==========
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator:
     Numerator for loss from continuing operations per share ..............      $   (1,929)      $   (5,417)
     Numerator for income from discontinued operations per share ..........                              632
                                                                                 ----------       ----------
     Numerator for net loss per share .....................................      $   (1,929)      $   (4,785)
                                                                                 ==========       ==========
Denominator:
     Weighted average common shares outstanding - Basic and Diluted .......          13,727           14,334
                                                                                 ==========       ==========

Loss from continuing operations per share - Diluted .......................      $     (.14)      $     (.37)
Income from discontinued operations per share - Diluted ...................                              .04
                                                                                 ----------       ----------
Net loss per share - Diluted ..............................................      $     (.14)      $     (.33)
                                                                                 ==========       ==========
</TABLE>




                                       8
<PAGE>   11

     There were 629,250 options, and 3,446,863 warrants for the three months
ended June 30, 2000 that were not included in the computation of diluted
earnings per share because their inclusion would have been anti-dilutive. No
stock options or warrants were included in the loss per share computation for
the three and six month periods ended June 30, 2001 or the six month period
ended June 30, 2000 as their effect was anti-dilutive due to the losses
recorded. The Company had 5,388,258 warrants and 2,598,417 options outstanding
at June 30, 2001, and 5,346,863 warrants and 2,668,750 options outstanding at
June 30, 2000.

5.   DEBT

     Effective January 31, 2001, the Company entered into a fourth amendment to
its senior credit agreement. This amendment required that the outstanding
borrowings under the credit agreement be paid in full by August 31, 2001 and
required the Company to implement a plan to accomplish this repayment. The
amendment further modified the financial covenants to require maintenance of a
minimum tangible net worth and to limit capital expenditures. On December 31,
2000 and March 31, 2001, the Company was in violation of the financial covenants
under the credit agreement in effect as of those dates. On May 4, 2001, the
Company entered into a fifth amendment to its credit agreement. This amendment
provided the consent of the lenders to the execution of the merger agreement
between the Company and T-3 and the sale of A&B Bolt to T-3. The fifth amendment
required a permanent reduction in the maximum borrowings under the revolving
line of credit to the lesser of $43 million or a defined borrowing base and
further modified the financial covenants to require maintenance of minimum
consolidated tangible net worth and an EBITDA-to-debt-service ratio. In
addition, the lenders waived all prior covenant violations under the previous
agreement. The Company is currently in discussions with its senior lenders
concerning a proposed sixth amendment that would (i) extend the maturity date of
the credit agreement from August 31, 2001 to October 31, 2001 and (ii) modify
the financial covenants to accommodate the impact of the sale of A&B Bolt.

     The Company has a $15 million note payable to EnSerCo that matured on
November 15, 1999. The Company was granted an extension of the due date through
January 31, 2000. On January 31, 2000, the Company was unable to repay the
amounts borrowed and defaulted on the note payable. On March 6, 2001, EnSerCo
made demand for immediate payment of the outstanding principal and interest
totaling $18 million and initiated an arbitration proceeding as required under
the loan document. On April 12, 2001, EnSerCo and the Company signed an
agreement, so long as the definitive merger agreement between the Company and
T-3 is in effect, that: (i) suspended the arbitration proceeding until October
31, 2001, extendable to December 31, 2001 under certain circumstances; (ii)
provided for a consent fee of $1 million payable to EnSerCo at the time of the
execution of the definitive merger agreement; and (iii) obtained EnSerCo's
consent to the Merger transaction, the disposition of the Company's EPG and the
disposition of the Company's subsidiaries, A&B Bolt and Beaird.

     The Company has a $5.8 million term note with Heller, which matures on
September 30, 2004. The Company was not in compliance with certain financial
covenants at each of the required quarterly reporting dates during 1999 through
2001. The Company requested and received waivers from Heller through the
September 30, 2000 reporting period; however, it did not seek waivers for the
reporting dates of December 31, 2000, March 31, 2001 or June 30, 2001.
Additionally, the Company does not anticipate being in compliance with these
covenants any time during the remainder of 2001 absent modifications from
Heller. The Company is in violation of the credit agreement, and although Heller
has not expressed the intent to call this obligation, it retains the right to do
so.

     In August 2000, the Company issued two convertible subordinated notes
("Note A" and "Note B") to SJMB, L.P. ("SJMB") in connection with its
acquisition of the 51% of limited partnership interests of Orbitform that it did
not already own. Note A is an 11% promissory note in the original principal
amount of $3.45 million, convertible at





                                       9
<PAGE>   12

any time, together with accrued interest, into shares of the Company's common
stock at a price of $1.15 per share. Note B is an 11% promissory note in the
original principal amount of $3.45 million, convertible, together with accrued
interest, beginning one year after issuance into shares of the Company's common
stock at a price of $2.00 per share. In connection with the merger with T-3,
SJMB agreed to convert amounts outstanding under the notes immediately prior to
the merger into shares of the Company's common stock at $1.75 per share.

     On June 29, 2001, SJMB converted Note A and $0.3 million in accrued
interest on Note A into approximately 3.3 million shares of the Company's common
stock. Additionally, upon the completion of the merger with T-3, the Company
agreed to pay to SJMB $350,000 of accrued interest owed on Note B which was
convertible into the Company's common stock at $2.00 per share. At the
consummation of the merger, SJMB agreed to convert all of the remaining
principal and accrued interest into the number of shares of the Company's common
stock equal to a number of shares that will be calculated by dividing the
principal and interest that would have been outstanding at the merger date if no
amounts of Note A or Note B had been paid or converted, divided by $1.75, less
the 3,284,167 shares issued to SJMB from the conversion of Note A described
above. (For example, this additional amount would be approximately 1.1 million
shares if the merger were to close on September 30, 2001.)

     Additionally, if the merger is not completed by December 31, 2001, the
Company agreed to pay SJMB a fee of $600,000 and issue to SJMB a warrant to
purchase 1.0 million shares of the Company's common stock at an exercise price
of $1.00 per share.

6.   NASDAQ

     On April 18, 2001, the Company received a notice of delisting of its Common
Stock and Class B, C, and D Warrants from the Nasdaq NMS because the Company's
consolidated financial statements contained in the 2000 Annual Report on Form
10-K, filed on April 12, 2001, reflected potential non-compliance with the
requirements of the Nasdaq Marketplace rules that require National Market
companies to have $4 million in net tangible assets. As of December 31, 2000,
the Company had negative net tangible assets of $8.4 million. The Nasdaq notice
also cited the proposed merger with T-3 as a potential change of control
transaction that would require the combined company to qualify for listing under
the initial listing requirements of the Nasdaq Marketplace rules, which are more
stringent than the continued listing requirements. The Company responded that it
believes that it can satisfy the Nasdaq Marketplace rules for continued listing
based on a pilot program which allows Nasdaq National Market companies to comply
with a standard requiring $10 million in shareholders' equity instead of $4
million in net tangible assets. On June 11, 2001, Nasdaq notified the Company
that it had presented a definitive plan that would enable it to evidence
compliance with requirements for continued listing, pending completion of the
merger with T-3, and determined to continue listing the Company's securities on
the Nasdaq National Market provided that IHI complies with the following
conditions:


     1.   On or before June 29, 2001, the Company must make a public filing
          evidencing a minimum of $10 million in shareholders' equity, as well
          as compliance with all other requirements for continued listing on the
          Nasdaq National Market;

     2.   The Company must make a timely filing of its Form 10-Q for the quarter
          ended June 30, 2001 evidencing continued compliance;

     3.   On or before October 31, 2001, the Company must submit documentation
          to Nasdaq evidencing the consummation of the merger with T-3; and

     4.   Immediately upon consummation of the merger, the combined company must
          satisfy all requirements for initial listing on the Nasdaq National
          Market, including the minimum $5 bid price per share requirement.



