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

                       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
                               SEPTEMBER 30, 2000

                                         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 [ ] No [X]

   The aggregate market value of common stock held by non-affiliates of the
registrant was $20,979,523 at November 10, 2000. At that date, there were
13,684,832 shares of common stock outstanding.
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<PAGE>
                            INDUSTRIAL HOLDINGS, INC.
                                      INDEX


                                                                        PAGE NO.
                                                                        --------
PART  I     FINANCIAL INFORMATION
            Item 1.  Financial Statements (unaudited)

                     Consolidated Balance Sheets at September 30, 2000
                        and December 31, 1999 .........................     1

                     Consolidated Statements of Operations for the
                        Three and Nine Months ended September 30,
                        2000 and 1999 .................................     2

                     Consolidated Statements of Cash Flows for the Nine
                       Months ended September 30, 2000 and 1999 .......     3

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

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

            Item 3.  Quantitative and Qualitative Disclosures about
                       Market Risk .....................................   22

PART  II    OTHER INFORMATION

            Item 1.  Legal Proceedings .................................   23

            Item 2.  Changes in Securities .............................   23

            Item 3.  Defaults upon Senior Securities ...................   23

            Item 4.  Submission of Matters to a Vote of Security Holders   23

            Item 5.  Other Information (no response required)

            Item 6.  Exhibits and reports on Form 8-K...................   25

                                       i
<PAGE>
                                     PART I
                              FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                                                  SEPTEMBER 30,      DECEMBER 31,
                                                                                                      2000               1999
                                                                                                 ---------------    ---------------

                                     ASSETS                                                        (UNAUDITED)
<S>                                                                                              <C>                <C>
Current assets:
Cash and equivalents .........................................................................   $           532    $         1,738
Accounts receivable - trade, net .............................................................            40,634             38,511
Cost and estimated earnings in excess of billings ............................................             2,337              3,704
Inventories ..................................................................................            38,250             38,260
Employee advances ............................................................................                59                 59
Notes receivable, current portion ............................................................               650              4,175
Other current assets .........................................................................             1,216              4,702
                                                                                                 ---------------    ---------------
   Total current assets ......................................................................            83,678             91,149

Property and equipment, net ..................................................................            56,919             64,707
Notes receivable, less current portion .......................................................               704              1,120
Investment in unconsolidated affiliates ......................................................                               (1,005)
Other assets .................................................................................             7,511              7,172
Goodwill and other intangible assets, net ....................................................            31,389             26,100
                                                                                                 ---------------    ---------------
   Total assets ..............................................................................   $       180,201    $       189,243
                                                                                                 ===============    ===============

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................................   $        44,406    $        46,193
Accounts payable - trade .....................................................................            24,166             24,688
Billings in excess of costs and estimated earnings ...........................................             3,864              2,170
Accrued expenses .............................................................................            13,235             11,410
Current portion of long-term obligations .....................................................            28,925             42,767
                                                                                                 ---------------    ---------------
   Total current liabilities .................................................................           114,596            127,228

Long-term obligations, less current portion ..................................................            20,056              9,903
Other long-term liabilities ..................................................................             2,593              2,202
Deferred income tax liability ................................................................               306                306
                                                                                                 ---------------    ---------------
   Total liabilities .........................................................................           137,551            139,639
                                                                                                 ---------------    ---------------
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, 15,271,097 and
     15,111,097 shares issued at September 30, 2000 and December 31, 1999,
     respectively ............................................................................               153                151
   Additional paid-in capital ................................................................            54,867             54,201
   Accumulated deficit .......................................................................            (8,418)            (3,868)
   Treasury stock, at cost, 1,586,265 shares .................................................            (3,272)
   Notes receivable from officers ............................................................              (680)              (880)
                                                                                                 ---------------    ---------------
     Total shareholders' equity ..............................................................            42,650             49,604
                                                                                                 ---------------    ---------------

   Total liabilities and shareholders' equity ................................................   $       180,201    $       189,243
                                                                                                 ===============    ===============
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       1
<PAGE>
                            INDUSTRIAL HOLDINGS, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                              SEPTEMBER 30,                    SEPTEMBER 30,
                                                                       ----------------------------    ----------------------------
                                                                         2000             1999             2000             1999
                                                                       ------------    ------------    ------------    ------------
<S>                                                                    <C>             <C>             <C>             <C>
Sales ..............................................................   $     61,044    $     55,544    $    167,115    $    194,382
Cost of sales ......................................................         48,172          48,257         132,903         159,714
                                                                       ------------    ------------    ------------    ------------

Gross profit .......................................................         12,872           7,287          34,212          34,668

Selling, general and administrative expenses .......................          9,704          17,491          33,212          38,941
                                                                       ------------    ------------    ------------    ------------

Income (loss) from operations ......................................          3,168         (10,204)          1,000          (4,273)
Earnings from equity investments
   in unconsolidated affiliates ....................................              7             163              47           1,494

Other income (expense):
   Interest expense ................................................         (3,125)         (2,320)         (9,011)         (6,257)
   Interest income .................................................             20              75             120             234
   Other income, net ...............................................            276             364           3,455           1,247
                                                                       ------------    ------------    ------------    ------------

Total other income (expense) .......................................         (2,829)         (1,881)         (5,436)         (4,776)
                                                                       ------------    ------------    ------------    ------------


Income (loss) before income taxes ..................................            346         (11,922)         (4,389)         (7,555)
Income tax expense (benefit) .......................................            111          (4,628)            161          (2,857)
                                                                       ------------    ------------    ------------    ------------
Net income (loss) ..................................................   $        235    $     (7,294)   $     (4,550)   $     (4,698)
                                                                       ============    ============    ============    ============
Basic earnings (loss) per share ....................................   $       0.02    $      (0.48)   $      (0.32)   $      (0.32)
Diluted earnings (loss) per share ..................................   $       0.02    $      (0.48)   $      (0.32)   $      (0.32)
Weighted average number of common shares
   outstanding - basic .............................................         13,685          15,111          14,107          14,905
Weighted average number of common shares
   outstanding - dilutive ..........................................         15,139          15,111          14,107          14,905
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       2
<PAGE>
                            INDUSTRIAL HOLDINGS, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                      NINE MONTHS ENDED
                                                                                                         SEPTEMBER 30,
                                                                                               ----------------------------------
                                                                                                    2000               1999
                                                                                               ---------------    ---------------
<S>                                                                                            <C>                <C>
Cash flows from operating activities:
   Net loss ................................................................................   $        (4,550)   $        (4,698)
   Adjustments to reconcile net loss to net
     cash provided by operating activities:
        Depreciation and amortization ......................................................             5,445              5,712
        Equity in earnings of unconsolidated affiliates ....................................               (47)            (1,494)
        Deferred income tax expense ........................................................                                 (509)
        Deferred compensation paid .........................................................                 8                 55
        Stock compensation .................................................................               261
        Deferred gain on demolition contract ...............................................                                 (750)
        Gain on sale of Blastco Services Company ...........................................            (2,551)
   Changes in assets and liabilities, net of effect of purchase acquisitions and
     divestitures:
        Accounts receivable ................................................................            (1,491)            10,254
        Inventories ........................................................................              (931)             7,157
        Notes receivable ...................................................................             1,678              1,657
        Prepaid expenses and other assets ..................................................             2,704            (12,359)
        Accounts payable ...................................................................              (275)            (1,634)
        Accrued expenses and other .........................................................             6,012             (3,457)
                                                                                               ---------------    ---------------
Net cash provided by (used in) operating activities ........................................             6,263                (66)

Cash flows from investing activities:
   Purchase of property and equipment ......................................................            (3,566)            (7,952)
   Proceeds from disposals of property and equipment, net ..................................               941                441
   Proceeds from sale of Blastco Services Company ..........................................             2,000
   Purchase of Orbitform, net of cash ......................................................               692
   Investment in unconsolidated affiliates .................................................            (1,446)            (2,477)
                                                                                               ---------------    ---------------
Net cash used in investing activities ......................................................            (1,379)            (9,988)

Cash flows from financing activities:
   Net borrowings (repayments) under
     revolving line of credit ..............................................................            (1,843)             3,712
   Proceeds from the issuance of long-term obligations .....................................             2,091              6,193
   Principal payments on long-term obligations .............................................            (6,338)            (5,657)
   Proceeds from issuance of common stock ..................................................                                2,659
                                                                                               ---------------    ---------------
Net cash provided by (used in) by financing activities .....................................            (6,090)             6,907

Net decrease in cash and cash equivalents ..................................................            (1,206)            (3,147)
Cash and cash equivalents, beginning of period .............................................             1,738              3,412
                                                                                               ---------------    ---------------
Cash and cash equivalents, end of period ...................................................   $           532    $           265
                                                                                               ===============    ===============

Supplemental schedule of non-cash investing and financing activities:
   Issuance of warrants ....................................................................   $           407

Supplemental disclosures of cash flow information: Cash paid for:
     Interest ..............................................................................   $         5,169    $         6,454
     Income taxes ..........................................................................                                  364
</TABLE>
            See notes to unaudited consolidated financial statements.

