INDUSTRIAL HOLDINGS INC, S-1, 1996-10-02

INDUSTRIAL HOLDINGS INC
S-1, 1996-10-02
MACHINERY, EQUIPMENT & SUPPLIES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER __, 1996
REGISTRATION NO. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

UNDER
THE SECURITIES ACT OF 1933
FORM S-1
REGISTRATION STATEMENT
INDUSTRIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

5080
(Primary Standard Industrial
Classification Code Number)

Texas 76-0289495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

7135 ARDMORE
HOUSTON, TEXAS 77054
(713) 747-1025
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
ROBERT E. CONE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7135 ARDMORE
HOUSTON, TEXAS 77054
(713) 747-1025
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------
COPY TO:
SABRINA A. MCTOPY
NORTON, JACOBS, KUHN & MCTOPY, L.L.P.
1111 BAGBY, SUITE 2450
HOUSTON, TEXAS 77002
(713) 659-1131

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
---------------------

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number on the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

---------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================================================================
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PER SHARE OR AGGREGATE OFFERINGREGISTRATION
SECURITIES TO BE REGISTEREDREGISTERED(2) WARRANT(3) PRICE FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
("Common Stock"), underlying
Class A Redeemable Warrants(1) 632,500 $6.00 $3,795,000 $1,308.62(1)
- ---------------------------------------------------------------------------------------------
Common Stock underlying Class B
Redeemable Warrants(1).. 632,500 $10.00 $6,325,000 $2,181.03(1)
<PAGE>
- ---------------------------------------------------------------------------------------------
Class B Redeemable Warrants 632,500 $3.00 $1,897,500 $654.32
- ---------------------------------------------------------------------------------------------
Common Stock underlying Class B
Redeemable Warrants..... 632,500 $10.00 $6,325,000 $2,181.03
- ---------------------------------------------------------------------------------------------
Class C Redeemable Warrants 632,500 $ .06 $37,950 $13.09
- ---------------------------------------------------------------------------------------------
Common Stock Underlying Class C
Redeemable Warrants..... 632,500 $15.00 $9,487,500 $3,271.55
- ---------------------------------------------------------------------------------------------
Total................... $27,867,950 $9,609.64
=============================================================================================
</TABLE>
(1) 632,500 Class A Redeemable Warrants (57,500 of which were issued to Texas
Capital Securities, Inc., as Representative of the Underwriters (the
"Representative") and 632,500 Class B Redeemable Warrants (57,500 of which
were issued to the Representative) were issued in connection with the
Company's initial public offering of securities in January 1992. The
aggregate 1,265,000 underlying shares of Common Stock were registered in
its Registration Statement on Form S-1. A filing fee of $3,306.25
attributable to those securities was previously paid as part of the
registration fee with the Registration Statement on Form S-1, Commission
File No. 33-43169, which included the foregoing securities, and the net
filing fee due is $6,303.39.
(2) The Registration Statement also covers any additional securities which may
be issuable pursuant to anti-dilution provisions of warrants.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INDUSTRIAL HOLDINGS, INC.

CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
<C> <S>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........... Outside front cover page of Prospectus

2. Inside Front and Outside Back Cover Pages of Inside and outside back cover pages of
Prospectus................................ Prospectus

3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges.................

4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds;
Capitalization

5. Determination of Offering Price........... Not applicable

6. Dilution.................................. Dilution

7. Selling Securityholders................... Not applicable

8. Plan of Distribution...................... Outside front cover page of Prospectus; The
Offer

9. Description of Securities to be Registered Prospectus Summary; The Offer;
Description of Securities

10. Interests of Named Experts and Counsel.... Not applicable

11. Information with Respect to the Registrant Outside front cover page of Prospectus;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Capitalization;
Dilution; Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Trans-actions; Principal
Shareholders; Description of Securities;
Shares Eligible for Future Sale;
Consolidated Financial Statements

12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not applicable
</TABLE>
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
OFFERING CIRCULAR - PROSPECTUS

INDUSTRIAL HOLDINGS, INC.

OFFER TO EXCHANGE ONE CLASS A REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS B REDEEMABLE WARRANT AND
ONE CLASS C REDEEMABLE WARRANT

- --------------------------------------------------------------------------------
THIS OFFER WILL BEGIN ON ___________, 1996 AND WILL EXPIRE 30 CALENDAR DAYS
THEREAFTER, ON _________, 1996 AT 5:00 P.M., NEW YORK CITY TIME, UNLESS
EXTENDED.
- --------------------------------------------------------------------------------

INDUSTRIAL HOLDINGS, INC. (THE "COMPANY") HEREBY OFFERS TO THE HOLDERS
OF ITS 632,500 ISSUED AND OUTSTANDING CLASS A REDEEMABLE COMMON STOCK PURCHASE
WARRANTS ("CLASS A WARRANTS") THE OPPORTUNITY TO EXCHANGE EACH CLASS A WARRANT
AND CASH FOR ONE SHARE OF THE COMPANY'S COMMON STOCK, $.01 PAR VALUE, ONE CLASS
B REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS B WARRANT") AND ONE CLASS C
REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS C WARRANT") BEGINNING ON THE
DATE HEREOF AND ENDING 30 CALENDAR DAYS HEREAFTER, ON ______________, 1996, ON
THE TERMS HEREINAFTER DESCRIBED.

THIS OFFER IS BEING MADE ON THE FOLLOWING TERMS (SEE "THE OFFER" FOR A
MORE COMPLETE DESCRIPTION OF THE TERMS OF THIS OFFER):

AN EXCHANGING CLASS A WARRANTHOLDER ("WARRANTHOLDER") WHO TENDERS CLASS
A WARRANTS AND PAYS SIX DOLLARS ($6.00) PER CLASS A WARRANT (THE "WARRANT
EXERCISE PRICE") WILL RECEIVE FOR EACH CLASS A WARRANT TENDERED ONE SHARE OF
COMMON STOCK, ONE CLASS B WARRANT AND ONE CLASS C WARRANT.

EACH CLASS B WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $10.00
PER SHARE THROUGH AND INCLUDING JANUARY 14, 1999. THE TERMS OF CURRENTLY
OUTSTANDING CLASS B WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING
JANUARY 14, 1997, WILL AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO
JANUARY 14, 1999. EACH CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $15.00
PER SHARE THROUGH AND INCLUDING JANUARY 14, 1999. THE COMPANY MAY REDEEM THE

(CONTINUED ON NEXT PAGE)
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING CIRCULAR-PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------

The date of this Offering Circular-Prospectus is ___________, 1996.
<PAGE>
CLASS B AND CLASS C WARRANTS AT $.05 PER WARRANT UPON 30 DAYS PRIOR WRITTEN
NOTICE IF THE CLOSING BID PRICE OF THE COMPANY'S COMMON STOCK EQUALS OR EXCEEDS
$12.00 AND $17.00, RESPECTIVELY, FOR 20 CONSECUTIVE TRADING DAYS. THE EXERCISE
PRICE OF THE CLASS B AND CLASS C WARRANTS WERE ARBITRARILY DETERMINED BY THE
COMPANY'S BOARD OF DIRECTORS AND IS NOT NECESSARILY RELATED TO THE COMPANY'S
ASSETS, EARNINGS, BOOK VALUE OR OTHER GENERALLY ACCEPTED CRITERIA OF VALUE.

The exercise of the Class A Warrants pursuant to this Offer may be
withdrawn prior to 5:00 p.m., New York City time on ______________, 1996 (the
"Expiration Date") (or the latest time and date at which this Offer, as extended
by the Company, shall expire). This Offer is subject to a number of customary
conditions, any or all of which may be waived by the Company, but is not
conditioned upon the exercise of a minimum number of Class A Warrants. The
Company also reserves the right to extend this Offer. See "The Offer--Expiration
Date; Extensions" and "--Conditions of the Offer."