     In the event the Company fails to comply with any of these terms, its
securities may be immediately transferred to the Nasdaq SmallCap market or may
be completely delisted from The Nasdaq Stock Market, in which case, it would
become eligible to trade on the over-the-counter bulletin board.

     On July 2, 2001, Nasdaq notified the Company that it had evidenced
compliance with the first requirement necessary for continued listing on The
Nasdaq National Market and, accordingly, the Company's securities will









                                       10
<PAGE>   13

remain on The Nasdaq National Market and the qualifications exception shall
continue, subject to the Company meeting the above-listed future requirements.
Additionally, as required by condition 2 above, the Company has filed its Form
10-Q for the quarter ended June 30, 2001 on a timely basis and its consolidated
balance sheet as of June 30, 2001 reflects shareholders' equity in excess of $10
million.

7.   COMMITMENTS AND CONTINGENCIES

     The Company is involved in various claims and litigation arising in the
ordinary course of its business. In the opinion of management, the ultimate
liabilities, if any, as a result of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations or cash flows.

8.   DIVESTITURES

     In connection with the execution of the Merger Agreement and to improve the
liquidity of the Company during the approval period, T-3 purchased the Company's
subsidiary, A&B Bolt, for a cash purchase price of $15.0 million. The proceeds
were used by the Company to repay secured bank indebtedness of approximately
$8.8 million and for working capital purposes. The Company recognized a loss of
approximately $4.2 million in connection with this disposition. Sales and
operating income for A&B Bolt were as follows:

<TABLE>
<CAPTION>
                                                                 (DOLLARS IN THOUSANDS)
                                                                                OPERATING
                   FOR THE YEAR ENDED:                            SALES          INCOME
                                                                --------        ---------

<S>                                                             <C>             <C>
                   December 31, 2000                            $ 39,041        $    798

                   FOR THE THREE MONTHS ENDED:

                   June 30, 2001                                   3,869             297
                   June 30, 2000                                  10,029             457

                   FOR THE SIX MONTHS ENDED:

                   June 30, 2001                                  14,191           1,025
                   June 30, 2000                                  17,870             457
</TABLE>


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

GENERAL

     The Company owns and operates a diversified group of middle-market
industrial manufacturing and distribution businesses whose products include
metal fasteners, large and heavy pressure vessels, steam panels and wind towers,
high-pressure industrial valves and related products and services. Its
operations are organized into three business segments: (i) the Energy Group;
(ii) the Stud Bolt and Gasket Group ("Stud Bolt"); and (iii) the Heavy
Fabrication Group. The Engineered Products Group ("EPG") was accounted for as a
discontinued operation beginning in 2000.

     The Company believes its businesses are characterized by strong market
positions in niche markets, high value-added products and services, an
established and diversified customer base, experienced and committed management,
cost-efficient equipment and production facilities with a low sensitivity to
technological change. The Company's products and services are sold to a broad
customer base primarily in the energy industry. Most of the Company's products
are manufactured to specific technical requirements and for specific customer
orders.

     During 1999, the Company's operating results were adversely affected by
falling oil and gas prices and depressed activity in the energy industry, a
decline in spending in the refining and processing industry, increased foreign
competition in its Heavy Fabrication Group, and costs associated with a
strategic reorganization within EPG. The losses incurred caused financial
covenant defaults under most of its indebtedness. Because of weak energy prices
and continuing losses, the Company was unable to refinance its debt.

     Although the Company's operating results have improved in 2001 and 2000
over 1999, the Company remains cash constrained and highly leveraged with $80.5
million in debt at June 30, 2001, a significant amount of which is






                                       11
<PAGE>   14

currently due or in default. As a result, the Company (1) is currently seeking
an extension to its credit agreement with its senior lenders, which matures
August 31, 2001, in order to provide for enough time to complete the merger with
T-3; (2) is a party to an agreed temporary injunction and an agreed judgment
with respect to an approximately $18 million debt obligation with EnSerCo that
requires the merger with T-3 to be completed by October 31, 2001, extendable to
December 31, 2001 under certain circumstances; and (3) is currently in default
on approximately $5.8 million of term debt with Heller and, absent future
financial covenant modifications, expects to remain in default for the rest of
2001. Although Heller has not expressed the intent to call this obligation, it
retains the right to do so.

     In late 2000, the Company's Board of Directors determined that it would be
in the best interest of the Company to become solely an energy services company.
The board of directors believed that the Company would benefit from a
concentration of both management and financial resources on a single market.
Additionally, the Company's management believed that this strategic change would
enhance the probability of successfully refinancing the Company's indebtedness.
To begin implementation of its strategy, in December 2000, the Company's board
of directors decided to sell EPG and adopted a plan of disposal. In furtherance
of this strategy, in April 2000, the board directed management to attempt to
sell its Heavy Fabrication Group subsidiary, Beaird Industries, Inc. The Company
plans to use the proceeds from the sale of EPG and Beaird to reduce outstanding
indebtedness.

     As it became apparent to the Company's management in December 2000 that a
successful refinancing of its indebtedness was not likely to occur in the near
term, it began to review various alternatives to ensure the ongoing viability of
the Company. These alternatives included raising additional equity or selling
other non-essential assets. One of these alternatives included seeking a
strategic business combination in the oilfield service industry.

     On May 7, 2001, the Company executed the merger agreement with T-3. The
merger agreement provides for an equity infusion by T-3's principal shareholder,
First Reserve Fund VIII, in the combined company which is estimated to be $1.9
million (based on an expected closing date of September 30, 2001), and the
refinancing of substantially all of the Company's indebtedness.

     In connection with the execution of the merger agreement with T-3, and to
improve the Company's liquidity, the Company sold A&B Bolt to T-3, for a cash
purchase price of $15 million. Approximately $8.8 million of the proceeds were
used to repay secured bank indebtedness with the remaining proceeds utilized to
pay a $1 million consent fee to EnSerCo under the agreed injunction and for
working capital purposes.

     Effective January 31, 2001, the Company entered into a fourth amendment to
its senior credit agreement. This amendment required that the outstanding
borrowings under the credit agreement be paid in full by August 31, 2001 and
required the Company to implement a plan to accomplish this repayment. The
amendment further modified the financial covenants to require maintenance of a
minimum tangible net worth and to limit capital expenditures. On December 31,
2000 and March 31, 2001, the Company was in violation of the financial covenants
under the credit agreement in effect as of those dates. On May 4, 2001, the
Company entered into a fifth amendment to its credit agreement. This amendment
provided the consent of the lenders to the execution of the merger agreement
between the Company and T-3 and the sale of A&B Bolt to T-3. The fifth amendment
required a permanent reduction in the maximum borrowings under the revolving
line of credit to the lesser of $43 million or a defined borrowing base and
further modified the financial covenants to require maintenance of minimum
consolidated tangible net worth and an EBITDA-to-debt-service ratio. In
addition, the lenders waived all prior covenant violations under the previous
agreement. The Company is currently in discussions with its senior lenders
concerning a proposed sixth amendment that would (i) extend the maturity date of
the credit agreement from August 31, 2001 to October 31, 2001 and (ii) modify
the financial covenants to accommodate the impact of the sale of A&B Bolt.

     The Company's results of operations are affected by the level of economic
activity in the industries served by its customers, which in turn may be
affected by other factors, including the level of economic activity in the U.S.
and foreign markets they serve. The principal industries served by the Company's
customers within its continuing operations are the petrochemical and oil and gas
industries. An economic slowdown in these industries could result in a decrease
in demand for products and services, which could adversely affect operating
results. During 2000 and continuing into the first six months of 2001, oil and
gas prices increased significantly, resulting in an increase in the demand for
products and services that are used in the exploration, production and refining
of oil and gas. Additionally, because of the extension of the tax credit for
Renewable Electricity Production through December 31, 2001, the Company was
awarded a significant contract for the fabrication of wind towers. Although the
Company expects this credit to be extended, should it expire without extension,
the Company expects the level of wind tower revenues to decrease in 2002.