                                       3
<PAGE>
                            INDUSTRIAL HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               SEPTEMBER 30, 2000

1. BASIS OF PRESENTATION AND MANAGEMENT PLANS

   The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles 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 have been
eliminated in consolidation. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000. 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, 1999.
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 contemplated 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 $36.1 million and $30.9 million and debt in default
at December 31, 1999 and September 30, 2000, respectively. In addition, the
Company incurred a net loss of $19.0 million for the year ended December 31,
1999 and $4.6 million for the nine-month period ended September 30, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying unaudited consolidated financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.

   The Company has a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo")
that became due 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. EnSerCo
has not called this note due; however, it retains the right to do so. The
Company has held preliminary discussions with EnSerCo to modify the terms of the
original note agreement, which include extending the due date; however, no
agreement has been reached between the parties. Furthermore, no assurances can
be given that the Company will be able to successfully conclude any arrangement
being considered.

   The Company has a $7.6 million term note with Heller Financial, Inc.
("Heller"), which expires on September 30, 2004. The Company was not in
compliance with certain financial covenants at each of the required quarterly
reporting dates during 1999 and 2000. In October 2000, the Company requested and
received waivers from Heller through the September 30, 2000 reporting period.

   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 and
to obtain new financing or refinancing of the Company's debt obligations.

                                       4
<PAGE>
2. INVENTORY

   Inventory consists of the following (dollars in thousands):

                                   SEPTEMBER 30,          DECEMBER 31,
                                       2000                   1999
                               --------------------   --------------------
   Raw materials ...........   $             12,378   $             11,791

   Finished goods ..........                 22,122                 22,088

   Other ...................                  3,750                  4,381
                               --------------------   --------------------

                               $             38,250   $             38,260
                               ====================   ====================

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. The Company evaluates performance based on income
from operations excluding certain corporate costs not allocated to the segments.
Intersegment sales are not material. Substantially all sales are from domestic
sources and all assets are held in the United States.

   During the second quarter of 2000, the Company's operations were reorganized
into four business segments: (i) the energy group (formerly known as valve
manufacturing and repair); (ii) the stud bolt and gasket group; (iii) the
engineered products group; and (iv) the heavy fabrication group. The engineered
products group and the stud bolt and gasket group were previously 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 the Company's subsidiaries that was previously included in
the fastener manufacturing and distribution segment is now part of the energy
group.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)

                                                     STUD BOLT       ENGINEERED         HEAVY
FOR THE THREE MONTHS ENDED:           ENERGY         AND GASKET       PRODUCTS       FABRICATION       CORPORATE        CONSOLIDATED
                                      ------         ----------       --------       -----------       ---------        ------------
<S>                                   <C>            <C>              <C>            <C>               <C>              <C>
SEPTEMBER 30, 2000
Sales                                   $26,461        $12,672          $10,170         $11,741         $                 $  61,044
Income (loss) from operations             2,704            918              160             123             (737)             3,168

SEPTEMBER 30, 1999
Sales                                   $22,218        $11,735         $  9,163         $12,428         $                 $  55,544
Income (loss) from operations            (1,104)           802           (2,184)         (5,096)          (2,622)           (10,204)


FOR THE NINE MONTHS ENDED:
SEPTEMBER 30, 2000
Sales                                   $72,060        $37,983          $30,285         $26,787         $                  $167,115
Income (loss) from operations             4,788          2,355            1,213          (2,737)          (4,619)             1,000

SEPTEMBER 30, 1999
Sales                                   $64,295        $34,983          $30,956         $64,148         $                  $194,382
Income (loss) from operations             2,918          1,695           (1,197)         (3,936)          (3,753)            (4,273)

AS OF SEPTEMBER 30, 2000:
Total assets                            $53,641        $24,729          $55,427         $38,109         $  8,295           $180,201

AS OF DECEMBER 31, 1999:
Total assets                            $49,613        $24,565          $59,485         $44,987          $10,593           $189,243
</TABLE>

                                       5
<PAGE>
4. EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                                                         THREE MONTHS ENDED
                                                                                                            SEPTEMBER 30,
                                                                                                -----------------------------------
                                                                                                      2000                   1999
                                                                                                ---------------     ---------------
<S>                                                                                             <C>                 <C>
EARNINGS (LOSS) FOR BASIC AND DILUTED COMPUTATION:
   Net income (loss) used for basic earnings (loss) per share ..............................    $           235     $        (7,294)
   Interest on convertible debt securities, net of tax .....................................
                                                                                                ---------------     ---------------
   Net income available to common shareholders .............................................    $           235     $        (7,294)
                                                                                                ===============     ===============

BASIC EARNINGS (LOSS) PER SHARE:
   Weighted average common shares outstanding ..............................................             13,685              15,111

Basic earnings (loss) per share ............................................................    $          0.02     $         (0.48)
                                                                                                ===============     ===============

DILUTED EARNINGS (LOSS) PER SHARE:
   Weighted average common shares outstanding ..............................................             13,685              15,111
   Shares issuable from assumed conversion of common share
     options, warrants granted and debt conversion .........................................              1,454
                                                                                                ---------------     ---------------

   Weighted average common shares outstanding, as adjusted .................................             15,139              15,111
                                                                                                ===============     ===============

Diluted earnings (loss) per share ..........................................................    $          0.02     $         (0.48)
                                                                                                ===============     ===============
<CAPTION>
                                                                                                         NINE MONTHS ENDED
                                                                                                           SEPTEMBER 30,
                                                                                                -----------------------------------
                                                                                                     2000                1999
                                                                                                ---------------     ---------------
<S>                                                                                             <C>                 <C>
EARNINGS (LOSS) FOR BASIC AND DILUTED COMPUTATION:
   Net income (loss) used for basic earnings (loss) per share ..............................    $        (4,550)    $        (4,698)
   Interest on convertible debt securities, net of tax .....................................
                                                                                                ---------------     ---------------
   Net income (loss) available to common shareholders ......................................    $        (4,550)    $        (4,698)
                                                                                                ===============     ===============

BASIC EARNINGS (LOSS) PER SHARE:
   Weighted average common shares outstanding ..............................................             14,107              14,905

Basic earnings (loss) per share ............................................................    $         (0.32)    $         (0.32)
                                                                                                ===============     ===============

DILUTED EARNINGS (LOSS) PER SHARE:
   Weighted average common shares outstanding ..............................................             14,107              14,905
   Shares issuable from assumed conversion of common share
     options, warrants granted and debt conversion
                                                                                                ---------------     ---------------

   Weighted average common shares outstanding, as adjusted .................................             14,107              14,905
                                                                                                ===============     ===============

Diluted earnings (loss) per share ..........................................................    $         (0.32)    $         (0.32)
                                                                                                ===============     ===============
</TABLE>

   There were 4,117,508 stock options and warrants that were not included in the
earnings per share computation for the three months ended September 30, 2000 as
their effect was anti-dilutive. Additionally, all convertible debt was
anti-dilutive and therefore not included in the computation. No stock options
and warrants were included in the loss per share computation for the nine months
ended September 30, 2000 as their effect was anti-dilutive due to the loss
recorded. There were 4,137,208 stock options and warrants that were not included
in the earnings per share computation for the three months and nine months ended
September 30, 1999 as their effect was anti-dilutive. Effective June 9, 2000, an
aggregate of 2,039,500 stock options were granted to approximately 125
employees.