Warrantholders who desire to exercise their Class A Warrants should (a)
execute the subscription form on the back of their Class A Warrant Certificate
and submit same, together with (i) a certified or official bank check in the
amount of the aggregate Warrant Exercise Price made payable to Industrial
Holdings, Inc.; or (ii) a wire transfer to ChaseMellon Shareholder Services (the
"Exchange Agent") in the amount of the aggregate Warrant Exercise Price for the
benefit of the Company, and any other required documents to the Exchange Agent,
or (b) request a broker or bank to effect the transaction for him or her.
Holders of Class A Warrants registered in the name of a broker, dealer, bank,
trust or nominee should instruct such institutions to exercise their Class A
Warrants. The Company does not intend to pay broker-dealers solicitation fees
for the exercise of its Class A Warrants. See "The Offer--Procedure for
Tendering Class A Warrants."

If a holder of Class A Warrants does not want to tender his Class A
Warrants pursuant to the terms of this Offer, he may exercise such Class A
Warrants under the present terms of the Class A Warrants. Each Class A Warrant
entitles the registered holder to purchase one share of Common Stock at an
exercise price of $6.00 per share through and including January 14, 1997.

The Class A Warrants may be redeemed by the Company at $.05 per
warrant, on not less than 30 days' written notice, if the closing bid price of
the Common Stock for a period of 20 consecutive trading days equals or exceeds
$8.00 per share. As of September 27, 1996, the closing bid price of the Common
Stock had equalled or exceeded $8.00 per share for 20 consecutive trading days.
Therefore, the Company may redeem the Class A Warrants of non-exercising
Warrantholders at any time after the consummation of this Offer upon 30 days
prior written notice to such Warrantholders.

The Common Stock, Class A Warrants and Class B Warrants are currently
traded on the Nasdaq National Market under the symbols "IHII," "IHIIW," and
"IHIIZ," respectively. On September 27, 1996, the closing sale prices of the
Common Stock, Class A and Class B Warrants were $9.88, $6.38 and $3.00,
respectively. The Company intends to apply for listing of the Class C Warrants
on the Nasdaq National Market.

Questions and requests for assistance or for additional copies of this
Offering Circular-Prospectus should be directed to ChaseMellon Shareholder
Services, Stock Transfer Department, 85 Challenger Road, Overpeck Centre,
Ridgefield Park, NJ 07660, or to the Company at 7135 Ardmore, Houston, Texas
77054, (713) 747-1025.

2
<PAGE>
AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "Commission") with respect to the securities
offered hereby (the "Registration Statement"), as well as a Schedule 13e-4
Issuer Tender Offer Statement (the "Schedule 13e-4") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act'). This Offering
Circular-Prospectus does not contain all information set forth in the
Registration Statement, the Schedule 13e-4 and the exhibits thereto, to which
reference is hereby made. The Company is subject to the informational
requirements of the Exchange Act, and in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. Copies of such material may also be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Such materials may also be
inspected at the offices of Nasdaq/NMS, 1735 K Street, N.W. Washington, D.C.,
20006- 1506, on which the Common Stock, Class A Warrants and Class B Warrants
are listed.

TABLE OF CONTENTS
PAGE NO.

Available Information ....................................................... 3
Summary ..................................................................... 4
Summary Consolidated Financial Data.......................................... 8
Risk Factors................................................................. 9
The Offer....................................................................12
Use of Proceeds..............................................................20
Price Range of Common Stock and Warrants ....................................20
Dividend Policy..............................................................21
Capitalization...............................................................22
Dilution.....................................................................23
Pro Forma Condensed Consolidated Financial Statements........................24
Selected Consolidated Financial Data.........................................32
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................33
Business.....................................................................39
Management...................................................................47
Certain Transactions.........................................................58
Principal Shareholders.......................................................59
Description of Securities....................................................60
Shares Eligible for Future Sale..............................................63
Legal Matters................................................................63
Additional Information.......................................................64
Index to Financial Statements................................................F-1

3
<PAGE>
SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN
THIS OFFERING CIRCULAR-PROSPECTUS.

THE COMPANY

Industrial Holdings, Inc. (including its subsidiaries, the "Company") was
incorporated in Texas in August 1989. The Company's principal executive offices
are located at 7135 Ardmore, Houston, Texas 77054, and its telephone number is
(713) 747-1025.

The Company's business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth Engineering Company
("Landreth") and Connecticut Rivet ("CRivet") (collectively, "LEC") and the
Energy Products and Services Division, comprised of the Valve and Supplies Sales
Group which includes Pipeline Valve Specialty ("PVS") and Industrial Municipal
Supply Company ("IMSCO"); the New Machine Sales and Services Group which
includes Regal Machine Tools ("Regal") and Rex Machinery Movers ("RMM"); the
Export Crating Group which includes U.S. Crating ("USC"); and the Used Machine
Sales Group which includes Rex/Paul's Machine Sales ("RPMS").

The Fastener Manufacturing and Sales Division manufactures industrial
metal fasteners, including special cold-formed fasteners and threaded fastener
products for sale primarily to manufacturers in the home furniture, home
appliance and automotive industries. In the Energy Products and Services
Division, the Valve and Supplies Sales Group remanufactures pipeline valves and
distributes pipe, valves, fittings and other products primarily to the
petrochemical, chemical and petroleum refining industries and to the pipeline
transportation and product storage industries. The New Machine Sales and
Services Group sells new machine tools and conducts a machine moving operation.
The Export Crating Group provides international export crating services. The
Used Machine Sales Groups sells used machine tools.

The Company's strategy is to identify and pursue acquisitions within the
lines of business in which the Company currently operates. The Company believes
that it is a leading manufacturer of semi-tubular rivets and cold-headed
specials with pro forma revenues for that segment for the twelve months ended
December 31, 1995 of approximately $22,068,000. The Company's growth strategy
includes an emphasis on the continued acquisition of fastener manufacturing
companies with a particular emphasis on expansion into new customer bases and
geographical markets.

Since its inception, the Company has expanded its business through
acquisition. PVS was acquired in connection with the Company's initial public
offering in January 1992. Landreth was acquired in October 1992. The companies
comprising the New Machine Sales and Services Group, the Export Crating Group
and the Used Machine Sales Group were acquired as part of The Rex Group, Inc.
("REX") in 1993. Most recently, in December, 1995, CRivet was acquired. The
Company has financed these acquisitions with cash provided by operations,
borrowings under its credit agreements and public and private financings. The
Company anticipates that future acquisitions, if any, will be similarly
financed.

4
<PAGE>
RECENT DEVELOPMENTS

In July 1996, the Company signed a Letter of Intent to purchase all of
the outstanding stock of American Rivet Company, Inc. ("American"), a primary
competitor of LEC, for a purchase price of $11,125,000, subject to closing
adjustments (the "American Acquisition"). The Company and American are in the
process of negotiating a Stock Purchase Agreement and anticipate that the
closing will occur on or before October 15, 1996. While there is no assurance
that the American Acquisition will occur, the Company presently anticipates that
it will obtain approximately $3,695,000 of the purchase price with bridge
financing from a private source ("Bridge Financing"). If the American
Acquisition is consummated, the Company anticipates that it will use the
majority of the estimated $3,695,000 net proceeds from the exercise of the Class
A Redeemable Common Stock Purchase Warrants ("Class A Warrants") to repay the
Bridge Financing. (See Use of Proceeds).

American is a manufacturer of semi-tubular rivets and cold-headed
specials located in a suburb of Chicago, Illinois. American's customer are
primarily national manufacturers in the office furniture, automotive and
appliance industries. Net sales of American were $9,188,541 for its fiscal year
ended August 31, 1995 and $7,431,141 for the ten months ended June 30, 1996.
After the acquisition, American will operate within the Fastener Manufacturing
and Sales Division as part of LEC.

THE OFFER

The Offer....................... Each holder of Class A Warrants may exchange
one Class A Warrant and $6.00 cash (the
"Warrant Exercise Price") for one share of
the Company's Common Stock, one Class B
Redeemable Common Stock Purchase Warrant
("Class B Warrant") and one Class C
Redeemable Common Stock Purchase Warrant
("Class C Warrant").