                                       12
<PAGE>   15

     This section should be read in conjunction with the Company's consolidated
financial statements included elsewhere.

RESULTS OF OPERATIONS

     The following table sets forth certain operating statement data for each of
the Company's segments for each of the periods presented.

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED                SIX MONTHS ENDED
                                                        JUNE 30,                         JUNE 30,
                                                 2001             2000             2001             2000
                                              ----------       ----------       ----------       ----------

<S>                                           <C>              <C>              <C>              <C>
Sales:
     Energy(1) .........................      $   21,812       $   22,993       $   49,217       $   45,599
     Stud Bolt and Gasket ..............          13,154           12,617           27,910           25,311
     Heavy Fabrication .................          18,964            7,082           37,517           15,046
                                              ----------       ----------       ----------       ----------

                                                  53,930           42,692          114,644           85,956
                                              ----------       ----------       ----------       ----------
Cost of Sales:
     Energy(1) .........................          15,266           17,142           34,656           34,625
     Stud Bolt and Gasket ..............           9,713            9,384           20,294           18,660
     Heavy Fabrication .................          16,735            7,044           34,029           15,059
                                              ----------       ----------       ----------       ----------

                                                  41,714           33,570           88,979           68,344
                                              ----------       ----------       ----------       ----------
Gross Profit (Loss):
     Energy(1) .........................           6,546            5,851           14,561           10,974
     Stud Bolt and Gasket ..............           3,441            3,233            7,616            6,651
     Heavy Fabrication .................           2,229               38            3,488              (13)
                                              ----------       ----------       ----------       ----------

                                                  12,216            9,122           25,665           17,612
                                              ----------       ----------       ----------       ----------
Selling, General and Administrative:
     Energy(1) .........................           3,491            3,810            8,513            8,889
     Stud Bolt and Gasket ..............           2,816            2,613            5,653            5,215
     Heavy Fabrication .................           1,439            1,416            2,843            2,847
     Corporate .........................             832            1,608            1,567            3,882
                                              ----------       ----------       ----------       ----------

                                                   8,578            9,447           18,576           20,833
                                              ----------       ----------       ----------       ----------
Operating Income (Loss):
     Energy(1) .........................           3,055            2,041            6,048            2,085
     Stud Bolt and Gasket ..............             625              620            1,963            1,436
     Heavy Fabrication .................             790           (1,378)             645           (2,860)
     Corporate .........................            (832)          (1,608)          (1,567)          (3,882)
                                              ----------       ----------       ----------       ----------

                                              $    3,638       $     (325)      $    7,089       $   (3,221)
                                              ==========       ==========       ==========       ==========
</TABLE>

(1)  A&B Bolt was sold on May 7, 2001 and amounts include activity through that
     date.


THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000.

     Sales. On a consolidated basis, sales increased $11.2 million, or 26%, for
the three months ended June 30, 2001 compared to the three months ended June 30,
2000.

     Sales for the Energy Group decreased $1.2 million, or 5%, for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000,
primarily as a result of the sale of A&B Bolt to T-3 effective May 7, 2001.
Without A&B Bolt in either period, sales would have increased $4.6 million, or
35%, for the three months ended June 30, 2001 compared to the three months ended
June 30, 2000. This sales increase was primarily attributable to increases in
the worldwide rig count, optimism regarding the long-term hydrocarbon price
environment, increasing worldwide demand for oil and gas coupled with declining
production in many areas all resulting in increased oil and





                                       13
<PAGE>   16

gas prices, increased exploration and production spending in the latter part of
2000 and first half of 2001 and an improved demand for oilfield services.

     Sales for the Stud Bolt Group increased $0.5 million, or 4%, for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000.
Over half of this group's sales are to the refining and processing industry and
about one-fourth of its sales are to the upstream (or exploration and
production) energy industry. Sales increased due to improvements in the refining
and energy industries.

     Sales for the Heavy Fabrication Group increased by $11.9 million, or 168%,
for the three months ended June 30, 2001 compared to the three months ended June
30, 2000. Historically, a substantial percentage of this group's revenue was
derived from the fabrication of heavy pressure vessels for customers in the
hydrocarbon processing industry. Customers in the hydrocarbon processing
industry materially reduced their capital spending during 1999 and 2000, which
directly impacted sales in this group. Additionally, heavy competitive pressure
from overseas, particularly Korean competition, has negatively impacted sales in
the markets Beaird has traditionally served. As a result, Beaird actively
pursued sales in new markets and in August 2000, Beaird entered into a contract
with FPL Energy LLC ("FPL") to fabricate up to 800 wind turbine towers by
November 2001 for a total price in excess of $55 million, with firm orders to
date of 696 50-meter towers and 52 65-meter towers for delivery to wind energy
projects in West Texas and Oregon. Additionally, Beaird has a significant
contract to produce steam panels for use in cogeneration power plants. As a
result of these and other market diversification efforts, in the second quarter
of 2001, the manufacture of wind turbine towers and steam panels made up 59% of
Beaird's revenues. Backlog at Beaird as of June 30, 2001 has increased 20% over
June 30, 2000.

     Cost of Sales. On a consolidated basis, cost of sales increased $8.1
million, or 24%, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000. Gross margin was 23% in 2001 compared to 21% in
2000. Gross margins were higher on a consolidated basis in the 2001 period
compared to the 2000 period primarily as a result of improvements in margins at
the Energy Group and the Heavy Fabrication Group.

     Cost of sales for the Energy Group decreased $1.9 million, or 11%, for the
three months ended June 30, 2001 compared to the three months ended June 30,
2000, primarily as a result of the sale of A&B Bolt to T-3 effective May 7,
2001. Without A&B Bolt in either period, cost of sales would have increased $2.6
million, or 26%, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000, primarily as a result of the increase in sales
described above. Gross margin increased from 26% in the 2000 period to 30% in
the 2001 period. Excluding A&B Bolt from both periods, the 2001 gross margin was
31% and the 2000 gross margin was 26%. The improvement in margins in 2001
compared to 2000 is attributable to increased sales that cover more fixed costs
resulting in higher margins and less competitive pressure on prices to customers
as manufacturers' shops became more fully utilized.

     Cost of sales for the Stud Bolt Group increased $0.3 million, or 4%, for
the three months ended June 30, 2001 compared to the three months ended June 30,
2000, primarily as a result of the increase in sales described above. Gross
margin remained unchanged, 26% in both the 2000 and 2001 periods.

     Cost of sales for the Heavy Fabrication Group increased $9.7 million, or
138%, for the three months ended June 30, 2001 compared to the three months
ended June 30, 2000. The gross margin was 12% in the 2001 period compared to 1%
for the 2000 period. Gross margin was higher in the 2001 period than the 2000
period as sales increased to levels that were sufficient to generate enough
gross profit to cover fixed costs. Additionally, Beaird experienced a favorable
sales mix as a significant portion of sales in the 2001 period were made up of
wind turbine tower work which has a higher margin than Beaird's other product
lines.

     Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses decreased $0.9 million, or 9%, for
the three months ended June 30, 2001 compared to the three months ended June 30,
2000. The 2000 period includes approximately $0.3 million in expenses associated
with failed refinancing efforts, $0.3 million in stock compensation expenses,
and $0.2 million in additional professional fees.

     Selling, general and administrative expenses for the Energy Group decreased
$0.3 million, or 8%, for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000. Excluding the effect of A&B Bolt, which was
sold in May 2001, selling, general and administrative expenses would have
increased $0.9 million or 49% for the 2001 period compared to the 2000 period as
a result of the increase in sales described above.






                                       14
<PAGE>   17

     Selling, general and administrative expenses for the Stud Bolt Group
increased $0.2 million, or 8%, for the three months ended June 30, 2001 compared
to the three months ended June 30, 2000, primarily as a result of the increase
in sales described above.