                                       6
<PAGE>
5. DEBT

   On June 30, 2000 the Company entered into an amendment of its credit
agreement with Comerica Bank-Texas, National Bank of Canada and Hibernia Bank
(the "Senior Lenders"), which: (i) accelerated the maturity to January 31, 2001;
(ii) reduced the revolving credit line to the lesser of $50 million or the
defined borrowing base; (iii) increased the interest rate from prime plus 2% to
prime plus 3%, payable weekly; and (iv) modified the financial covenants to
require maintenance of minimum consolidated tangible net worth, and earnings
before interest, taxes, depreciation and amortization ("EBITDA")-to-debt-service
ratio as well as to require limitations on capital expenditures. In addition,
the Senior Lenders waived all prior violations under the credit agreement. At
September 30, 2000, the Company was in compliance with the loan covenants.

   In connection with the Company's amended credit agreement with its Senior
Lenders, St. James Capital Corp. or its affiliates (collectively, "St. James")
agreed, under the terms of a Limited Guaranty Agreement with the Company's
Senior Lenders (the "Guaranty"), to guarantee up to $2.0 million of any amount
that the Senior Lenders advance to the Company in excess of the defined
borrowing base amount under the amended credit agreement. As a condition of
providing this Guaranty, the Company entered into a Reimbursement Agreement with
St. James. Additionally, St. James has entered into a Credit Support Agreement
under which it has agreed to advance up to $1.5 million of funds to cure future
financial covenant defaults under the Company's amended credit agreement.

   Under the Reimbursement Agreement and in consideration of the Guaranty, the
Company issued warrants to St. James to purchase 400,000 shares of the Company's
common stock at $1.25 per share (valued at $84,000) and forgave a $0.35 million
note receivable from St. James. In addition, the Company will issue subordinated
notes to St. James for Guaranty payments and Credit Support payments, if any,
that are made to the Senior Lenders. These notes, if any, and accrued interest
at an annual rate of 11%, will be due on January 31, 2002. The principal amount
of these notes together with all accrued and unpaid interest is convertible into
shares of the Company's common stock at a conversion price of $1.25 per share.
Additionally, the Company agreed to issue to St. James warrants to purchase a
number of shares of the Company's common stock equal to the amount of any
Guaranty payments multiplied by 0.25, so that if St. James makes the full $2.0
million in Guaranty payments, the Company would issue 500,000 warrants to
acquire shares of its common stock at $1.25 per share. At September 30, 2000,
there were no Guaranty or Credit Support payments.

   As discussed in Note 1, the Company has a $15 million note payable to
EnSerCo, L.L.C. ("EnSerCo") that became due 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. EnSerCo has not called this note due; however, it retains the
right to do so. The Company has held preliminary discussions with EnSerCo to
modify the terms of the original note agreement, which include extending the due
date; however, no agreement has been reached between the parties. Furthermore,
no assurances can be given that the Company will be able to successfully
conclude any arrangement being considered. As a result, the Company has
classified this obligation as current in the accompanying consolidated balance
sheets at December 31, 1999 and September 30, 2000.

   The Company's $7.6 million term note with Heller 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. The Company was not in compliance
with certain financial covenants at each of the required quarterly reporting
dates during 1999 and 2000. Because of the losses incurred in 1999, the Company
did not meet certain required levels of working capital and net worth, ratios of
debt to cash flow, cash flow to certain fixed charges, liabilities to tangible
net worth and current ratio required by the debt agreements. In October 2000,
the Company requested and received waivers from Heller through the September 30,
2000 reporting period.

                                       7
<PAGE>
   In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird") from
Trinity Industries, Inc. (the "Seller") for $35.0 million in cash and
receivables and a $5.0 million note to the Seller. Under the purchase agreement,
the Seller assumed all liabilities and retained certain accounts receivable of
Beaird. The Company believed that it was entitled to receive $2.2 million of
excess purchase price paid to the Seller under the purchase agreement resulting
from liabilities incurred by the Company in connection with the acquisition, and
$1.84 million in other claims arising from breaches of representation and
warranties. On July 15, 1999, the first installment of $1.8 million was due on
the Seller note. It was the Company's position that it had offset the amount
owed under the purchase agreement against this principal and interest payment.
Although the Seller agreed that the Company was owed an amount, in January 2000,
the Seller filed suit against the Company in the 134th Judicial District in the
District Court of Dallas County, Texas, in a suit styled TRINITY INDUSTRIES,
INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the Seller alleged that the
Company defaulted on the $5 million note payment and asserted that the amount it
owed the Company was not sufficient to pay the first principal and interest
payment and additionally could not be offset against the $5 million note
payment. In response, in February 2000, the Company filed a counterclaim
alleging the Seller's fraud in failing to disclose, and in misrepresenting,
certain facts about Beaird. In June 2000, the litigation was settled. Pursuant
to the settlement agreement, the Seller agreed to reduce the note payable by
$1.6 million in satisfaction of the counterclaim and reimbursement to the
Company for losses incurred and recognized during 1999 on a contract. The
Company has recorded the reduction in the note payable as an offset to the
original purchase price and the loss reimbursement as other income during the
three-month period ended June 30, 2000. The new note has a balance of $3.4
million with interest at the prime rate of interest and is payable in equal
quarterly installments over two years beginning January 31, 2001.

   Effective as of August 25, 2000, the Company issued two separate convertible
subordinated notes ("Acquisition Note A" and "Acquisition Note B") to SJMB, L.P.
("SJMB") in connection with the Company's acquisition of the general partnership
interest and the 51% of limited partnership interests of Orbitform that the
Company did not already own. Acquisition Note A is an 11% promissory note in the
original principal amount of $3.45 million, convertible at any time, together
with accrued interest thereon, into shares of the Company's common stock, par
value $0.01 per share ("Common Stock"), at a price of $1.15 per share.
Acquisition Note B is an 11% promissory note in the original principal amount of
$3.45 million, convertible, together with accrued interest thereon, beginning
one year after issuance into shares of the Company's Common Stock at a price of
$2.00 per share.

6. COMMITMENTS AND CONTINGENCIES

   In April 2000, the Company sold Blastco Services Company ("Blastco") to
Blastco's former shareholders. Although the sales agreement required the
purchasers to obtain the Company's release from any of its guarantees of Blastco
debt, the purchasers have not done so and the Company continues to have in place
its corporate guaranty of $1.6 million of Blastco term debt. This term debt is
secured by equipment owned by Blastco.

   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.

7. ACQUISITIONS AND DIVESTITURES

   Effective April 1, 2000, the Company sold its refinery dismantling and gas
metering subsidiary, Blastco, back to Blastco's former shareholders. The sales
price of Blastco was $2.0 million in cash, $0.8 million in notes receivable and
1,586,265 shares of the Company's common stock that the former shareholders of
Blastco received in the Company's acquisition of Blastco in a
pooling-of-interests transaction. Also, the Company retained inventory and
equipment with a net book value of $0.3 million. The Company recognized a gain
of approximately $2.6 million in connection with this sale, which is included in
other income.

                                       8
<PAGE>
   In August 2000, the Company acquired from SJMB the general partnership
interest and the 51% of limited partnership interests of OF Acquisition, L.P.
("Orbitform") that the Company did not already own (the "Orbitform Partnership
Interests") (the "St. James Transaction"). The purchase price for the Orbitform
Partnership Interests was approximately $7.8 million in the form of: (i) $6.9
million in secured subordinated debt bearing interest at an annual rate of 11%
that is convertible into shares of the Company's common stock ($3.45 million
convertible any time at $1.15 per share and $3.45 million convertible after one
year at $2.00 per share); (ii) warrants to acquire 300,000 shares of the
Company's common stock at an exercise price of $1.25 per share (valued at
$64,000); and (iii) forgiveness of an $0.8 million note receivable from St.
James.