Expiration Date................. 5:00 p.m., New York City time, on
____________, 1996, unless extended (the
"Expiration Date"). See "The Offer--
Expiration Date; Extensions."

Withdrawal Rights............... Acceptance of the Offer may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The
Offer--Withdrawal Rights."

Risk Factors.................... Class A Warrantholders (the
"Warrantholders") who elect to exercise
their Class A Warrants and receive Common
Stock, Class B and Class C Warrants should
consider certain factors regarding the
Company. See "Risk Factors."

Warrant Terms................... Each Class B and Class C Warrant will
entitle the holder to purchase one share of
Common Stock at $10.00 per share and $15.00
per share, respectively, through and
including January 14, 1999.

5
<PAGE>
Effect of the Offer on Non-Exercising
Warrantholders.............. SINCE THE CONDITIONS HAVE BEEN MET FOR THE
COMPANY TO REDEEM THE CLASS A WARRANTS, THE
COMPANY MAY DO SO AT ANY TIME AFTER THE
CONSUMMATION OF THE OFFER, UPON 30 DAYS
PRIOR WRITTEN NOTICE TO THE WARRANTHOLDERS.
EVEN ASSUMING THE COMPANY DOES NOT REDEEM
THE REMAINING CLASS A WARRANTS UPON THE
CONSUMMATION OF THE OFFER, THE REDUCED
NUMBER OF OUTSTANDING CLASS A WARRANTS AS A
RESULT OF THE ACCEPTANCE OF THE OFFER MAY
LIMIT THE TRADING MARKET FOR THE CLASS A
WARRANTS AND MAY ADVERSELY AFFECT THEIR
LIQUIDITY AND MARKET PRICE. TO THE EXTENT
THE NUMBER OF CLASS A WARRANTS AND
WARRANTHOLDERS IS REDUCED PURSUANT TO THE
OFFER, THE CLASS A WARRANTS MAY NOT BE
ELIGIBLE TO BE QUOTED BY NASDAQ AND MAY
CEASE TO BE REGISTERED UNDER THE EXCHANGE
ACT.

Use of Proceeds................. It is anticipated that the net proceeds of
the Offer of up to $3,695,000 will be used
by the Company to repay the Bridge Financing
indebtedness to be incurred in connection
with the American Acquisition.
Alternatively, if the American Acquisition
is not consummated, the Company intends to
use the net proceeds for general working
capital purposes. See "Use of Proceeds."

Acceptance of the Class A Warrants..The Company will accept all Class A Warrants
duly exercised and not properly withdrawn on
the Expiration Date, subject to certain
conditions. See "The Offer-- Conditions of
the Offer."

Conditions of the Offer......... The Offer is subject to a number of
customary conditions, any or all of which
may be waived by the Company. See "The
Offer--Conditions of the Offer."

How to Tender the Class A Warrants..Any holder of Class A Warrants desiring to
accept the Offer should either (a) complete
the subscription form on the reverse side of
the Class A Warrant certificate and forward
it together with (i) a certified or official
bank

6
<PAGE>
check in the amount of the aggregate Warrant
Exercise Price made payable to Industrial
Holdings, Inc.; or (ii) a wire transfer to
ChaseMellon Shareholder Services (the
"Exchange Agent") in the amount of the
Warrant Exercise Price and any other
required documents to the Exchange Agent; or
(b) request a broker or bank to effect the
transaction for him or her. Holders of Class
A Warrants registered in the name of a
broker, dealer, bank or nominee should
instruct such institutions to accept the
Offer. See "The Offer--Procedure for
Tendering Class A Warrants."

Certain Income Tax Consequences. The tax consequences of the Offer are
uncertain under federal income tax law, and
Warrantholders are urged to consult their
own tax advisors regarding this matter. The
recognition of income or gain characterized
as capital gain or ordinary income could
result from the acceptance of the Offer by a
Warrantholder. See "The Offer-- Certain
Federal Income Tax Consequences."

Delivery of Securities.......... The Exchange Agent will deliver the
certificates for shares of Common Stock,
Class B and Class C Warrants as soon as
practicable after the receipt of the Letter
of Transmittal, the Class A Warrants
tendered and the applicable cash payment.
See "The Offer--Delivery of Common Stock,
Class B Warrants and Class CWarrants."

Common Stock Outstanding....... There are presently 7,500,000 authorized
shares of Common Stock, and as of September
27, 1996, there were 4,057,580 shares of
Common Stock, 632,500 Class A Warrants and
632,500 Class B Warrants outstanding.
Assuming the acceptance of the Offer by all
Warrantholders, there will be 4,690,080
shares of Common Stock outstanding.

Market Prices................... As of September 27, 1996, the last reported
sales prices of the Common Stock, Class A
and Class B Warrants on the Nasdaq National
Market were $9.88, $6.38, and $3.00,
respectively. The Company intends to apply
for listing of the Class C Warrants on the
Nasdaq National Market. See "Price Range of
Common Stock and Warrants."

Exchange Agent.................. ChaseMellon Shareholder Services, Stock
Transfer Department, 85 Challenger Road,
Overpeck Centre, Ridgefield Park, NJ 07660.

7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR SHARES AND PER SHARE DATA)

The selected financial data presented below are derived from and should
be read in conjunction with the Company's Consolidated Financial Statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The unaudited pro forma
income statement data for the year ended December 31, 1995 and the six months
ended June 30, 1996 are presented as if, at the beginning of each period, the
American Acquisition (which transaction is expected to close in the fourth
quarter of 1996) had taken place and the proceeds of the Offer were used to
repay the Bridge Financing. The unaudited pro forma income statement data for
the year ended December 31, 1995 also assumes that the December 1995 purchase of
CRivet had taken place at the beginning of the period. The unaudited pro forma
balance sheet data at June 30, 1996 are presented as if, at such date, the
American Acquisition had taken place and the proceeds of the Offer were used to
repay the Bridge Financing. The unaudited pro forma data should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS HISTORICAL PRO FORMA
ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30 JUNE 30 DECEMBER 31
----------- --------------------- -----------
1996 1996 1995 1995
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ......................... $ 30,366 $ 25,627 $ 19,722 $ 56,655
Cost of sales ................. 23,464 19,937 15,530 43,832
Gross profit .................. 6,902 5,690 4,192 12,733
Operating expenses:
Selling, general &
administrative .......... 4,542 4,033 3,226 8,492
Depreciation & amortization 276 187 200 595
Total operating expenses ... 4,818 4,220 3,426 9,087
Operating income (loss) ....... 2,084 1,470 766 3,646
Other income (expense) ........ (876) (628) (378) (1,842)
Income (loss) before income
taxes ...................... 1,208 842 388 1,804
Income tax expense (benefit) .. 432 286 34 537
Net income (loss) ............. 776 556 354 1,267
Earnings (loss) per share ..... .18 .14 .12 .33
Weighted average common and
common equivalent shares
outstanding(1) .............. 4,397,932 3,868,158 3,080,010 3,828,297
<CAPTION>
HISTORICAL
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ........................ $ 38,983 $ 34,730 $ 35,113 $ 20,769 $ 16,878
Cost of sales ................ 30,613 26,933 26,924 15,882 14,098
Gross profit ................. 8,370 7,797 8,189 4,887 2,780
Operating expenses:
Selling, general &
administrative ......... 6,512 6,689 6,204 4,089 3,097
Depreciation & amortization 413 485 478 434 249
Total operating expenses .. 6,925 7,174 6,682 4,523 3,346
Operating income (loss) ...... 1,445 623 1,507 364 (566)
Other income (expense) ....... (824) (575) (666) (261) (432)
Income (loss) before income
taxes ..................... 621 48 841 103 (998)
Income tax expense (benefit) . 76 16 78 (279) --
Net income (loss) ............ 545 32 763 382 (998)
Earnings (loss) per share .... .17 .01 .27 .17 (1.39)
Weighted average common and
common equivalent shares
outstanding(1) ............. 3,149,579 3,029,574 2,828,635 2,101,503 716,239
<CAPTION>
PRO FORMA HISTORICAL HISTORICAL
JUNE 30 JUNE 30 DECEMBER 31
---------- ------------------ -------------------------------------------------
1996 1996 1995 1995 1994 1993 1992 1991
---------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......$ 3,315 $ 2,819 $ 2,403 $ 1,459 $ 2,254 $ 1,164 $ 1,551 $(2,367)
Total assets ................... 41,754 30,126 21,654 27,494 20,848 20,819 13,972 5,139
Long-term obligations(2) ....... 8,572 5,002 3,236 5,891 3,568 3,229 3,242 218
Total liabilities .............. 28,058 20,125 14,408 19,891 13,965 14,386 9,312 6,367
Shareholders' equity (deficit) 13,696 10,001 7,246 7,603 6,883 6,433 4,660 (1,228)
</TABLE>
- -------------------------------

(1) Calculated on the basis of the weighted average number of common and
common equivalent shares outstanding pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83.