     Selling, general and administrative expenses in the Heavy Fabrication Group
remained unchanged for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000.

     Selling, general and administrative expenses at corporate decreased $0.8
million, or 48%, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000. The 2000 period includes approximately $0.3 million
in expenses associated with failed refinancing efforts, $0.3 million in stock
compensation expenses, and $0.2 million in additional professional fees.

     Interest Expense. On a consolidated basis, interest expense decreased $0.1
million, or 4%, for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000, primarily as a result of lower interest rates and
average debt balances.

     Other Income (Expense), Net. On a consolidated basis, other income
(expense), net, was an expense of approximately $4.1 million for the three
months ended June 30, 2001 compared with income of approximately $3.1 million
for the three months ended June 30, 2000. The 2001 period included a loss of the
sale of A&B Bolt of approximately $4.2 million, while the 2000 period included a
gain on the sale of Blastco of approximately $2.6 million as well as a gain on
the settlement of litigation with Trinity Industries of approximately $0.8
million.

     Income Taxes. The Company recognized no federal tax benefit or expense for
the three months ended June 30, 2001 or June 30, 2000 as a result of adjustments
to its valuation allowance to offset the deferred tax asset associated with net
operating loss carry forwards.

     Income (Loss) From Continuing Operations. On a consolidated basis, the
Company generated a net loss from continuing operations of $2.8 million for the
three months ended June 30, 2001 compared to income from continuing operations
of $0.4 million for the three months ended June 30, 2000 as a result of the
foregoing factors.

     Loss From Discontinued Operations. In December 2000, the Company made the
decision to actively seek a purchaser for EPG and adopted a plan of disposal.
The Company recorded a $22.5 million loss from discontinued operations for 2000.
The net loss was comprised of a $1.0 million net loss from operations for 2000
and an estimated $21.5 million net loss on the disposal of EPG which included an
accrual for the estimated net loss of EPG between the measurement date of
December 29, 2000 and the estimated disposal date of July 31, 2001. The
operating results of EPG have been reflected as Discontinued Operations. Income
from discontinued operations was approximately $0.3 million for the three months
ended June 30, 2000.

     Net Income (Loss). On a consolidated basis, the Company generated a net
loss of $2.8 million for the three months ended June 30, 2001 compared to net
income of $0.7 million for the three months ended June 30, 2000 as a result of
the foregoing factors.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000.

     Sales. On a consolidated basis, sales increased $28.7 million, or 33%, for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000.

     Sales for the Energy Group increased $3.6 million, or 8%, for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000,
primarily attributable to increases in the worldwide rig count, optimism
regarding the long-term hydrocarbon price environment, increasing worldwide
demand for oil and gas coupled with declining production in many areas all
resulting in increased oil and gas prices, increased exploration and production
spending in the latter part of 2000 and early 2001 and an improved demand for
oilfield services. Additionally, the Company sold A&B Bolt to T-3 effective May
7, 2001, and in April 2000, the Company sold Blastco, its refinery demolition
subsidiary. Blastco's sales were $3.5 million for the 2000 period. Excluding the
effects of Blastco and A&B Bolt, sales in the Energy Group would have increased
$10.4 million, or 42%, for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000. Additionally in the second quarter of 2000, the
group began providing temporary labor services to the oil and gas construction
industry. Sales of $3.0 million were recognized in the 2001 period related to
this activity as compared with $1.8 million in the comparable 2000 period.




                                       15
<PAGE>   18

     Sales for the Stud Bolt Group increased $2.6 million, or 10%, for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000. Over
half of this group's sales are to the refining and processing industry and about
one-fourth of its sales are to the upstream (or exploration and production)
energy industry. Sales increased due to improvements in the refining and energy
industries.

     Sales for the Heavy Fabrication Group increased by $22.5 million, or 149%,
for the six months ended June 30, 2001 compared to the six months ended June 30,
2000. Historically, a substantial percentage of this group's revenue was derived
from the fabrication of heavy pressure vessels for customers in the hydrocarbon
processing industry. Customers in the hydrocarbon processing industry materially
reduced their capital spending during 1999 and 2000, which directly impacted
sales in this group. Additionally, heavy competitive pressure from overseas,
particularly Korean competition, has negatively impacted sales in the markets
Beaird has traditionally served. As a result, Beaird actively pursued sales in
new markets and in August 2000, Beaird entered into a contract with FPL to
fabricate up to 800 wind turbine towers by November 2001 for a total price in
excess of $55 million, with firm orders to date of 696 50-meter towers and 52
65-meter towers for delivery to wind energy projects in West Texas and Oregon.
Additionally, Beaird has a significant contract to produce steam panels for use
in cogeneration power plants. As a result of these and other market
diversification efforts, in the first six months of 2001, the manufacture of
wind turbine towers and steam panels made up 73% of Beaird's revenues. Backlog
at Beaird as of June 30, 2001 has increased 20% over June 30, 2000.

     Cost of Sales. On a consolidated basis, cost of sales increased $20.6
million, or 30%, for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000. Gross margin was 22% in 2001 compared to 21% in
2000. Gross margins were higher on a consolidated basis in the 2001 period
compared to the 2000 period primarily as a result of improvements in margins at
the Energy Group and the Heavy Fabrication Group.

     Cost of sales for the Energy Group remained unchanged for the six months
ended June 30, 2001 compared to the six months ended June 30, 2000. Gross margin
increased from 24% in the 2000 period to 30% in the 2001 period. The Company
sold A&B Bolt to T-3 effective May 7, 2001, and in April 2000, the Company sold
Blastco, its refinery demolition subsidiary. Excluding the effects of Blastco
and A&B Bolt, cost of sales would have increased $6.2 million, or 34%, for the
six months ended June 30, 2001 compared to the six months ended June 30, 2000,
and the 2001 gross margin would have been 30% and the 2000 gross margin would
have been 26%. The improvement in margins in 2001 compared to 2000 is
attributable to increased sales that cover more fixed costs resulting in higher
margins and less competitive pressure on prices to customers as manufacturers'
shops became more fully utilized.

     Cost of sales for the Stud Bolt Group increased $1.6 million, or 9%, for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000, primarily as a result of the increase in sales described above. Gross
margin was 27% in the 2001 period compared with 26% in the 2000 period.

     Cost of sales for the Heavy Fabrication Group increased $19.0 million, or
126%, for the six months ended June 30, 2001 compared to the six months ended
June 30, 2000. The gross margin was 9% in the 2001 period compared to 0% for the
2000 period. Gross margin was higher in the 2001 period than the 2000 period as
sales increased to levels that were sufficient to generate enough gross profit
to cover fixed costs. Additionally, Beaird experienced a favorable sales mix as
a significant portion of sales in the 2001 period were made up of wind turbine
tower work which has a higher margin than Beaird's other product lines.

     Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses decreased $2.3 million, or 11%, for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000. The 2000 period includes approximately $1.0 million in expenses associated
with failed refinancing efforts, $0.5 million in officer loan forgiveness and
stock compensation expenses, and $0.3 million in additional professional fees.

     Selling, general and administrative expenses for the Energy Group decreased
$0.4 million, or 4%, for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000. Excluding the effect of A&B Bolt, which was sold in
May 2001 and the effect of Blastco, which was sold in April 2000, selling,
general and administrative expenses would have increased $1.4 million or 33% for
the 2001 period compared to the 2000 period as a result of the increase in sales
described above.




                                       16
<PAGE>   19

     Selling, general and administrative expenses for the Stud Bolt Group
increased $0.4 million, or 8%, for the six months ended June 30, 2001 compared
to the six months ended June 30, 2000, primarily as a result of the increase in
sales described above.

     Selling, general and administrative expenses in the Heavy Fabrication Group
remained unchanged for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000.