   On a pro forma unaudited basis, as if this acquisition and divestiture each
had occurred as of January 1, 2000, sales, net income and income per share would
have been $61.8 million, $0.3 million and $0.02 per share for the three months
ended September 30, 2000, respectively. For the nine months ended September 30,
2000, sales, net loss and loss per share would have been $170.9 million, $3.5
million and $0.23 per share, respectively.

8. SUBSEQUENT EVENTS

   On November 6, 2000, the Company sold a surplus parcel of land located in
downtown Houston, Texas for approximately $3.3 million in cash. The facility had
been owned and occupied by GHX Inc., a subsidiary in the Company's Stud Bolt and
Gasket Group, which is moving its downtown Houston location to another
Company-owned manufacturing facility located less than 10 miles away.

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, high-pressure industrial valves and
related products and services. During the second quarter of 2000, the Company's
operations were reorganized into four business segments: (i) the energy group
(formerly known as valve manufacturing and repair); (ii) the stud bolt and
gasket group; (iii) the engineered products group; and (iv) the heavy
fabrication group. The engineered products group and the stud bolt and gasket
group were previously 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 the Company's subsidiaries that
was previously included in the fastener manufacturing and distribution segment
is now part of the energy group.

   In addition to its current focus on refinancing its indebtedness (see
Liquidity and Capital Resources), the Company's business strategy is to increase
the sales, cash flow and profitability of each business group through a
turnaround plan that was developed and implemented by the Company to address the
operational difficulties that occurred during 1999 and into 2000. This
turnaround plan entails streamlining operations and refocusing on core
competencies in the following three areas:

   ENHANCE REVENUE GROWTH. The Company believes that significant opportunities
   exist to enhance revenue growth in its business groups. The Company plans to
   achieve this growth by: (i) promoting cross-selling opportunities across its
   customer base; (ii) identifying new applications and new markets for existing
   products, production capabilities, and skill base; and (iii) acquiring
   companies that are strategic fits within its business segments. To date in
   the engineered products group as well as the stud bolt and gasket group, the
   Company has integrated the sales of certain product lines across each of the
   related companies within these groups. In the energy group, rather than
   integrate the sales of its product lines across the companies within that
   group, the Company has begun to integrate its customer base through the joint
   marketing of the individual companies' products and services to the entire
   energy group customer base. Over the next year, the Company will continue to
   expand on these efforts. In the heavy fabrication group, the Company has
   focused its efforts on developing and expanding its power generation
   customers in order to solidify its position in this burgeoning market. The
   Company believes that its strong market positions within the niche markets it
   serves enhances its ability to effectively implement this aspect of the
   turnaround plan. Although historically much of the Company's growth has been
   through acquisition, acquisitions will not be an area of emphasis until the
   turnaround plan has been fully executed and the Company's financial
   performance has returned to historical levels.

                                       9
<PAGE>
   ELIMINATE WASTE. The Company believes that significant opportunities exist to
   reduce or eliminate waste by: (i) reducing working capital levels
   company-wide through increased inventory turns and accelerated collection of
   receivables; (ii) selling non-strategic assets that are not part of the
   Company's core competencies; (iii) consolidating selected facilities; (iv)
   converting present manufacturing processes to "lean" or more efficient
   manufacturing techniques; and (v) fully implementing the Company's ERP
   systems, which will allow managers to obtain and use production information
   faster and more efficiently than before.

      During the past approximately year-and-a-half, the Company has: (i)
   consolidated three of its facilities into other existing facilities; (ii)
   sold three non-core business units; (iii) closed and liquidated four non-core
   and unprofitable business units; (iv) completed the installation of two ERP
   systems; (v) converted one plant from a traditional "batch and queue"
   operation to one that employs one-piece flow or cellular production; and (vi)
   reduced inventory and receivables. On a going-forward basis, the Company
   intends to: (i) consolidate an additional plant into an existing facility;
   (ii) sell three parcels of excess real estate; (iii) convert the distribution
   operations of its stud bolt and gasket group to a common ERP system; and (iv)
   continue the implementation of "lean" manufacturing techniques. The Company
   plans to continue to pursue similar measures when it is in its best interest
   to do so.

   DEVELOP EMPLOYEES. The Company believes that employee development is an
   integral part of the turnaround plan. Across all of the Company's businesses,
   its management, sales and operations teams have participated in numerous
   training and development programs that focus on management, sales,
   production, technical, safety and quality issues. The Company believes that
   this training is a valuable tool in the development and enhancement of its
   employees' skill sets and that the Company will continue to be rewarded for
   these efforts by a better trained, more knowledgeable and skilled workforce.

   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
clients are the automotive, home furnishings, petrochemical and oil and gas
industries. An economic slowdown in these industries could result in a decrease
in demand for the Company's products and services, which could adversely affect
operating results. During 1998 and into 1999, oil and gas prices declined
significantly, resulting in a decrease in the demand for the Company's products
and services that are used in the exploration and production of oil and gas.
Exploration and production expenditures generally lag improvements in oil and
gas prices; therefore, as oil and gas prices improved during 1999 and into 2000,
the Company has experienced increased sales and backlog in 2000.

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

                                       10
<PAGE>
RESULTS OF OPERATIONS

           The following table sets forth certain operating statement data for
each of the Company's groups for each of the periods presented (in thousands):

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                                                    -----------------------------     -----------------------------
                                                                          2000            1999             2000             1999
                                                                    ------------     ------------     ------------     ------------
<S>                                                                 <C>              <C>              <C>              <C>
Sales:
   Energy ......................................................    $     26,461     $     22,218     $     72,060     $     64,295
   Stud Bolt and Gasket ........................................          12,672           11,735           37,983           34,983
   Engineered Products .........................................          10,170            9,163           30,285           30,956
   Heavy Fabrication ...........................................          11,741           12,428           26,787           64,148
                                                                    ------------     ------------     ------------     ------------
                                                                          61,044           55,544          167,115          194,382
                                                                    ------------     ------------     ------------     ------------
Cost of Sales:
   Energy ......................................................          20,004           18,737           54,629           48,383
   Stud Bolt and Gasket ........................................           9,176            8,339           27,836           25,371
   Engineered Products .........................................           8,342            8,106           24,729           25,845
   Heavy Fabrication ...........................................          10,650           13,075           25,709           60,115
                                                                    ------------     ------------     ------------     ------------
                                                                          48,172           48,257          132,903          159,714
                                                                    ------------     ------------     ------------     ------------
Gross Profit:
   Energy ......................................................           6,457            3,481           17,431           15,912
   Stud Bolt and Gasket ........................................           3,496            3,396           10,147            9,612
   Engineered Products .........................................           1,828            1,057            5,556            5,111
   Heavy Fabrication ...........................................           1,091             (647)           1,078            4,033
                                                                    ------------     ------------     ------------     ------------
                                                                          12,872            7,287           34,212           34,668
                                                                    ------------     ------------     ------------     ------------
Selling, General and Administrative:
   Energy ......................................................           3,753            4,585           12,643           12,994
   Stud Bolt and Gasket ........................................           2,578            2,594            7,792            7,917
   Engineered Products .........................................           1,668            3,241            4,343            6,308
   Heavy Fabrication ...........................................             968            4,449            3,815            7,969
   Corporate ...................................................             737            2,622            4,619            3,753
                                                                    ------------     ------------     ------------     ------------
                                                                           9,704           17,491           33,212           38,941
                                                                    ------------     ------------     ------------     ------------
Operating Income (Loss):
   Energy ......................................................           2,704           (1,104)           4,788            2,918
   Stud Bolt and Gasket ........................................             918              802            2,355            1,695
   Engineered Products .........................................             160           (2,184)           1,213           (1,197)
   Heavy Fabrication ...........................................             123           (5,096)          (2,737)          (3,936)
   Corporate ...................................................            (737)          (2,622)          (4,619)          (3,753)
                                                                    ------------     ------------     ------------     ------------
                                                                    $      3,168     $    (10,204)    $      1,000     $     (4,273)
                                                                    ============     ============     ============     ============
</TABLE>

                                       11
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999.

   SALES. On a consolidated basis, sales increased $5.5 million or 10% for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999.