(2) Excludes deferred income taxes and deferred compensation.

8
<PAGE>
RISK FACTORS

THE SHARES OF COMMON STOCK, CLASS B AND CLASS C WARRANTS OFFERED HEREBY
INVOLVE MATERIAL RISKS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS BEFORE MAKING A DECISION TO EXERCISE THEIR CLASS A
WARRANTS AND PURCHASE ANY SHARES OF COMMON STOCK:

LIMITED CAPITAL; RISKS RELATED TO BUSINESS STRATEGY AND ACQUISITIONS. The
Company's ability to effect its business plan depends on its ability to raise
funds to consummate acquisitions and provide necessary working capital. The
Company's future growth through acquisitions will require substantial capital
expenditures. While the Company evaluates business opportunities on a regular
basis, there can be no assurance that the Company will be successful in
identifying any additional acquisitions or will have sufficient financial
resources with which to make additional acquisitions. In the event that the
Company is unable to obtain cash in order to effect additional acquisitions, the
Company may issue additional shares, and further dilution to shareholders may
result. As the Company effects acquisitions and expands its operations, it 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.

At June 30, 1996, the Company had working capital of $2,819,101, long-term
debt of $5,001,834, shareholders' equity of $10,000,888 and availability of
$1,536,352 under its credit facilities with Comerica Bank - Texas. The Company
anticipates that its operating cash needs for fiscal 1996 can be met with cash
generated from operations, borrowings under its credit facilities with Comerica
Bank-Texas and private placements of equity and debt securities. Any future
acquisition of companies in connection with the Company's acquisition strategy
will require additional financing, which likely would include a combination of
debt and equity financing. There can be no assurance that the Company will be
able to obtain such financing on terms acceptable to it, if at all.

COMPETITION. The industries in which the Company and its subsidiaries
operate are highly competitive. Many of these competitors have greater financial
and other resources than the Company. Competitive factors for the Company's
subsidiaries include price sensitivity and customer service. The industries in
which the Company's subsidiaries operate are highly fragmented and dominated by
privately-owned businesses. Management's marketing strategy is to institute
centralized inventory controls, reduce personnel costs and achieve greater
buying power through expansion. Management believes that these strategies will
allow the Company and its subsidiaries to be more competitive. However, there
can be no assurance that the Company will be able to successfully compete
against presently known or future competitors.

FOREIGN SUPPLIERS. Certain of the Company's subsidiaries purchase products
from United States manufacturing companies operating abroad and from foreign
manufacturers. Accordingly, the Company is subject to the risks of doing
business abroad, including fluctuations in currency exchange rates, changes in
import duties or quotas, transportation costs, labor disputes and strikes. The
occurrence of any one or more of the foregoing events could materially adversely
affect the Company's product supply. All payables are settled in U.S. dollars.

9
<PAGE>
GOVERNMENTAL REGULATION. The Company's business is affected by
governmental regulations relating to its industry segments in general, as well
as environmental and safety regulations that have specific application to the
Company's business. While the Company is not aware of any proposed or pending
legislation, there can be no assurance that future legislation will not have an
adverse effect on the Company's business or competitive position. The Company
believes that it disposes of environmentally sensitive materials in accordance
with present rules and regulations. In the event the Company is required to
adopt additional environmental measures, the cost may be substantial.

DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent on,
among other things, the services of Robert E. Cone, President and Chief
Executive Officer, James H. Brock, Jr., President - Energy Products and Services
Division and Thomas C. Landreth, President - Fastener Manufacturing and Sales
Division. The Company has entered into employment agreements with Messrs. Cone,
Brock and Landreth. The loss of the services of any of these officers, for any
reason, may have a material adverse effect on the business and prospects of the
Company.

VOTING CONTROL BY CERTAIN SHAREHOLDERS. Directors and officers of the
Company own approximately 25% of the Company's outstanding shares and are
therefore able to elect a majority of the Company's Board of Directors and to
control the business and affairs of the Company. After the Offer is consummated
(assuming the exercise of all of the Class A Warrants), such officers and
directors will own approximately 22% of the Company's then outstanding shares,
and will continue to have the ability to control the business and affairs of the
Company.

LIMITED BACKLOG. Due to the nature of the distribution and remanufacturing
businesses, there exists no firm backlog for products of the Company's Energy
Products and Services Division. The Companies that comprise the Energy Products
and Services Division have historically operated without firm backlog, which is
standard practice in the industry.

LACK OF CONTRACTUAL SUPPLY AGREEMENTS. The Company's subsidiaries purchase
products from various sources of supply. The Company does not maintain firm
contractual agreements with any of its suppliers with respect to the product
purchases. Instead, the Company purchases its products from suppliers on the
most favorable terms that can be negotiated. Since product purchases are
negotiated on a continuing basis, the Company's reserve stream may not be as
secure as if they were negotiated pursuant to a long-term contract. The
Company's inability to obtain sufficient product from its suppliers would have a
material adverse effect on its business and operations.

DIVIDENDS NOT LIKELY. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends for the foreseeable
future. It is anticipated that any earnings that may be generated from the
Company's operations will be used to finance the Company's growth. Certain of
the Company's outstanding debt instruments currently prohibit the Company from
paying dividends. See "Dividend Policy."

DILUTION. Exercising Warrantholders will incur immediate and substantial
dilution of $3.12 per share from their exercise price of $6.00, since the pro
forma net tangible book value per share of Common Stock will be considerably
less than the Exercise Price. See "Dilution."

FUTURE SALES OF COMMON STOCK. Of the Company's currently outstanding
4,057,580 shares, 1,074,956 are "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act ("Restricted Shares"). All of the
Restricted Shares are currently eligible for public sale in accordance with

10
<PAGE>
the requirements of Rule 144. The remaining 2,982,624 shares are freely
tradeable without restrictions or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which will be subject to
resale limitations of Rule 144. In addition, the Company has filed registration
statements on Form S-3 under the Securities Act relating to 903,735 shares of
Common Stock issued or issuable upon the exercise of warrants or conversion of
convertible securities and offered by certain selling securityholders. Such
shares of Common Stock are (or if not issued, will be when issued) freely
tradeable without restriction or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which shares will be
subject to the resale limitations of Rule 144. The Company has also filed a
registration statement under the Securities Act to register the shares of Common
Stock issuable under its stock option plans. Shares issued under such plans,
other than shares issued to affiliates of the Company, will be freely tradeable
in the public market.

The Company is unable to predict the effect that sales made under Rule 144
or otherwise may have on the then-prevailing market price of the Common Stock.
The issuance of a significant number of additional securities, or even the
possibility thereof, could depress the market price of such securities.
See "Shares Eligible for Future Sale."