     Selling, general and administrative expenses at corporate decreased $2.3
million, or 60%, for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000. The 2000 period includes approximately $1.0 million
in expenses associated with failed refinancing efforts, $0.5 million in officer
loan forgiveness and stock compensation expenses, and $0.3 million in additional
professional fees.

     Interest Expense. On a consolidated basis, interest expense decreased $0.3
million, or 5%, for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000, primarily as a result of lower interest rates and
average debt balances.

     Other Income (Expense), Net. On a consolidated basis, other income
(expense), net, was an expense of approximately $4.3 million for the six months
ended June 30, 2001 compared with income of approximately $2.8 million for the
six months ended June 30, 2000. The 2001 period included a loss of the sale of
A&B Bolt of approximately $4.2 million, while the 2000 period included a gain on
the sale of Blastco of approximately $2.6 million as well as a gain on the
settlement of litigation matters with Trinity Industries of approximately $0.8
million.

     Income Taxes. The Company recognized no federal tax benefit or expense for
the six months ended June 30, 2001 or June 30, 2000 as a result of adjustments
to its valuation allowance to offset the deferred tax asset associated with net
operating loss carry forwards.

     Income (Loss) From Continuing Operations. On a consolidated basis, the
Company generated a net loss from continuing operations of $1.9 million for the
six months ended June 30, 2001 compared to a net loss from continuing operations
of $5.4 million for the six months ended June 30, 2000 as a result of the
foregoing factors.

     Loss From Discontinued Operations. In December 2000, the Company made the
decision to actively seek a purchaser for EPG and adopted a plan of disposal.
The Company recorded a $22.5 million loss from discontinued operations for 2000.
The net loss was comprised of a $1.0 million net loss from operations for 2000
and an estimated $21.5 million net loss on the disposal of EPG which included an
accrual for the estimated net loss of EPG between the measurement date of
December 29, 2000 and the estimated disposal date of July 31, 2001. The
operating results of EPG have been reflected as Discontinued Operations. Income
from discontinued operations was approximately $0.6 million for the six months
ended June 30, 2000.

     Net Income (Loss). On a consolidated basis, the Company generated a net
loss of $1.9 million for the six months ended June 30, 2001 compared to a net
loss of $4.8 million for the six months ended June 30, 2000 as a result of the
foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 2001, the Company had an accumulated deficit of $45.3 million
and negative working capital of $23.4 million as a result of $75.0 million in
notes payable and long-term obligations classified as current liabilities.

     At June 30, 2001, the Company had short-term debt of $39.7 million, current
maturities of long-term obligations of $35.3 million, long-term obligations of
$5.5 million and shareholders' equity of $10.5 million. Historically, the
Company's principal liquidity requirements and uses of cash have been for debt
service, capital expenditures, working capital and acquisition financing, and
the Company's principal sources of liquidity and cash have been from cash flows
from operations, borrowings under long-term debt arrangements and issuances of
equity securities. The Company financed acquisitions through bank borrowings,
sales of equity and internally generated funds.

     Principal Debt Instruments. As of June 30, 2001, the Company had an
aggregate of $80.5 million borrowed under its principal bank credit facility and
debt instruments entered into or assumed in connection with acquisitions as well
as other bank financings. Of the $80.5 million in debt, $20.8 is currently in
default.



                                       17
<PAGE>   20

     Effective January 31, 2001, the Company entered into a fourth amendment to
its senior credit agreement. This amendment required that the outstanding
borrowings under the credit agreement be paid in full by August 31, 2001 and
required the Company to implement a plan to accomplish this repayment. The
amendment further modified the financial covenants to require maintenance of a
minimum tangible net worth and to limit capital expenditures. On December 31,
2000 and March 31, 2001, the Company was in violation of the financial covenants
under the credit agreement in effect as of those dates. On May 4, 2001, the
Company entered into a fifth amendment to its credit agreement. This amendment
provided the consent of the lenders to the execution of the merger agreement
between the Company and T-3 and the sale of A&B Bolt to T-3. The fifth amendment
required a permanent reduction in the maximum borrowings under the revolving
line of credit to the lesser of $43 million or a defined borrowing base and
further modified the financial covenants to require maintenance of minimum
consolidated tangible net worth and an EBITDA-to-debt-service ratio. In
addition, the lenders waived all prior covenant violations under the previous
agreement. The Company is currently in discussions with its senior lenders
concerning a proposed sixth amendment that would (i) extend the maturity date of
the credit agreement from August 31, 2001 to October 31, 2001 and (ii) modify
the financial covenants to accommodate the impact of the sale of A&B Bolt.

     In connection with the Company's revolving line of credit agreement, SJMB
agreed, under the terms of a limited guaranty agreement with the senior lenders,
to guarantee up to $2.0 million of any amount that is advanced to the Company in
excess of the defined borrowing base amount under the credit agreement. As a
condition of providing this guaranty, the Company entered into a reimbursement
agreement with SJMB. Additionally, SJMB has entered into a credit support
agreement under which it has agreed to advance up to $1.5 million of funds to
cure any future financial covenant defaults under our credit agreement. No
amounts have been advanced under these agreements.

     The Company has a $15 million note payable to EnSerCo that matured on
November 15, 1999. The Company was granted an extension of the due date through
January 31, 2000. On January 31, 2000, the Company defaulted on the EnSerCo
note. On March 6, 2001, EnSerCo made demand for immediate payment of the
outstanding principal and interest totaling $18 million and initiated an
arbitration proceeding as required under the loan document. On April 12, 2001,
the Company and EnSerCo signed an agreed temporary injunction enjoining the
Company from selling or disposing of any assets and enjoining the Company from
proceeding with the T-3 merger without the consent of EnSerCo, which would not
be granted unless EnSerCo was paid a consent fee of $1 million. On May 4, 2001,
the Company obtained the consent of EnSerCo to the merger with T-3 and to the
sale of A&B Bolt, EPG and Beaird, subject to the payment of the $1 million
consent fee and application of the proceeds of the transactions in accordance
with the agreed injunction. The consent was provided in an amended agreed
injunction which provides that the arbitration proceeding to collect the debt
and the temporary restraining order are stayed until the earlier of a default
under the terms of the agreed injunction or the termination or the consummation
of the merger, at which time all amounts due EnSerCo are to be paid. If the
merger is not closed by October 31, 2001, or if the parties are not continuing
to use reasonable commercial efforts to close the merger by December 31, 2001,
EnSerCo will enter with the court an agreed judgment with respect to all amounts
payable by the Company. The Company paid the $1 million consent fee on the
signing of the merger agreement.

     The Company has a $5.8 million term note with Heller, which matures on
September 30, 2004. The Company was not in compliance with certain financial
covenants at each of the required quarterly reporting dates during 1999 through
2001. The Company requested and received waivers from Heller through the
September 30, 2000 reporting period; however, the Company did not seek waivers
for the reporting dates of December 31, 2000, March 31, 2001 or June 30, 2001.
The Company is in violation of the credit agreement, and although Heller has not
expressed the intent to call this obligation, it retains the right to do so.

     The Company has a $3.4 million note payable to Trinity arising from its
purchase of Beaird in 1998. This note was payable in equal quarterly
installments over two years beginning January 31, 2001. In January 2001, this
note was amended and extended. Under the terms of the amended agreement,
interest accrued at prime until May 31, 2001, at which time the accrued interest
was paid. Beginning August 2001, the note is payable in seven quarterly
installments of principal plus accrued interest through February 2003.