   Sales for the Energy Group increased $4.2 million or 19% for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.
In April 2000, the Company sold Blastco, its refinery demolition subsidiary.
Blastco's sales were $3.3 million in the third quarter of 1999. Excluding
Blastco, sales in the Energy Group would have increased $7.5 million or 40% for
2000 compared to 1999. The increase is attributable to internal growth primarily
as the result of improved economic conditions in the energy industry. Increasing
worldwide demand for oil and gas coupled with declining production has resulted
in more stable prices and an increase in the worldwide rig count. Additionally
in 2000, the group began providing temporary labor services to the oil and gas
construction industry. Sales of $2.7 million were recognized in the third
quarter related to this activity.

   Sales for the Stud Bolt and Gasket Group increased $0.9 million or 8% for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. 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 processing and energy industries.

   Sales for the Engineered Products Group increased $1.0 million or 11% for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. This increase was attributable to the acquisition of the
remaining 51% of Orbitform in August 2000, which the Company is now
consolidating. The increase attributable to this acquisition was partially
offset by a sales decrease at this group's manufacturing location in
Connecticut. The Connecticut plant has experienced significant sales declines
attributable to several of its major customers. These declines have primarily
been the result of customers slowing purchases either in response to an
inventory overstock situation or softness in their own sales.

   Sales for the Heavy Fabrication Group, comprised solely of Beaird, decreased
$0.7 million or 6% for the three months ended September 30, 2000 compared to the
three months ended September 30, 1999. 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 to fabricate up to 800 wind turbine
towers by November 2001 for a total price in excess of $55 million, with the
initial order of 242 towers for delivery to a wind energy project in West Texas.
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 third quarter of 2000, the manufacture of heavy
pressure vessels made up only 25% of Beaird's revenues in comparison to 72% for
the third quarter of 1999. Backlog at Beaird as of September 30, 2000 has
increased 171% over December 31, 1999.

   COST OF SALES. Cost of sales decreased $0.1 million for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.

   Cost of sales for the Energy Group increased $1.3 million or 7% for the three
months ended September 30, 2000 compared to the three months ended September 30,
1999 primarily as a result of the increase in sales described above. Gross
margin increased from 16% for the third quarter of 1999 to 25% in the third
quarter of 2000. Cost of sales in 1999 included charges of approximately $0.2
million related to the liquidation of certain inventories of a discontinued
product offering. The unusually low margin in 1999 was primarily attributable to
the refinery demolition business, Blastco. Excluding Blastco, the 1999 gross
margin was 20%. The improvement in margins in 2000 compared to 1999 is
attributable to increased sales that cover more fixed costs resulting in higher
margins.

                                       12
<PAGE>
   Cost of sales for the Stud Bolt and Gasket Group increased $0.8 million or
10% for the three months ended September 30, 2000 compared to the three months
ended September 30, 1999 primarily as a result of the increase in sales
described above. Gross margin decreased from 29% for the third quarter of 1999
to 28% in the third quarter of 2000. The decline in gross margin was primarily
attributable to competitive pressure within the stud bolt market as competitors
attempt to capture market share through price reductions.

   Cost of sales for the Engineered Products Group increased $0.2 million or 3%
for the three months ended September 30, 2000 compared to the three months ended
September 30, 1999. Cost of sales increased as a result of the acquisition of
Orbitform in August 2000. However, cost of sales in 1999 included charges
related to the liquidation of certain production related assets and inventory in
association with the closing of the group's Waterbury, Connecticut and El Paso,
Texas manufacturing facilities. Gross margin increased from 12% for the third
quarter of 1999 to 18% for the third quarter of 2000 because the gross margin of
Orbitform, which exceeds the margins of the remainder of the group, improved the
composite margin of the group. The declining sales level in the Connecticut
plant as described above has adversely affected the gross margin of the group.

   Cost of sales for the Heavy Fabrication Group decreased $2.4 million or 19%
for the three months ended September 30, 2000 compared to the three months ended
September 30, 1999. In response to the declining sales, Beaird reduced costs in
all areas and substantially reduced its workforce. In 1999, Beaird recorded
approximately $0.4 million in costs associated with personnel reductions. Gross
margin increased from a negative 5% in the third quarter of 1999 to 9% in the
third quarter of 2000.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $7.8 million or 45% for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999.

   The Energy Group's selling, general and administrative expenses decreased
$0.8 million or 18% for the three months ended September 30, 2000 compared to
the three months ended September 30, 1999. $0.5 million of this decrease is as a
result of the sale of Blastco, the group's refinery demolition subsidiary,
effective April 2000. Excluding Blastco, selling, general and administrative
expenses would have decreased $0.3 million or 8% for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999
primarily as a result of elimination of certain management positions at two of
the group's subsidiaries.

   The Stud Bolt and Gasket Group's selling, general and administrative expense
was $2.6 million in the third quarter of 2000 and 1999.

   The Engineered Products Group's selling, general and administrative expenses
decreased $1.6 million or 49% for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. 1999 includes
approximately $0.9 million in expenses associated with the closing of the
group's Waterbury, Connecticut and El Paso, Texas manufacturing facilities. The
consolidation of the group's two Connecticut plants resulted in an overall
decrease in selling, general and administrative expenses in 2000 that was
partially offset by the selling, general and administrative expenses of
Orbitform that was acquired in August 2000.

   The Heavy Fabrication Group's selling, general and administrative expenses
decreased $3.5 million or 78% for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. 1999 included a charge
for $2.5 million for an uncollectible receivable associated with a customer
dispute that was subsequently settled for $1 million. As a result of sales
declines in 1999, Beaird reduced its workforce and implemented other cost
reduction measures, reducing its 2000 selling, general and administrative
expenses.

   Corporate selling, general and administrative expenses decreased $1.9 million
or 72% for the three months ended September 30, 2000 compared to the three
months ended September 30, 1999. 1999 included approximately $1.6 million in
professional fees and other expenses associated with the Company's refinancing
efforts. Additionally, certain corporate expenses were reduced or eliminated in
2000.

                                       13
<PAGE>
   EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $0.2 million for
the three months ended September 30, 2000 compared to the three months ended
September 30, 1999. In August 2000, the Company acquired the remaining interest
in its equity investee, Orbitform. Therefore, Orbitform's results were
consolidated from the date of acquisition rather than reflected as earnings from
equity investments.

   INTEREST EXPENSE. Interest expense increased $0.8 million or 35% for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999, primarily as a result of higher interest rates.

   OTHER INCOME (EXPENSE), NET. Other income (expense) was $0.3 million for the
three months ended September 30, 2000 compared to $0.4 million for the three
months ended September 30, 1999.

   INCOME TAXES. The Company recognized no federal tax expense for the three
months ended September 30, 2000 as a result of adjustments to its valuation
allowance to offset the deferred tax asset associated with net operating loss
carry forwards.

   NET INCOME (LOSS). Net income was $0.2 million, or $0.02 per share, for the
three months ended September 30, 2000 compared to a net loss of $7.3 million, or
a loss of $0.48 per share, for the three months ended September 30, 1999 as a
result of the foregoing factors.

   NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999.

   SALES. On a consolidated basis, sales decreased $27.3 million or 14% for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999.

   Sales for the Energy Group increased $7.8 million or 12% for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
The Company sold Blastco, with sales of $6.5 million for the nine months ended
September 30, 1999, in April 2000. Excluding Blastco, sales would have increased
$14.3 million or 25% for the nine months ended September 30, 2000 compared to
the nine months ended September 30, 1999, with almost all the increase occurring
in the second and third quarters. The increase is attributable to internal
growth primarily as the result of improved economic conditions in the energy
sector. Increasing worldwide demand for oil and gas coupled with declining
production has resulted in more stable prices and the worldwide rig count has
increased. Additionally in 2000, the group began providing temporary labor
services to the oil and gas construction industry. Sales of $4 million were
recognized in 2000 related to this activity.

   Sales for the Stud Bolt and Gasket Group increased $3.0 million or 9% for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. 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 processing and energy industries.