POSSIBLE INABILITY TO EXERCISE CLASS B AND CLASS C WARRANTS. The Class B
or Class C Warrants to be issued in the Offer may not be exercised unless at the
time of exercise there is a current prospectus under an effective registration
statement covering shares of Common Stock issuable upon exercise of such
warrants and such shares have been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder. The
Company will use its best efforts to have a current registration statement in
effect and to have all such shares so registered or qualified at any time when
the holders thereof may exercise their warrants. While it is the Company's
intention to do so, there is no assurance that it will be able to do so.

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS B AND CLASS C WARRANTS.
The Class B and Class C Warrants to be issued in the Offer may be redeemed by
the Company at any time prior to their expiration, at a price of $.05 per
warrant upon at least 30 days' notice if the closing bid price of the Common
Stock has equaled or exceeded $12.00 and $17.00 per share, respectively, for a
period of 20 consecutive trading days. Redemption of the warrants could force
the holders to exercise the warrants and pay the exercise price at a time when
it may be disadvantageous for the holders to do so, to sell the warrants at the
then-current market price when they might otherwise wish to hold the warrants,
or to accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption.

ADVERSE EFFECT OF OFFER ON NON-EXERCISING CLASS A WARRANTHOLDERS. The
Offer may have significant consequences for holders of Class A Warrants who do
not accept the Offer. Since the conditions have been met for the Company to
redeem the Class A Warrants, the Company may do so at any time after the
consummation of the Offer, upon 30 days prior written notice to the
Warrantholders. To the extent that Class A Warrants are tendered, the trading
market for unexercised Class A Warrants will become more limited. The market
price for unexercised warrants may be affected adversely to the extent that the
Class A Warrants tendered pursuant to the Offer reduce the number of Class A
Warrants available for trading. To the extent the number of Class A Warrants and
Warrantholders is reduced, the remaining Class A Warrants may not be eligible to
be quoted by the Nasdaq and may cease to be registered under the Exchange Act.
The reduced number of Class A Warrants available for trading may also tend to
make the trading price more volatile.

11
<PAGE>
ANTI-TAKEOVER EFFECT. The provisions of the Amended and Restated Articles
of Incorporation ("Amended Articles") may be deemed to have an anti-takeover
effect or may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in such shareholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by a shareholder. Pursuant to the Amended Articles, the Board of Directors
may, by resolution, establish one or more series of preferred stock, having such
number of shares, designation, relative voting rights, dividend rates,
liquidation or other rights, preferences and limitations as may be fixed by the
Board of Directors without any further shareholder approval. Such rights,
preferences, privileges and limitations as may be established could have the
effect of impeding or discouraging the acquisition of control of the Company.

THE OFFER

TERMS OF THE OFFER

The Company hereby offers to the holders of its issued and outstanding
Class A Warrants the opportunity to exchange each Class A Warrant and $6.00 cash
for one share of the Company's Common Stock, $.01 par value, one Class B Warrant
and one Class C Warrant, beginning on the date hereof and ending 30 calendar
days hereafter on the Expiration Date, subject to the terms and conditions set
forth herein and in the accompanying Letter of Transmittal.

AN EXCHANGING WARRANTHOLDER WHO TENDERS CLASS A WARRANTS AND PAYS SIX
DOLLARS ($6.00) PER CLASS A WARRANT WILL RECEIVE FOR EACH CLASS A WARRANT
TENDERED ONE SHARE OF COMMON STOCK, ONE CLASS B WARRANT AND ONE CLASS C WARRANT.

EACH CLASS B WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT A PURCHASE PRICE OF $10.00
THROUGH AND INCLUDING JANUARY 14, 1999. THE TERMS OF CURRENTLY OUTSTANDING CLASS
B WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING JANUARY 14, 1997, WILL
AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO JANUARY 14, 1999. EACH
CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO PURCHASE ONE SHARE OF
THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $15.00 PER SHARE THROUGH AND
INCLUDING JANUARY 14, 1999. THE COMPANY MAY REDEEM THE CLASS B AND CLASS C
WARRANTS AT $.05 PER WARRANT UPON 30 DAYS PRIOR WRITTEN NOTICE IF THE CLOSING
BID PRICE OF THE COMPANY'S COMMON STOCK EQUALS OR EXCEEDS $12.00 AND $17.00,
RESPECTIVELY, FOR 20 CONSECUTIVE TRADING DAYS. THE EXERCISE PRICES OF THE CLASS
B AND CLASS C

12
<PAGE>
WARRANTS WERE ARBITRARILY DETERMINED BY THE COMPANY'S BOARD OF DIRECTORS AND ARE
NOT NECESSARILY RELATED TO THE COMPANY'S ASSETS, EARNINGS, BOOK VALUE OR OTHER
GENERALLY ACCEPTED CRITERIA OF VALUE.

The Class A Warrants may be redeemed by the Company at $.05 per warrant,
on not less than 30 days' written notice, if the closing bid price of the Common
Stock for a period of 20 consecutive trading days equals or exceeds $8.00 per
share. As of September 27, 1996, the closing bid price of the Common Stock had
equaled or exceeded $8.00 per share for 20 consecutive trading days. Therefore,
the Company may redeem the Class A Warrants of non-exercising Warrantholders at
any time after the Expiration Date upon 30 days prior written notice to such
Warrantholders.

EXPIRATION DATE; EXTENSIONS

Subject to the terms and conditions as set forth herein and in the Letter
of Transmittal, the Company will accept all Class A Warrants tendered under the
terms of this Offer which are not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company at its sole option may extend this
Offer for an additional period of time by giving written notification of such
extension to the Exchange Agent. In addition, the Company may at its election
cause notice of any extension of the Offer to be published in the "New York
Times," the "Wall Street Journal" or any other newspaper selected by the
Company.

The Company has no present intention to extend this Offer beyond the
Expiration Date. If, however, the Company does extend this Offer beyond such
date, the Company intends that such extension will not exceed an additional 10
business days. Any extension or expiration of the Offer will be followed as soon
as practicable, but in no event later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date, by public
announcement thereof, and any amendment of the Offer will be followed as soon as
practicable by public announcement. Without limiting the manner by which the
Company may choose to make such public announcement, the Company shall not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service.

If the Company decides to waive, modify or amend a material provision of
the Offer, it may do so at any time, provided that it gives notice thereof in
the manner specified above and extends such Offer to the extent required by the
Exchange Act. With respect to an increase or decrease in the percentage of the
class of securities being tendered for or a change in the consideration offered,
Rule 13e-4(f)(1) of the Exchange Act generally requires that a tender offer
remain open for at least 10 business days from the date the notice of such
change is first published or sent or given to security holders. The minimum
period during which an offer must remain open following other material changes
in the terms of the offer will depend on the facts and circumstances, including
the relative materiality of the change in the terms of information concerning
the Offer. Any amendment to the Offer will apply to all Class A Warrants
exercised pursuant thereto, regardless of when or in what order the Class A
Warrants are exercised.

13
<PAGE>
Requests for additional copies of this Offering Circular-Prospectus or the
Letter of Transmittal or assistance in completing an exchange should be made by
mail or telephone to any of the following:

Exchange Agent:
ChaseMellon Shareholder Services
Stock Transfer Department
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07660

The Company:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
(713) 747-1025

PROCEDURE FOR TENDERING CLASS A WARRANTS

To accept the Offer and tender the Class A Warrants, the subscription form
on the reverse side of each Class A Warrant certificate must be completed and
executed as indicated thereon and the Class A Warrants must be accompanied by
payment of the aggregate Warrant Exercise Price in cash or certified or official
bank check made payable to Industrial Holdings, Inc. or by wire transfer to the
Exchange Agent for the benefit of the Company, together with any other required
documents. The foregoing materials must be delivered to and received by the
Exchange Agent at its address set forth herein on or before the Expiration Date.
However, in lieu of the foregoing, a holder may either (i) exercise the Class A
Warrants pursuant to the procedure for book-entry exercise set forth below (and
a confirmation of such book-entry exercise must be received by the Exchange
Agent on or before the Expiration Date) or (ii) comply with the guaranteed
delivery procedure set forth below. The beneficial holders of Class A Warrants
that are held by or registered in the name of a broker, dealer, commercial bank,
trust company or other nominee or custodian are urged to contact such entity
promptly if they wish to accept the Offer. Class A Warrants, together with a
certified or official bank check made payable to Industrial Holdings, Inc. or a
wire transfer to the Exchange Agent for the benefit of the Company and any other
required documents to be delivered under the Offer, should be delivered only by
hand or by courier, or transmitted by mail, and only to the Exchange Agent.
LETTERS OF TRANSMITTAL AND CLASS A WARRANTS SHOULD NOT BE SENT TO THE COMPANY.
The method of delivery of Class A Warrants and all other required documents to
the Exchange Agent is at the election and risk of the holder, but if such
delivery is by mail, it is suggested that the holder use properly insured,
registered mail with return receipt requested, and that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent on or prior to the Expiration Date.

Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Class A Warrants at each of the
Depository Trust Company, the Midwest Securities Trust Company and Philadelphia
Depository Trust Company (each a "Book-Entry Transfer Facility" and collectively
referred to as "Book-Entry Transfer Facilities") for purposes of the Offer. Any
financial institution that is a participant in a Book-Entry Transfer Facility's
system may make book-entry delivery of Class A Warrants by causing the
Book-Entry Transfer Facility to transfer the same into the Exchange Agent's
account at such Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer

14
<PAGE>
Facility's procedure for such transfer and to confirm such transfer to the
Exchange Agent in writing. Any exercise of Class A Warrants to be effected
through book-entry delivery at a Book-Entry Transfer Facility must have either
(i) the Class A Warrant executed by the holder of record, together with the
proper signature guarantees, and delivered to a Book-Entry Transfer Facility and
the cash or certified or official bank check made payable to Industrial
Holdings, Inc. or a wire transfer for the benefit of the Company, together with
all other documents required, transmitted to and received by the Exchange Agent
at its address set forth herein on or before the Expiration Date or (ii)
complied with the guaranteed delivery procedure set forth below. Delivery of
documents to a Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedure does not constitute delivery to the Exchange
Agent.

Each signature on a Class A Warrant must be guaranteed by a member firm of
the Medallion Signature Guarantee Program or by an eligible institution pursuant
to the rules and guidelines of the Commission (collectively, "Eligible
Institutions").

If the certificates for Class A Warrants are registered in the name of a
person other than the person executing such Class A Warrants, or if Class A
Warrants that are not accepted for exercise pursuant to the Offer are to be
returned to a person other than the registered owner, then the certificates for
such Class A Warrants must be endorsed or accompanied by an appropriate
instrument of transfer, signed exactly as the name of the registered owner
appears on the certificates, with the signatures on the certificates or
instruments of transfer guaranteed by an Eligible Institution.

The issuance of Common Stock in exchange for Class A Warrants exercised
pursuant to the Offer will be made only after timely receipt by the Exchange
Agent of the certificates for such Class A Warrants (or a confirmation of a
book-entry transfer of such Class A Warrants into the Exchange Agent's account
at one of the Book-Entry Transfer Facilities as described above) and the
certified or official bank check or the wire transfer, together with all other
documents required. If less than the entire number of Class A Warrants evidenced
by a submitted certificate are to be exercised, the exercising Warrantholder
should indicate the number of Class A Warrants being exercised. The entire
number of Class A Warrants represented by the certificates for Class A Warrants
delivered to the Exchange Agent will be deemed to have been exercised unless
otherwise indicated.

All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the Class A Warrants or cash payments tendered will
be determined by the Company, which determination shall be final and binding.
The Company reserves the absolute right to reject any or all tenders of any
particular Class A Warrants and cash payments not properly tendered or the
acceptance of which would, in the opinion of the Company, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to any particular Class A Warrants, and the Company's interpretation
of the terms and conditions of this Offer (including the instructions and Letter
of Transmittal) shall be final and binding. Any irregularities in connection
with the tenders, unless waived, must be cured within such time as the Company
shall determine, which time may be extended beyond the Expiration Date. Neither
the Company nor the Exchange Agent shall be under any duty to give notification
of defects in such tenders or incur any liability for failure to give such
notification. Tenders of the Class A Warrants and cash payments received by the
Exchange Agent that are not properly tendered and as to which the irregularities
have not been cured or waived will be returned (without interest on the cash
payment or deduction therefrom) by the Exchange Agent to the appropriate
Warrantholder as soon as practicable.

15
<PAGE>
GUARANTEED DELIVERY PROCEDURE

If a holder of Class A Warrants desires to exercise such Class A Warrants
pursuant to the Offer but is unable either to deliver his certificates, the
certified or official bank check or the wire transfer and all other required
documents to the Exchange Agent on or before the Expiration Date or to comply
with the procedure for book-entry exercise on a timely basis, such Class A
Warrants may nevertheless be exercised pursuant to the Offer, provided that all
of the following conditions are satisfied:

(i) such exercises are made by or through an Eligible Institution;

(ii) prior to the Expiration Date, a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex,
facsimile transmission, mail or hand delivery) setting forth the
name and address of the Warrantholder and the number of Class A
Warrants exercised, stating that the exercise is being made thereby
and guaranteeing that within three trading days after the Expiration
Date, the Class A Warrants and the certified or official bank check
or the wire transfer, together with all other documents required,
will be deposited by the Eligible Institution with the Exchange
Agent; and

(iii) the certificates for all exercised Class A Warrants in proper
form for transfer (or a written confirmation of book-entry transfer
into the Exchange Agent's account at a Book-Entry Transfer Facility
as described above) and the cash, the certified or official bank
check or the wire transfer, together with all other documents
required, are received by the Exchange Agent within three trading
days after the Expiration Date.

WITHDRAWAL RIGHTS

Any exercise of Class A Warrants pursuant to the Offer may be withdrawn
subject to the procedures described below, at any time prior to the Expiration
Date. Thereafter, such exercises are irrevocable, except that they may be
withdrawn after the expiration of 40 business days from the beginning of this
Offer, unless previously accepted for exercise as provided in this Offering
Circular- Prospectus. If the Company extends the period of time during which the
Offer is open, is delayed in its acceptance of the Class A Warrants for exercise
or is unable to accept the Class A Warrants for exercise for any reason, then,
without prejudice to the Company's rights under the Offer, the Exchange Agent
may, on behalf of the Company, retain all Class A Warrants exercised, and such
Class A Warrants may not be withdrawn except as provided herein, subject to Rule
13e-4(f)(5) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which provides that the person making an issuer exchange offer shall
either pay the consideration offered or return tendered securities, promptly
after the termination or withdrawal of the offer.

For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange Agent
at its address as set forth above. Such notice of withdrawal must set forth the
name of the tendering Warrantholder, the name of the registered holder if
different from that of the Warrantholder, the number of Class A Warrants and the
amount of the cash payment to be withdrawn. If the Class A Warrants to be
withdrawn have been delivered to the Exchange Agent, a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution must be
submitted prior to the release of such Class A Warrants and the return of the
accompanying cash payment. In addition, such notice must specify in the case of
Class A Warrants tendered by delivery of certificates, the numbers shown on the
Class A Warrant certificates or, in the case of Class A Warrants tendered by

16
<PAGE>
book-entry transfer, the name and number of the account at one of the Book-Entry
Transfer Facilities to be credited with the withdrawn Class A Warrants. All
questions as to the validity (including the time of receipt) of notices of
withdrawal will be determined by the Company, whose determination shall be final
and binding. Class A Warrants and cash payments withdrawn in the manner
specified above will not be considered to have been duly tendered.

No interest shall be paid on any amount returned to a Warrantholder
pursuant to a proper withdrawal or otherwise, regardless of any delay in the
Offer.