     In August 2000, the Company issued two convertible subordinated notes
("Note A" and "Note B") to SJMB, L.P. ("SJMB") in connection with its
acquisition of the 51% of limited partnership interests of Orbitform that it did
not already own. Note A is an 11% promissory note in the original principal
amount of $3.45 million, convertible at any time, together with accrued
interest, into shares of the Company's common stock at a price of $1.15 per
share. Note B is an 11% promissory note in the original principal amount of
$3.45 million, convertible, together with







                                       18
<PAGE>   21

accrued interest, beginning one year after issuance into shares of the Company's
common stock at a price of $2.00 per share. In connection with the merger with
T-3, SJMB agreed to convert amounts outstanding under the notes immediately
prior to the merger into shares of the Company's common stock at $1.75 per
share. On June 29, 2001, SJMB converted Note A and $0.3 million in accrued
interest on Note A into approximately 3.3 million shares of the Company's common
stock. Additionally, upon the completion of the merger with T-3, the Company
agreed to pay to SJMB in cash $350,000 of accrued interest owed on Note B
convertible into the Company's common stock at $2.00 per share. At the
consummation of the merger, SJMB agreed to convert all of the remaining
principal and accrued interest into the number of shares of the Company's common
stock equal to the number of shares calculated by dividing the principal and
interest that would have been outstanding at the merger date if no amounts of
Note A or Note B had been paid or converted divided by $1.75 less 3,284,167
shares (or approximately 1.1 million shares if the merger were to close on
September 30, 2001). Additionally, if the merger is not completed by December
31, 2001, the Company agreed to pay SJMB a fee of $600,000 and issue to SJMB a
warrant to purchase 1.0 million shares of the Company's common stock at an
exercise price of $1.00 per share.

     The Company's liquidity has been constrained by its borrowing base
limitations and by its operating losses and, as a result, its financial position
and cash flows have been adversely effected. A significant portion of the
Company's debt is currently due or in default. In connection with signing the
merger agreement with T-3, and to improve its liquidity prior to closing, the
Company sold A&B Bolt to T-3, for a cash purchase price of $15 million.
Approximately $8.8 million of the proceeds were used to repay amounts under the
senior credit agreement with the remaining proceeds used by the Company to pay
the $1 million consent fee to EnSerCo and for working capital purposes. The
Company will use the proceeds from the sale of EPG and Beaird to pay down its
debt and provide working capital.

     The merger agreement provides that a refinancing of substantially all of
the Company's indebtedness is a condition to the closing of the transaction.
T-3's principal shareholder, First Reserve Fund VIII, has agreed to assist the
combined company in the refinancing effort and, if necessary, to make an equity
contribution to the combined company in connection with the refinancing. If a
third party refinancing is not available on commercially reasonable terms, First
Reserve Fund VIII has agreed to provide a bridge loan to effect the refinancing.
If the merger with T-3 is not closed for any reason, the Company may not be able
to extend the payment of or refinance its indebtedness. In that event, the
Company's financial condition and liquidity will be adversely impacted, which
will negatively impact its business.

     The Energy Group's success is closely tied to the price of oil and gas.
Sales and operating income within the Energy Group have improved in 2000 and the
first six months of 2001. These improvements have been primarily attributable to
increases in the worldwide rig count, optimism regarding long-term energy
prices, increases in worldwide demand for oil and gas, coupled with declining
production in many areas, increased exploration and production spending in 2000
and 2001, and an improved demand for oilfield services. Within the Energy Group,
management believes that sales reached their lowest levels during the second and
third quarters of 1999.

     The Stud Bolt Group serves both the oil and gas exploration and production
industry and the hydrocarbon processing industry. The Stud Bolt Group has
experienced results similar to the Energy Group operations. Management's
expectation is that with higher oil and gas prices, higher sales and
profitability within these operations will be sustained. The Stud Bolt Group has
experienced such a trend for the first six months of 2001.

     The Heavy Fabrication Group's sales and profitability have improved in the
first six months of 2001 compared to the first six months of 2000 as a result of
a new market focus, namely the alternative energy market. The composition of its
backlog both at the end of 2000 and at the end of the second quarter of 2001
reflects this approach since a significant portion consists of products for the
power generation industry as opposed to its traditional products that serve the
hydrocarbon processing industry.

     Net Cash Provided by Operating Activities. For the six months ended June
30, 2001, net cash provided by operating activities was $0.7 million compared to
the six months ended June 30, 2000, which provided cash of $6.0 million. Net
cash was provided in the 2001 period because the net loss included a non-cash
loss on the sale of a subsidiary and net cash provided from discontinued
operations that, on a combined basis, more than offset the net cash used in
working capital changes. Net cash was provided in the 2000 period because the
sum of the net loss plus depreciation was more than offset by the net cash
provided by working capital changes.




                                       19
<PAGE>   22


     Net Cash Provided by (Used in) Investing Activities. Principal uses of cash
are for capital expenditures. For the six months ended June 30, 2001 and 2000,
the Company made capital expenditures of approximately $2.7 million and $2.2
million, respectively. Additionally, the Company received proceeds from the sale
of a subsidiary of approximately $14.9 million in the 2001 period compared with
$2.0 million in the 2000 period. Additionally, the Company made investments in
unconsolidated affiliates of $1.4 million for the six months ended June 30,
2000.

     Net Cash Used In Financing Activities. Sources of cash from financing
activities include proceeds from issuance of long-term obligations. Financing
activities used net cash of $12.8 million in the six months ended June 30, 2001
compared with the six months ended June 30, 2000, which used net cash of $5.5
million. During the six months ended June 30, 2001, the Company had net
repayments of $9.5 million under its credit facilities, compared with the six
months ended June 30, 2000, which had net repayments of $2.3 million under its
credit facilities. During the six months ended June 30, 2000, the Company had
proceeds from issuance of long-term obligations of $2.0 million. During the six
months ended June 30, 2001, the Company made principal payments on long-term
obligations of $3.5 million compared to $5.2 million in the six months ended
June 30, 2000.

     FORWARD-LOOKING INFORMATION AND RISK FACTORS

     Certain information in this Quarterly Report, including the information we
incorporate by reference, includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify our forward-looking statements by the
words "expects," "projects," "believes," "anticipates," "intends," "plans,"
"budgets," "predicts," "estimates" and similar expressions.

     We have based the forward-looking statements relating to our operations on
our current expectations, and estimates and projections about us and about the
industries in which we operate in general. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Our actual outcomes and results may differ materially from what
we have expressed or forecast in the forward-looking statements.

IF WE DO NOT COMPLETE THE MERGER WITH T-3, WE WOULD BE IN VIOLATION OF AN AGREED
ORDER WITH ENSERCO AND OUR AGREEMENT WITH NASDAQ.

     We have a $15 million note payable to EnSerCo that we defaulted on. On
March 6, 2001, EnSerCo made demand for immediate payment of the outstanding
principal and interest totaling $18 million and initiated an arbitration
proceeding as required under the loan document. On April 12, 2001, we and
EnSerCo signed an agreed temporary injunction enjoining us from selling or
disposing of any assets and enjoining us from proceeding with the T-3 merger
without the consent of EnSerCo, which we obtained on May 4, 2001. The consent
was provided in an amended agreed injunction which provides that the arbitration
proceeding to collect the debt and the temporary restraining order are stayed
until the earlier of a default under the terms of the agreed injunction or the
termination or the consummation of the merger, at which time all amounts due
EnSerCo are to be paid. If the merger is not closed by October 31, 2001, or if
the parties are not continuing to use reasonable commercial efforts to close the
merger by December 31, 2001, EnSerCo will enter with the court an agreed
judgment with respect to all amounts payable by us. We paid the $1 million
consent fee on the signing of the merger agreement.