   Sales for the Engineered Product Group decreased $0.7 million or 2% for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. While three of the group's manufacturing locations have experienced
relatively flat sales, its manufacturing location in Connecticut has experienced
significant sales declines attributable to several of its major customers. These
declines have primarily been the result of customers slowing purchases either in
response to an inventory overstock situation or softness in their own sales.
These sale decreases were partially offset by the increase in sales resulting
from the acquisition of Orbitform in August 2000.

   Sales for the Heavy Fabrication Group decreased $37.4 million or 58% for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. The decrease is attributable to the completion of a major contract for
wind turbine towers in June 1999 that was not replaced until the third quarter
of 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 to fabricate up to 800 wind turbine towers by

                                       14
<PAGE>
November 2001 for a total price in excess of $55 million, with the initial order
of 242 towers for delivery to a wind energy project in West Texas. 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 for the nine months ended September 30, 2000, the manufacture of heavy
pressure vessels made up only 33% of Beaird's revenues in comparison to 42% for
the nine months ended September 30, 1999. Backlog at Beaird as of September 30,
2000 has increased 171% over December 31, 1999.

   COST OF SALES. Cost of sales decreased $26.9 million or 17% for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999.

   Cost of sales for the Energy Group increased $6.2 million or 13% for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999 primarily as a result of the increase in sales described above. Gross
margin decreased from 25% for the first nine months of 1999 to 24% for the first
nine months of 2000.

   Cost of sales for the Stud Bolt and Gasket Group increased $2.5 million or
10% for the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999 primarily as a result of the increase in sales
described above. Gross margin decreased from 28% for the first nine months of
1999 to 27% in the first nine months of 2000. The decline in gross margin was
primarily attributable to competitive pressure within the stud bolt market as
competitors attempt to capture market share through price reductions.

    Cost of sales for the Engineered Products Group decreased $1.1 million or 4%
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. Cost of sales in 1999 included charges related to the
liquidation of certain production related assets and inventory in association
with the closing of the group's Waterbury, Connecticut and El Paso, Texas
manufacturing facilities. Additionally, cost of sales decreased as a result of
the decrease in sales described above. These decreases were offset by the
inclusion of cost of sales for Orbitform that was acquired in August 2000. Gross
margin increased from 17% for the nine months ended September 30, 1999 to 18%
for the nine months ended September 30, 2000 because the gross margin of
Orbitform, which exceeds the margins of the remainder of the group, has improved
the composite margin of the group. The declining sales level in the Connecticut
plant has adversely affected the gross margin of the group.

   Cost of sales for the Heavy Fabrication Group decreased $34.4 million or 57%
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. In response to the declining sales, Beaird attempted to
reduce costs in all areas and substantially reduced its workforce. Gross margin
decreased from 6% in the first nine months of 1999 to 4% in the first nine
months of 2000 as sales decreased to levels that were insufficient to generate
enough gross profit to cover fixed costs in the first quarter of 2000.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $5.7 million or 15% for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.

   The Energy Group's selling, general and administrative expenses increased
$0.4 million or 3% for the nine months ended September 30, 2000 compared to the
nine months ended September 30, 1999 primarily as a result of an increase of
$0.5 million at Blastco, the group's refinery demolition subsidiary, which was
sold in April 2000. Excluding Blastco, selling, general and administrative
expenses would have decreased $0.1 million or 1% for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999
primarily as a result of elimination of certain management positions at two of
the group's subsidiaries.

   The Stud Bolt and Gasket Group's selling, general and administrative expenses
decreased $0.1 million or 2% for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 as a result of cost
reduction measures implemented in the first quarter of 2000.

                                       15
<PAGE>
   The Engineered Products Group's selling, general and administrative expense
decreased $2.0 million or 31% for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999. 1999 includes
approximately $0.9 million in expenses associated with the closing of the
group's Waterbury, Connecticut and El Paso, Texas manufacturing facilities. The
consolidation of the group's two Connecticut plants resulted in an overall
decrease in selling, general and administrative expenses in 2000 that was
partially offset by the selling, general and administrative expenses of
Orbitform that was acquired in August 2000.

   The Heavy Fabrication Group's selling, general and administrative expense
decreased $4.2 million or 52% for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999. 1999 included a charge for
$2.5 million for an uncollectible receivable associated with a customer dispute
that was subsequently settled for $1 million. As a result of sales declines in
1999, Beaird reduced its workforce and implemented other cost reduction
measures, reducing its 2000 selling, general and administrative expenses.

   Corporate selling, general and administrative expenses increased $0.9 million
or 23% for the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. Both 2000 and 1999 included professional fees and
other expenses associated with the Company's refinancing efforts, the amendment
to its current loan agreements and preparation of its proxy as well as an
increase in salaries and related expenses resulting from additional corporate
personnel.

   EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $1.4 million for
the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999 primarily as a result of the Company's equity investee
involved in demolition activities which had earnings in the first quarter of
1999 and had no earnings in 2000 as anticipated losses on its contracts were
accrued as of December 31, 1999. Additionally, the equity investment was sold as
part of the sale of Blastco in April 2000.

   INTEREST EXPENSE. Interest expense increased $2.8 million or 44% for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999, primarily as a result of higher interest rates.

   OTHER INCOME (EXPENSE), NET. Other income (expense) was $3.5 million for the
nine months ended September 30, 2000 compared to $1.2 million for the nine
months ended September 30, 1999. In the second quarter of 2000, the Company
recognized a gain of approximately $2.6 million on the sale of Blastco and $0.8
million (net of expenses) in income on the settlement of its litigation with
Trinity Industries.

   INCOME TAXES. The Company recognized no federal tax benefit for the nine
months ended September 30, 2000 as a result of adjustments to its valuation
allowance to offset the deferred tax asset associated with net operating loss
carry forwards.

   NET INCOME (LOSS). The net loss was $4.6 million, or a loss of $0.32 per
share, for the nine months ended September 30, 2000 compared to a net loss of
$4.7 million, or a loss of $0.32 per share, for the nine months ended September
30, 1999 as a result of the foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

   At September 30, 2000, we had a deficit in retained earnings of $8.4 million
and a working capital deficit of $30.9 million as a result of $68.1 million in
debt maturing on or before September 30, 2001.

   PRINCIPAL DEBT INSTRUMENTS. As of September 30, 2000, we had an aggregate of
$93.4 million borrowed under our principal bank credit facility and debt
instruments entered into or assumed in connection with acquisitions as well as
other bank financings.

   We are currently exploring various financing alternatives to meet our future
liquidity needs. We anticipate refinancing certain of our debt facilities in
2000, although no assurances can be given that we will be able to refinance such
facilities or that we will be able to obtain terms that are as favorable as
those that currently exist.

                                       16
<PAGE>
   On June 30, 2000 the Company entered into an amendment of its credit
agreement with Comerica Bank-Texas, National Bank of Canada and Hibernia Bank
(the "Senior Lenders"), which: (i) accelerated the maturity to January 31, 2001;
(ii) reduced the revolving credit line to the lesser of $50 million or the
defined borrowing base; (iii) increased the interest rate from prime plus 2% to
prime plus 3%, payable weekly; and (iv) modified the financial covenants to
require maintenance of minimum consolidated tangible net worth, and earnings
before interest, taxes, depreciation and amortization ("EBITDA")-to-debt-service
ratio as well as to require limitations on capital expenditures. In addition,
the Senior Lenders waived all prior violations under the credit agreement. At
September 30, 2000, the Company was in compliance with the loan covenants. At
September 30, 2000, we had no availability under the credit facility. At
November 10, 2000, we had availability under the facility of approximately $1.4
million.

   In connection with the Company's amended credit agreement with its Senior
Lenders, St. James Capital Corp. or its affiliates (collectively, "St. James")
agreed, under the terms of a Limited Guaranty Agreement with the Company's
Senior Lenders (the "Guaranty"), to guarantee up to $2.0 million of any amount
that the Senior Lenders advance to the Company in excess of the defined
borrowing base amount under the amended credit agreement. As a condition of
providing this Guaranty, the Company entered into a Reimbursement Agreement with
St. James. Additionally, St. James has entered into a Credit Support Agreement
under which it has agreed to advance up to $1.5 million of funds to cure future
financial covenant defaults under the Company's amended credit agreement.