DELIVERY OF COMMON STOCK, CLASS B WARRANTS AND CLASS C WARRANTS

Upon the terms and subject to the conditions of this Offer, delivery of
the Common Stock, Class B Warrants and Class C Warrants in exchange for Class A
Warrants and cash payments validly tendered and accepted by the Company will be
made as soon as practicable after receipt by the Exchange Agent of the Letter of
Transmittal, the Class A Warrants tendered and the applicable cash payment. All
deliveries will be made through the Exchange Agent.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary is a general discussion of certain of the
anticipated federal income tax consequences of the acceptance of the Offer. No
discussion is included regarding any applicable state, local or foreign tax
laws.

This summary is limited to Warrantholders who hold the Class A Warrants as
"capital assets" (generally, property held for investment) within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). The
tax consequences to any particular Warrantholder may be affected by matters not
discussed below. In addition, there is no current authority directly addressing
the tax consequences of the acceptance of the Offer, and the Company has not
sought a ruling from the Internal Revenue Service or an opinion of counsel with
respect to such tax consequences. Accordingly, each Warrantholder is advised to
consult with his or her own tax advisor regarding the tax consequences of
holding or exercising the Class A Warrants.

ACCEPTANCE OF THE OFFER. It is possible that the acceptance of the Offer
would require the recognition of income by a Warrantholder, as the Class B and
Class C Warrants received by any Warrantholder accepting the Offer constitute
new and independent value (in the form of an inducement to exercise the Class A
Warrant), which is in addition to the original rights granted under the Class A
Warrants. Thus, those Warrantholders who accept the Offer may recognize income
to the extent of the extra value received, measured by the fair market value of
the Class B and C Warrants. The character of the income will be either capital
gain realized from the exchange of a Class A Warrant for Common Stock and the
Class B and C Warrant or ordinary income in the form of a taxable receipt of
intangible property. Each Warrantholder who exercises his Class A Warrants
pursuant to this Offer will have an adjusted basis in the Class B and Class C
Warrants received equal to the amount of income reported on receipt thereof.

EXERCISE OF THE CLASS B AND CLASS C WARRANTS. If a Warrantholder who
accepts the Offer reports income upon the receipt of the Class B and C Warrants,
he will not report income when he subsequently exercises the Warrants. The
character of the income will depend upon the classification of the receipt of
the Class B and Class C Warrants as a capital transaction (which would result in
capital gain) or the

17
<PAGE>
receipt of intangible property (which would result in ordinary income). The
adjusted tax basis of the Common Stock received in exchange for the Class B and
Class C Warrants would be equal to the amount reported as income (whether at
inception or later) plus the amount paid upon exercise of the Class B and Class
C Warrants. The holding period for the Class B and C Warrants will begin on the
date this Offer is consummated.

TAX CONSEQUENCES TO THE COMPANY. No gain or loss will be recognized to the
Company as a result of the Offer or the acceptance of the Offer by the
Warrantholders. Pursuant to Section 382 of the Code, utilization of net
operating loss ("NOL") carryforwards is limited if there has been a change in
control of the Company during a specified time period. The Company's issuance of
Common Stock in its initial public offering in January 1992 has previously
resulted in limitations under Section 382 with respect to the Company's ability
to use NOL carryforwards. In addition, the Company issued Common Stock in
private offerings in 1995 and 1996. It is uncertain whether the exercise of the
Class A Warrants under this Offer, when added to the 1995 and 1996 Common Stock
issuances, would create an additional change in control under Section 382 and an
additional limitation on the Company's NOL carryforwards.

EFFECT ON NON-EXERCISING CLASS A WARRANTHOLDERS

THE EFFECT OF THE OFFER ON NON-EXERCISING CLASS A WARRANTHOLDERS WILL BE
SIGNIFICANT. FIRST, SINCE THE CONDITIONS HAVE BEEN MET FOR THE COMPANY TO REDEEM
THE CLASS A WARRANTS, THE COMPANY MAY DO SO AT ANY TIME AFTER THE CONSUMMATION
OF THIS OFFER UPON 30 DAYS PRIOR WRITTEN NOTICE TO THE WARRANTHOLDERS. EVEN
ASSUMING THE COMPANY DOES NOT REDEEM THE UNEXERCISED CLASS A WARRANTS AFTER THE
CONSUMMATION OF THIS OFFER, TO THE EXTENT THAT THE OFFER IS ACCEPTED AND CLASS A
WARRANTS ARE EXERCISED, THE TRADING MARKET FOR UNEXERCISED CLASS A WARRANTS WILL
BECOME MORE LIMITED, AND THEIR PRICE IS LIKELY TO BE ADVERSELY AFFECTED. TO THE
EXTENT THAT THE NUMBER OF OUTSTANDING CLASS A WARRANTS IS REDUCED, THE REMAINING
CLASS A WARRANTS MAY NOT BE ELIGIBLE TO BE QUOTED BY NASDAQ AND MAY CEASE TO BE
REGISTERED UNDER THE EXCHANGE ACT.

CONDITIONS OF THE OFFER

Notwithstanding any other provision of the Offer, the Company may cancel,
modify or terminate the Offer and is not required to accept for exercise any
Class A Warrants pursuant to the Offer if prior to the Expiration Date:

(i) there shall be pending, instituted or threatened any legal
action or administrative proceeding before any court or governmental
agency, by any governmental agency or any other person, prohibiting,
restricting or delaying the Offer;

(ii) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any governmental authority, which would
prohibit or materially restrict or delay consummation of the Offer; or

(iii) there shall have occurred (and the adverse effect of such
occurrence will be continuing): (a) any general suspension of, or
limitation on prices for trading on, the Nasdaq National Market or in the
other over-the-counter markets; (b) a declaration of a banking

18
<PAGE>
moratorium by United States or New York authorities; or (c) a commencement
of a war, armed hostilities or other international or national calamity
directly or indirectly involving the United States of America which would
reasonably be expected to affect materially and adversely (or to delay
materially) the consummation of the Offer.

If the Company terminates the Offer pursuant to any of the conditions set
forth above, the Exchange Agent will promptly return the applicable Class A
Warrants and funds for the aggregate Warrant Exercise Price to the holders
thereof.

The Company reserves the absolute right to waive satisfaction of any
conditions and compliance with any terms of the Offer. The Company further
reserves the absolute right to reject any and all exercises not in proper form.
The Company will accept any and all Class A Warrants which are properly
exercised, subject to the conditions stated herein.

LISTING OF THE CLASS C WARRANTS

The Company intends to apply for listing of the Class C Warrants on the
Nasdaq National Market. However, even if initially listed, there can be no
assurance that the Class C Warrants will meet the requirements for continued
inclusion and continue to be listed on the Nasdaq National Market. Failure to
continue to be listed may adversely affect the market value and liquidity of the
Class C Warrants.

POSITION OF THE BOARD OF DIRECTORS

The Board of Directors of the Company believes this Offer is in the best
interests of the Company inasmuch as it will benefit from the receipt of net
cash proceeds of up to $3,695,000 received pursuant to this Offer and provides
for the possible receipt of additional financing in the future from the exercise
of the Class B Warrants and subsequently from the Class C Warrants of up to
$22,137,500 in the aggregate. However, the Board of Directors is not making any
recommendations to the holders of the Class A Warrants as to whether they should
exchange or refrain from exchanging any or all of their Class A Warrants. Each
Warrantholder must make his or her own decision as to whether to exchange all or
any portion of the Class A Warrants owned.

PAYMENT OF FEES AND EXPENSES

The Company has agreed to pay the Exchange Agent a fee of $7,500 to act in
such capacity reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Offering Circular-Prospectus and related documents to the
beneficial owners of the Class A Warrants, and in handling or forwarding tenders
for their customers. However, the Company will not make any other payments to
brokers, dealers or others soliciting tenders of Class A Warrants. Employees of
the Company may solicit tenders of Class A Warrants, for which they will receive
no additional compensation.