     On April 18, 2001, we received a notice of delisting of its Common Stock
and Class B, C, and D Warrants from the Nasdaq NMS because our consolidated
financial statements contained in the 2000 Annual Report on Form 10-K reflected
potential non-compliance with the requirements of the Nasdaq Marketplace rules
that require National Market companies to have $4 million in net tangible
assets. As of December 31, 2000, we had negative net tangible assets of $8.4
million. The Nasdaq notice also cited the proposed merger with T-3 as a
potential change of control transaction that would require the combined company
to qualify for listing under the initial listing requirements of the Nasdaq
Marketplace rules, which are more stringent than the continued listing
requirements. We responded that we believe that we can satisfy the Nasdaq
Marketplace rules for continued listing based on a pilot program which allows
Nasdaq National Market companies to comply with a standard requiring $10 million
in shareholders' equity instead of $4 million in net tangible assets. On June
11, 2001, Nasdaq notified us that we had presented a definitive plan that would
enable us to evidence compliance with requirements for continued listing,
pending completion of the merger with T-3, and determined to continue listing
our securities on the Nasdaq National Market provided that we comply with the
following conditions:


                                       20
<PAGE>   23

     1.   On or before June 29, 2001, we must make a public filing evidencing a
          minimum of $10 million in shareholders' equity, as well as compliance
          with all other requirements for continued listing on the Nasdaq
          National Market;

     2.   We must make a timely filing of its Form 10-Q for the quarter ended
          June 30, 2001 evidencing continued compliance;

     3.   On or before October 31, 2001, we must submit documentation to Nasdaq
          evidencing the consummation of the merger with T-3; and

     4.   Immediately upon consummation of the merger, the combined company must
          satisfy all requirements for initial listing on the Nasdaq National
          Market, including the minimum $5 bid price per share requirement.

     In the event we fail to comply with any of these terms, our securities may
be immediately transferred to the Nasdaq SmallCap market or may be completely
delisted from The Nasdaq Stock Market, in which case, we would become eligible
to trade on the over-the-counter bulletin board.

WE ARE IN DEFAULT UNDER OUR HELLER TERM LOANS AND HELLER HAS THE RIGHT TO
DECLARE ALL OUTSTANDING AMOUNTS IMMEDIATELY DUE AND PAYABLE.

     We have a $5.8 million term note with Heller that contains requirements as
to the maintenance of minimum levels of working capital and net worth, minimum
ratios of debt to cash flow, cash flow to certain fixed charges, liabilities to
tangible net worth, current ratio, and capital expenditures, all of which are
calculated on a trailing twelve month basis. We were not in compliance with
certain financial covenants at each of the required quarterly reporting dates
during 1999 through 2001. In October 2000, we requested and received waivers
from Heller through the September 30, 2000 reporting period; however, we did not
seek waivers for the reporting date of December 31, 2000, March 31, 2001 or June
30, 2001. We are in violation of the credit agreement and although Heller has
not expressed the intent to call this obligation, it retains the right to do so.

EVEN IF WE SUCCESSFULLY REFINANCE OUR CREDIT FACILITY AND TERM LOANS, OUR
SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR PROSPECTS.

     We have a significant amount of debt, which requires us to dedicate a
substantial portion of our cash flow from operations to payments on our debt,
thereby reducing the availability of our cash flow to fund current working
capital, capital expenditures and other general corporate needs. In addition, it
could:

-    increase our vulnerability to general adverse economic and industry
     conditions;

-    limit our ability to fund future working capital, acquisitions, capital
     expenditures and other general corporate requirements;

-    limit our flexibility in planning for, or reacting to, changes in our
     business and our industry; and

-    place us at a competitive disadvantage compared to our competitors that
     have less debt.

EVEN IF OUR LENDER DOES NOT DECLARE AMOUNTS UNDER OUR TERM LOANS IMMEDIATELY DUE
AND PAYABLE, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT.

     Our ability to service our debt and to fund capital expenditures will
depend on our ability to generate cash in the future. Our ability to generate
sufficient cash, to a large extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that we will generate sufficient cash flow or be
able to obtain sufficient funding to satisfy our debt service requirements.

     We also cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings and financing alternatives will
be available to us under our credit facility or from alternative sources in an
amount sufficient to service our debts or to fund our other liquidity needs.




                                       21
<PAGE>   24


EVEN IF WE SUCCESSFULLY REFINANCE OUR CREDIT FACILITY AND TERM LOANS, OUR DEBT
TERMS IMPOSE CONDITIONS AND RESTRICTIONS THAT COULD SIGNIFICANTLY ADVERSELY
IMPACT OUR ABILITY TO OPERATE OUR BUSINESSES.

     Our credit agreements contain restrictive covenants that, among other
things, impose certain limitations on us and require us to maintain specified
consolidated financial ratios and satisfy certain consolidated financial tests.
Our ability to meet those financial ratios and financial tests may be affected
by events beyond our control. If we fail to meet those tests or breach any of
the covenants in the future, the lenders may still declare all amounts
outstanding under the credit facility, together with accrued interest, to be
immediately due and payable. If we are unable to repay those amounts, the
lenders could proceed against the collateral granted to them. Our assets may not
be sufficient to repay in full that indebtedness or any other indebtedness.

EVEN IF WE ARE SUCCESSFUL IN ATTRACTING BUYERS FOR EPG AND BEAIRD, WE MAY
RECEIVE LESS SALES PROCEEDS FOR EITHER OR BOTH OF THEM THAN WE HAVE ANTICIPATED.

     Part of our strategic plan is the divestiture of EPG and Beaird, and the
use of the cash proceeds to pay down debt. The cash proceeds received for EPG
and Beaird may be less than we anticipate.

THE MARKET VALUE OF OUR COMMON STOCK MAY DECLINE FURTHER IF WE CONTINUE TO INCUR
NET LOSSES.

     For the 2000 fiscal year, we incurred a net after-tax loss of $39.5
million, as more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations" in our
2000 Form 10-K. The price of our common stock, which has declined significantly
in the past year, depends on many factors, most importantly our financial
performance. If we continue to incur net losses, our stock price could decline
further.

SOME OF THE MARKETS FOR OUR PRODUCTS ARE CYCLICAL, WHICH MAY ADVERSELY IMPACT
SALES OF THOSE PRODUCTS DURING A DECLINE IN THOSE MARKETS.

     Some of our products are sold in markets that are affected by the state of
both the U.S. and worldwide economies and by conditions within the industries
that purchase our products. Therefore, sales of these products may be reduced as
a result of conditions in the markets in which they are sold. Even though the
markets in which we sell our products are diversified, decreased sales in some
of these markets may not be offset by sales in our other markets, which may
result in a material adverse effect on our business, financial condition,
results of operations or prospectus. A significant percentage of our 2000 and
2001 sales, most of which are attributable to our Energy Group and Stud Bolt
Group, are derived from the domestic oil and gas industry. Additionally, a
significant percentage of sales from our discontinued operations, EPG, are to
the automotive industry.

OUR ACQUISITION STRATEGY MAY NOT ACHIEVE OUR OBJECTIVES AS A RESULT OF A NUMBER
OF POTENTIAL FACTORS.

     Our acquisition strategy has been a significant component of our business
plan, and we plan to resume our acquisition strategy after we have completed the
sale of EPG and Beaird, refinanced our debt and our financial performance has
returned to historical levels. While we evaluate business opportunities on a
regular basis, we may not be successful in identifying any additional
acquisitions or we may not have sufficient financial resources to make
additional acquisitions. In addition, as we complete acquisitions and expand our
operations, we will be subject to all of the risks inherent in an expanding
business, including integrating financial reporting, establishing satisfactory
budgetary and other financial controls, funding increased capital needs and
overhead expenses, obtaining management personnel required for expanded
operations, and funding cash flow shortages that may occur if anticipated sales
and revenues are not realized or are delayed, whether by general economic or
market conditions or unforeseen internal difficulties. Our future performance
will depend, in part, on our ability to manage expanding operations and to adapt
our operational systems for these expansions. We may not succeed at effectively
and profitably managing the integration of our current or any future
acquisitions.