   We have a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo") that became
due on November 15, 1999. We were granted an extension of the due date through
January 31, 2000. On January 31, 2000, we were unable to repay the amounts
borrowed and defaulted on the note payable. EnSerCo has not called this note
due; however, it retains the right to do so.

   We have a $7.6 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999 and 2000. In October 2000, we requested and received waivers from Heller
through the September 30, 2000 reporting period.

   Effective as of August 25, 2000, the Company issued two convertible
subordinated notes ("Acquisition Note A" and "Acquisition Note B") to SJMB, L.P.
in connection with the Company's acquisition of the general partnership interest
and the 51% of limited partnership interests of Orbitform that the Company did
not already own. Acquisition Note A is an 11% promissory note in the original
principal amount of $3.45 million, convertible at any time, together with
accrued interest thereon, into shares of the Company's common stock, par value
$0.01 per share ("Common Stock"), at a price of $1.15 per share. Acquisition
Note B is an 11% promissory note in the original principal amount of $3.45
million, convertible, together with accrued interest thereon, beginning one year
after issuance into shares of the Company's Common Stock at a price of $2.00 per
share.

   In April 2000, the Company sold Blastco to Blastco's former shareholders.
Although the sales agreement required the purchasers to obtain the Company's
release from any of its guarantees of Blastco debt, the purchasers have not done
so and the Company continues to have in place its corporate guaranty of $1.6
million of Blastco term debt. This term debt is secured by equipment owned by
Blastco.

   Our liquidity has been constrained by our borrowing base limitations and by
our operating losses and, as a result, our financial position and cash flows
have been adversely effected. We continue to explore various alternatives to
improve our liquidity, including refinancing our indebtedness with other
lenders. In addition, we have identified and are pursuing the sale of
non-strategic assets as well as raising additional debt and equity capital.
There can be no assurance that we will successfully refinance our indebtedness
with other lenders, or successfully sell non-strategic assets.

                                       17
<PAGE>
   During the third quarter of 1999, we developed and implemented a turnaround
plan to streamline our operations and refocus on our core competencies through
enhanced revenue growth, elimination of waste and development of employees. As a
part of this turnaround plan, we closed duplicate facilities, reduced personnel,
eliminated certain products, wrote-off the related inventory, and adopted
uniform information systems platforms in the engineered products group. On a
going-forward basis, we intend to: (i) consolidate an additional plant into an
existing facility; (ii) sell three parcels of excess real estate; (iii) convert
the distribution operations of stud bolt and gasket group to a common ERP
system; and (iv) continue the implementation of "lean" manufacturing. We will
continue to pursue other similar measures when it is in our best interest to do
so.

   The Energy Group is closely tied to the price of oil and gas. Sales and
operating income within the Energy Group were adversely affected in 1999. The
reduction in sales volume and profitability in 1999 was primarily attributable
to reductions in the worldwide and gulf coast rig counts, continued caution
regarding the long-term hydrocarbon price environment, consolidation within the
oil and gas industry, and ongoing cost reduction efforts by oil and gas
companies. Within the Energy Group, we believe that sales reached their lowest
levels in 1999. Increasing worldwide demand for oil and gas coupled with
declining production in many areas should support a more stable and favorable
level of oil and gas prices, resulting in increased exploration and production
spending in 2000 and an improved demand for oilfield services. Excluding the
sales of Blastco, sales have increased each quarter in 2000 over sales of the
preceding quarter.

   The Stud Bolt and Gasket Group serves both the oil and gas exploration and
production industry and the refinery and processing industry. The Stud Bolt and
Gasket Group's operations have experienced results similar to the Energy Group's
operations. As oil and gas prices have increased, sales and profitability within
these operations have improved. We have experienced increasing backlog and sales
in each quarter of 2000 over the fourth quarter of 1999.

   The Engineered Products Group's operating profits have been adversely
effected by a decline in revenues as almost all the industries we serve in this
group have experienced softening in their markets and as a result have purchased
fewer products in the third quarter and are expected to continue to purchase
fewer products in the fourth quarter of 2000. In the home furnishing industry,
which represents about one-fifth of the group's sales, high energy prices are
creating rising utility, shipping and raw material costs, narrowing profit
margins. Additionally these same high prices are restraining consumers from
buying furniture and other big-ticket items. And, interest rate increases have
curbed consumer spending and contributed to a slow down in housing activity. The
bankruptcy filing of Heilig-Meyers, a large furniture chain and a major customer
of some of our customers, has caused a reduction in this group's customers'
purchases as they adjust to the impact of this filing. The slow-down in housing
activity coupled with changing fashion tastes have impacted the sales of our
major drapery hardware customer, which has resulted in fewer purchases from us.
The automotive industry, which represents about one-third of the group's sales,
is experiencing about a 5% reduction in sales over 1999, a record year.
Additionally several of this group's automotive customers have found themselves
in an inventory overstock situation and as a result have slowed or ceased
purchases from us until their own inventory levels are reduced. Based on all
these events, we expect sales to continue to be soft in the fourth quarter.
However, we have received several large purchase orders for new parts and our
quoting activity in general has increased.

   The Heavy Fabrication Group's sales and profitability decreased significantly
in 1999 from that of historical levels. This group's customers have seen a
reduction in their margins because of the volatility of oil feedstock prices
during 1999, and have significantly reduced their capital spending. In addition,
it has experienced significant competitive pressures from overseas. As a result,
Beaird actively pursued sales in new markets and in August 2000, Beaird entered
into a contract with FPL Energy LLC to fabricate up to 800 wind turbine towers
by November 2001 for a total price in excess of $55 million, with the initial
order of 242 towers for delivery to a wind energy project in West Texas.
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 for the nine months ended September 30, 2000, the
manufacture of heavy pressure vessels made up only 33% of Beaird's revenues in
comparison to 42% for the nine months ended September 30, 1999. Backlog at
Beaird as of September 30, 2000 has increased 171% over December 31, 1999.

                                       18
<PAGE>
   NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. For the nine months
ended September 30, 2000, net cash provided by operating activities was $6.3
million compared to the nine months ended September 30, 1999, which used cash of
$0.1 million. Cash was provided primarily through the collection of notes and
accounts receivable and increases in accounts payable and accrued liabilities.

   NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures and acquisitions. For the nine months ended September 30, 2000 and
1999, the Company made capital expenditures of approximately $3.6 million and
$8.0 million, respectively. Additionally, in 2000 and 1999 the Company made
investments in unconsolidated affiliates of $1.5 million and $2.5 million,
respectively. Effective April 2000, the Company sold its refinery demolition
subsidiary, Blastco, and received $2 million in cash proceeds and in August
2000, acquired Orbitform which included purchased cash of $0.7 million.

   NET CASH USED IN FINANCING ACTIVITIES. Sources of cash from financing
activities include borrowings under our credit facilities and sales of equity
securities. Financing activities used net cash of $6.1 million in the nine
months ended September 30, 2000 compared to providing net cash of $6.9 million
in 1999. During the nine months ended September 30, 2000, we repaid $1.8 million
of our borrowings under our credit facilities compared to net borrowings of $3.7
million during the same period in 1999. During the nine months ended September
30, 2000, we had proceeds from issuance of long-term obligations of $2.1
million, compared to proceeds of $6.2 million in the nine months ended September
30, 1999. During the nine months ended September 30, 2000, we made principal
payments on long-term obligations of $6.3 million compared to $5.7 million in
the nine months ended September 30, 1999. In 1999, we had $2.7 million in net
proceeds from the sale of our common stock.

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 the oil and gas
industry and us 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.

   WE ARE IN DEFAULT UNDER OUR NOTE WITH ENSERCO AND THEY HAVE THE RIGHT TO
DECLARE ALL OUTSTANDING AMOUNTS IMMEDIATELY DUE AND PAYABLE.

   We have a $15 million note payable to EnSerCo that was due on November 15,
1999 and extended to January 31, 2000. On January 31, 2000, we were unable to
repay the amounts borrowed and defaulted on the note. EnSerCo has not called
this note; however, they retain the right to do so.