     We may fail or be unable to discover liabilities in the course of
performing due diligence investigations on each business that we have acquired
or will acquire in the future. Liabilities could include those arising from
employee benefits contribution obligations of a prior owner or noncompliance
with federal, state or local environmental requirements by prior owners for
which we, as a successor owner, may be responsible. We try to minimize these
risks by conducting due diligence as we deem appropriate under the
circumstances. However, we may not have identified, or in the case of future
acquisitions, identify, all existing or potential risks. We also generally
require







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each seller of acquired businesses or properties to indemnify us against
undisclosed liabilities. In some cases, this indemnification obligation may be
supported by deferring payment of a portion of the purchase price or other
appropriate security. However, we cannot assure you that the indemnification,
even if obtained, will be enforceable, collectible or sufficient in amount,
scope or duration to fully offset the possible liabilities associated with the
business or property acquired. Any of these liabilities, individually or in the
aggregate, could have a material adverse effect on our business, financial
condition, results of operations or prospects.

MANY OF THE INDUSTRIES IN WHICH WE PARTICIPATE ARE HIGHLY COMPETITIVE, WHICH MAY
RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR PROFIT MARGINS.

     Many of the industries in which we operate are highly competitive. Some of
our competitors within each of our segments have greater financial and other
resources than us. In our Energy Group, we believe that we are subject to
competition from less than ten similarly-sized remanufacturing businesses. Our
competitors within our Heavy Fabrication Group vary based on the products
fabricated. As the size and complexity of the products increase, competition is
generally less. The market for each of our key heavy fabrication products is
very competitive, and we face competition from a number of different
manufacturers in each of our product areas. Factors that affect competition
within all of our segments include price, quality and customer service. Strong
competition may result in a loss of market share in the segments in which we
operate and a decrease in revenue and profit margins.

THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OR
OPERATIONS.

     Our success depends largely upon the abilities and experience of certain
key management personnel. If we lose the services of one or more of our key
personnel, it could have a material adverse effect on our business and results
of operations. We do not have non-compete agreements with all of our key
personnel. In addition, we generally do not maintain key-man life insurance
policies on our executives.

OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.

     Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.

OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.

     Our business is affected by governmental regulations relating to our
industry segments in general, as well as environmental and safety regulations
that have specific application to our business. While we are not aware of any
proposed or pending legislation, future legislation may have an adverse effect
on our business, financial condition, results of operations or prospects.

     We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. In
particular, our divested refinery demolition business involved the removal of
asbestos and other environmental contaminants for which we are responsible for
handling and disposal. We have in the past and will likely in the future incur
expenditures to ensure compliance with environmental laws. Due to the
possibility of unanticipated factual or regulatory developments, the amount and
timing of future environmental expenditures could vary substantially from those
currently anticipated. Moreover, certain of our facilities have been in
operation for many years and, over that time, we and other predecessor operators
have generated and disposed of wastes that are or may be considered hazardous.
Accordingly, although we have undertaken considerable efforts to comply with
applicable laws, it is possible that environmental requirements or facts not
currently known to us will require unanticipated efforts and expenditures that
cannot be currently quantified.





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<PAGE>   26



Item 3.  Qualitative and Quantitative Disclosures About Market Risk.

     Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.

     We are exposed to some market risk due to the floating interest rate under
our revolving line of credit and certain of our term debt. As of June 30, 2001,
the revolving line of credit had a principal balance of $39.7 million and an
interest rate that floats with prime. We also have $5.8 million of long-term
debt bearing interest at Libor plus 2.5% and long-term debt of $11.7 million and
an interest rate that floats with prime. A 1.0% increase in interest rates could
result in a $0.6 million annual increase in interest expense on the existing
principal balance. We have determined that it is not necessary to participate in
interest rate-related derivative financial instruments because we currently do
not expect significant short-term increases in interest rates charged under the
revolving line of credit.

                                     PART II
                                OTHER INFORMATION

Item 1.  Legal Proceedings.

     In November 2000, we filed suit in the 270th Judicial District Court in
Harris County, Texas for fraud and breach of contract against a number of the
former Blastco Services Company ("Blastco") shareholders in a suit styled
Industrial Holdings, Inc. and OF Acquisition, L.P. vs. Gary H. Martin and
William R. Massey for collection of amounts owed to us from the sale of Blastco.
We have received an interlocutory Summary Judgment against Messrs. Martin and
Massey in the amount of $500,000, and have been ordered to mediate the remaining
issues under dispute, which exceed $1,500,000. The Defendants have filed a
Motion to Reconsider, which has not been decided, alleging that they are
entitled to a credit of $50,000 against the judgment for amounts previously
paid.

     In addition to the above, we are involved in various claims and litigation
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
currently determine the ultimate costs that may be incurred, we believe the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on our consolidated financial condition or
results of operations.

Item 2.  Changes in Securities

     Effective June 29, 2001, SJMB converted $3.45 million in principal plus
accrued interest into 3,284,167 shares of common stock of the Company at a
conversion price of $1.15 per share.

Item 3.  Defaults upon Senior Securities

     See Item 1. Financial Statements (unaudited) Note 1. Basis of Presentation
and Management Plans and Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
for a discussion of the Company's debt in default.

Item 5.  Other Information

     (a)  Acquisition and Disposition of Assets

     On May 7, 2001, the Company sold its wholly-owned subsidiary, A&B Bolt &
Supply, Inc., to T-3 Energy Services, Inc., for a cash purchase price of $15
million. Approximately $8.8 million of the proceeds were used to repay secured
bank indebtedness with the remaining proceeds utilized to pay a $1 million
consent fee to EnSerCo, L.L.C. under an agreed injunction, and for working
capital purposes.





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<PAGE>   27



Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits

         None.

     (b)  Reports on Form 8-K

     On June 29, 2001, the Company filed a current report on Form 8-K disclosing
in Item 5 that SJMB, a large shareholder of the Company, had agreed to convert
all outstanding principal and accrued interest under Note A on June 29, 2001
into approximately 3.3 million shares of the Company's common stock at $1.15 per
share. SJMB's election to convert Note A is set forth in a second amendment of
the terms of the Convertible Notes filed as exhibit 99 to the current report on
Form 8-K (the "Second Amendment"). The Second Amendment also provides, among
other things, that the obligations and rights set forth in Amendment No. 1 are
terminated and on the date of the consummation of the merger between the Company
and T-3, all remaining principal and accrued interest outstanding under Note B
will automatically convert into that number of shares of the Company's common
stock equal to (1) the number of shares that would have been received by SJMB
had SJMB not converted Note A on June 29, 2001, but instead had converted the
entire principal and accrued interest outstanding on the date of the
consummation of the merger between the Company and T-3 under both Convertible
Notes less (2) the 3,284,167 shares of the Company's common stock received on
conversion of Note A. SJMB has agreed not to convert the principal amount or
interest of Note B prior to the earlier to occur of the merger or December 31,
2001.

     Also included in the current report on Form 8-K filed by the Company was an
unaudited pro forma condensed balance sheet that adjusts the Company's
historical balance sheet as of May 31, 2001 for the conversion of Note A as if
the conversion had occurred on May 31, 2001. The unaudited pro forma condensed
balance sheet in the opinion of management includes all adjustments considered
necessary to present fairly the balance sheet at May 31, 2001.

     (c)  Exhibits

     Amendment No. 2 to Industrial Holdings, Inc. $3.45 million Subordinated
Convertible Promissory Note Issued to SJMB, L.P. dated August 25, 2000 and $3.45
million Subordinated Convertible Promissory Note Issued to SJMB, L.P. dated
August 25, 2000 and Agreement to Convert dated June 29, 2001 was filed as
exhibit 99 to the current report on Form 8-K filed by the Company on June 29,
2001.





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<PAGE>   28



                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Industrial Holdings, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.


                            INDUSTRIAL HOLDINGS, INC.



Date: July 25, 2001                By: /s/Christine A. Smith
                                      --------------------------------------
                                       Christine A. Smith,
                                       Chief Accounting Officer and
                                       Executive Vice President




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