   We have a $7.6 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999 and 2000. In October 2000, we requested and received waivers from Heller
through the September 30, 2000 reporting period. Because of the significant
losses in the first quarter of 2000, we believe we will not be in compliance
with the same financial covenants at the December 31, 2000 reporting period.
Although we will request a waiver from Heller at that time, no assurances can be
given that Heller will provide such a waiver.

   EVEN IF WE SUCCESSFULLY RESTRUCTURE 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.

                                       19
<PAGE>
   EVEN IF OUR LENDERS DO NOT DECLARE ALL AMOUNTS UNDER OUR CREDIT FACILITY AND
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.

   EVEN IF WE SUCCESSFULLY RESTRUCTURE 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 OUR NON-STRATEGIC ASSETS
AND INVESTMENTS, WE MAY NOT BE ABLE TO RECOVER THE CARRYING VALUE OF SUCH
AMOUNTS.

   We are in the process of selling a number of non-strategic assets and
investments as a part of our turnaround plan. Due to the current carrying values
of certain of our non-strategic assets and investments on our consolidated
balance sheet, we may not be able to dispose of certain of these non-strategic
assets and investments at a price that will allow us to recover the carrying
value of such non-strategic assets and investments.

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

   For the 1999 fiscal year, we incurred a net after-tax loss of $19.0 million,
and a net after-tax loss of $4.5 million for the nine months ended September 30,
2000. 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 prospects. A significant percentage of our 2000 sales,
most of which are attributable to our energy group and stud bolt and gasket
group, are derived from the domestic oil and gas industry.

                                       20
<PAGE>
   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 our turnaround plan
has been accomplished 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 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 groups have greater financial and other
resources than us. In our key engineered products areas of semi-tubular
engineered fasteners and cold-formed specialty fasteners, safety and straight
pins and threaded stud bolts, we face competition from very small manufacturers
as well as from the operations of companies much larger than ourselves. 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. In our energy group, we believe that
we are subject to competition from less than ten similarly-sized remanufacturing
businesses. Factors that affect competition within all of our groups include
price, quality and customer service. Strong competition may result in a loss of
market share in the groups 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.

                                       21
<PAGE>
   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. 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.

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 September 30,
2000, the revolving line of credit had a principal balance of $44.4 million and
an interest rate that floats with prime. We also have $7.6 million of long-term
debt bearing interest at Libor plus 2.5% and long-term debt of $13.5 million at
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.

                                       22
<PAGE>
                                     PART II
                                OTHER INFORMATION

Item 1.     Legal Proceedings

   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 as of August 25, 2000, the Company issued two separate convertible
subordinated notes ("Acquisition Note A" and "Acquisition Note B") to SJMB, L.P.
in connection with the Company's acquisition of the general partnership interest
and the 51% of limited partnership interests of Orbitform that the Company did
not already own. Acquisition Note A is an 11% promissory note in the original
principal amount of $3.45 million, convertible at any time, together with
accrued interest thereon, into shares of the Company's common stock, par value
$0.01 per share ("Common Stock"), at a price of $1.15 per share. Acquisition
Note B is an 11% promissory note in the original principal amount of $3.45
million, convertible, together with accrued interest thereon, beginning one year
after issuance into shares of the Company's Common Stock at a price of $2.00 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 4.     Submission of Matters to a Vote of Security Holders

(a)         The Annual Meeting of Shareholders of the Company was held
            August 15, 2000.

(b)         The following persons were elected at that meeting as Class III
            directors to serve until the third Annual Meeting of Shareholders
            following their election:

                                                         NUMBER OF VOTES
                                                      ---------------------
            NAME OF NOMINEE                              FOR       AGAINST
            ---------------                           ----------  ---------
            Robert E. Cone                            10,593,772  1,816,848
            Charles E. Underbrink                     11,500,917    909,703
            Barbara S. Shuler                         10,700,217  1,710,403

                                       23
<PAGE>
(c)   The following-described securities were approved for issuance:

       a.      in connection with the Company's acquisition of the general
               partnership interest and the 51% of limited partnership interests
               of OF Acquisition, L.P. ("Orbitform") that the Company did not
               already own:

                  (a) 11% promissory notes (x) in the original principal amount
               of $3,450,000, convertible at any time, together with accrued
               interest thereon, into shares of our common stock, par value
               $0.01 per share ("Common Stock"), at a price of $1.15 per share
               ("Acquisition Note A"), and (y) in the original principal amount
               of $3,450,000, convertible, together with accrued interest
               thereon, beginning one year after issuance into shares of our
               Common Stock at a price of $2.00 per share ("Acquisition Note
               B"), only if we elect not to prepay this amount in the first year
               instead (collectively, the "Acquisition Notes");

                  (b) warrants (the "Acquisition Warrants") to purchase 300,000
               shares of Common Stock at an exercise price of $1.25 per share
               (the "Acquisition Warrant Shares");

                  (c) on the full conversion of Acquisition Note A, together
               with accrued interest thereon, at least 3,000,000 shares of our
               Common Stock (the "Acquisition Note A Shares");

                  (d) only if we do not prepay the principal and accrued
               interest within one year, on the full conversion of Acquisition
               Note B, together with accrued interest thereon, at least
               1,725,000 shares of our Common Stock (the "Acquisition Note B
               Shares"); and

                  (e) on the full exercise of the Acquisition Warrants, the
               Acquisition Warrant Shares (the Acquisition Notes, the
               Acquisition Warrants, the Acquisition Note A Shares, the
               Acquisition Note B Shares and the Acquisition Warrant Shares,
               collectively, the "Acquisition Securities").

       b.      to SJMB and St. James Capital Partners, L.P. ("SJCP"), in
               connection with their providing up to $1,500,000 of funding to us
               under an Optional Credit Support Agreement with Comerica
               Bank-Texas, National Bank of Canada and Hibernia Bank (our
               "Senior Lenders"), in order to cure future potential financial
               covenant defaults under our amended credit agreement with our
               Senior Lenders (the "Credit Support Agreement"):

                  (a) an 11% promissory note of up to a maximum principal amount
               of $1,500,000, depending on the actual amount of funding under
               the Credit Support Agreement, convertible at any time, together
               with accrued interest thereon, into shares of our Common Stock,
               at a price of $1.25 per share (the "Credit Support Note");

                  (b) on the full conversion of the Credit Support Note, at
               least 1,200,000 shares of our Common Stock (the "Credit Support
               Note Shares");

                  (c) warrants to purchase up to 375,000 shares of our Common
               Stock at a price of $1.25 per share, depending on the actual
               amount of funding under the Credit Support Agreement (the "Credit
               Support Warrants"); and

                  (d) on the full exercise of the Credit Support Warrants, up to
               the 375,000 underlying shares of Common Stock (the "Credit
               Support Warrant Shares") (the Credit Support Note Shares, Credit
               Support Warrants and the Credit Support Warrant Shares,
               collectively, the "Credit Support Securities").

                                 NUMBER OF VOTES
                     FOR             AGAINST                ABSTAIN
                  ---------      ---------------            -------
                  6,887,773          906,633                163,920

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

            (a)     Exhibits.

                    EXHIBIT
                    NUMBER            IDENTIFICATION OF EXHIBIT
                    -------           -------------------------
                      27              Financial Data Schedule

            (b)     Reports on Form 8-K.

   In August 2000, the Company filed a report on Form 8-K disclosing the
acquisition of OF Acquisition, L.P. ("Orbitform"), a company engaged in the
manufacture of forming, fastening and assembly systems that are sold primarily
to original equipment manufacturers in the automotive industry. In October 2000,
the Company filed an amendment to this report on Form 8-K which included: (i)
the audited financial statements of Orbitform for the years ended December 31,
1999 and 1998 and the unaudited financial statements for the three months ended
June 30, 2000; and (ii) the unaudited pro forma combined condensed financial
statements of the Company for the six months ended June 30, 2000 and the year
ended December 31, 1999 as if the transaction had taken place January 1, 1999.

                                       25
<PAGE>
                                    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: November 14, 2000                         By: /s/ CHRISTINE A. SMITH
                                                    ----------------------------
                                                    Christine A. Smith,
                                                    Executive Vice President and
                                                    Chief Accounting Officer

                                       26