19
<PAGE>
USE OF PROCEEDS

The Company estimates that the net proceeds from the exercise of the Class
A Warrants assuming the exercise of all outstanding Class A Warrants (after
deducting the estimated expenses of the Offer payable by the Company) will be
$3,695,000.

In July 1996, the Company signed a Letter of Intent to purchase all of the
outstanding stock of American Rivet Company, Inc. ("American"), a primary
competitor of LEC, for a purchase price of $11,125,000, subject to closing
adjustments (the "American Acquisition"). The Company and American are in the
process of negotiating a Stock Purchase Agreement and anticipate that the
closing will occur on or before October 15, 1996. While there is no assurance
that the American Acquisition will occur, the Company presently anticipates that
it will obtain approximately $3,695,000 of the purchase price with bridge
financing from a private source ("Bridge Financing"). If the American
Acquisition is consummated, the Company anticipates that it will use the
majority of the estimated $3,695,000 net proceeds from the exercise of the Class
A Warrants to repay the Bridge Financing. The remainder of the purchase price
will be funded with cash and marketable securities of American, an increase in
the Company's Demand Note secured by the inventory and receivables of American
and a term note secured by the real estate and equipment of American. In the
event that the proceeds from the exercise of the Class A Warrants are not
sufficient to repay the Bridge Financing, the Bridge Financing will be repaid
through other equity financing.

If the American Acquisition is not consummated, the Company intends to use
the net proceeds for working capital purposes.

PRICE RANGE OF COMMON STOCK AND WARRANTS

The Common Stock, Class A Warrants and Class B Warrants are traded on the
Nasdaq National Market under the symbols "IHII," "IHIIW" and "IHIIZ,"
respectively. The following table sets forth the high and low closing sales
prices of the Common Stock, Class A Warrants and Class B Warrants for the
periods indicated below:

Common Stock Class A Warrant Class B Warrant
PRICE RANGE PRICE RANGE PRICE RANGE
HIGH LOW HIGH LOW HIGH LOW
1994
First Quarter $5.25 $3.88 $1.31 $0.75 $0.81 $0.31
Second Quarter 4.81 3.50 1.25 0.38 0.38 0.13
Third Quarter 3.63 2.25 0.50 0.25 0.06 0.06
Fourth Quarter 3.75 2.00 0.94 0.31 0.19 0.09
1995
First Quarter $4.00 $3.25 $0.88 $0.63 $0.22 0.13
Second Quarter 3.63 2.88 0.75 0.63 0.34 0.19
Third Quarter 4.75 3.00 1.00 0.63 0.38 0.19
Fourth Quarter 4.38 3.31 0.81 0.63 0.38 0.28
1996
First Quarter $6.75 $3.75 $1.44 $0.63 $0.53 $0.31
Second Quarter 10.50 6.50 5.13 1.25 2.13 0.53
Third Quarter 9.88 7.00 6.38 3.75 3.00 1.50

20
<PAGE>
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in the Common Stock, Class A Warrants or Class B Warrants.

On September 27, 1996, the last reported sales prices of the Common Stock,
Class A Warrants and Class B Warrants as quoted by the Nasdaq National Market,
were $9.88, $6.38, and $3.00 per share or warrant, respectively. On September
27, 1996 there were approximately 126, 21 and 26 record holders of the Common
Stock, Class A Warrants and Class B Warrants, respectively.

DIVIDEND POLICY

The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
presently intends to retain future earnings to support the Company's operations
and growth. Any payment of cash dividends in the future will be dependent on the
amount of funds legally available therefor, the Company's earnings, financial
condition, capital requirements and other factors that the Board of Directors
may deem relevant. The payment of cash dividends is currently prohibited under
the terms of certain of the Company's long-term indebtedness.

21
<PAGE>
CAPITALIZATION

The following table sets forth (i) the capitalization of the Company at
June 30, 1996 and (ii) such capitalization as adjusted to reflect the
consummation of the American Acquisition; the exercise of all 632,500
outstanding Class A Warrants, the issuance of 632,500 shares of Common Stock and
the application of the estimated $3,695,000 in net proceeds therefrom. This
table should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and "Use of Proceeds" that are included elsewhere
in this Offering Circular-Prospectus.

JUNE 30, 1996
(in thousands)
PRO FORMA
ACTUAL AS ADJUSTED(2)
(UNAUDITED)
Short-term debt........................... $ 7,657 $9,542
======= ======

Long-term debt............................ 5,002 8,572
Shareholders' equity:
Common stock, $.01 par value; 7,500,000
shares authorized, 3,641,162 shares
issued and outstanding (1) and
4,273,662 shares issued and
outstanding, pro forma as adjusted (2) 36 43
Additional paid-in capital.......... 9,390 13,078
Retained earnings................... 575 575
--------- ---------

Total shareholders' equity.... $10,001 $13,696
------- -------

Total capitalization...................... $15,003 $22,268
======= =======
- ------------------------------------------

(1) As of June 30, 1996, excludes (i) 632,500 shares underlying the
outstanding Class B Warrants; (ii) an aggregate of 511,000 shares of
Common Stock issuable upon the exercise of options granted to directors or
employees under the Company's 1994 Amended and Restated Incentive Plan and
1995 Non-Employee Director Stock Option Plan and exercisable at an average
exercise price of $3.68 per share per share of Common Stock
("Shareholders' Options"), and an additional 20,000 shares that may be
granted in the future under the Company's 1995 Non-Employee Director Stock
Option Plan; (iii) an aggregate of 745,000 shares of Common Stock issuable
upon the exercise of warrants other than the outstanding Class A and Class
B Warrants and exercisable at an average exercise price of $4.08 per share
of Common Stock ("Other Warrants"); and (iv) 575,153 shares of Common
Stock issuable upon the conversion of a debenture granted to Renaissance
Capital Partners II, Ltd. ("Renaissance") and convertible at $3.26 per
share ("Renaissance Debenture"). From July through September 1996, an
aggregate of 166,418 Other Warrants were exercised, leaving 578,582
remaining Other Warrants. Proceeds from these exercises were $875,917. On
September 11, 1996, Renaissance converted $815,000 of the Renaissance
Debenture into 250,000 shares of Common Stock, leaving 325,153 shares of
Common Stock issuable upon the conversion of the Debenture. See
"Description of Securities," "Management--Stock Option Plans" and "Shares
Eligible for Future Sale."

(2) Pro Forma as adjusted gives effect to the exercise of all 632,500
outstanding Class A Warrants

22
<PAGE>
DILUTION

As of June 30, 1996, giving effect to the exercise of warrants and
conversion of debt to Common Stock occurring from July 1, 1996 to September 27,
1996, the Company had net tangible book value of $9,816,200 or $2.42 per share.
Giving effect to the exercise of 632,500 Class A Warrants at an exercise price
of $6.00 per share and the issuance of 632,500 shares of Common Stock and
deducting the estimated offering expenses of $100,000, the Company's adjusted
net tangible book value at June 30, 1996 would have been $13,511,200 or $2.88
per share. This represents an immediate increase in net tangible book value of
$.46 per share to existing shareholders and an immediate dilution of $3.12 per
share to new investors exercising Class A Warrants. Dilution per share
represents the difference between the price per share to be paid by persons
exercising the Class A Warrants and the pro forma consolidated net tangible book
value per share after the exercise of the Class A Warrants.

Exercise price per share..................... $6.00
Net tangible book value per share before the Offer $2.42
Increase per share attributable to new investors .46
-----
Net tangible book value per share after the Offer 2.88
-----
Dilution per share to new investors.......... $3.12
=====

The foregoing table excludes the effect of the exercise of Other Warrants,
Shareholders' Options and the Renaissance Debenture. If these outstanding
warrants and options were exercised or the debenture converted prior to the
exercise of the Class A Warrants, exercising Warrantholders would experience an
increase in net tangible book value per share.

23
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)

The following unaudited summary pro forma financial statements give effect
to the planned acquisition by Industrial Holdings, Inc. ("IHI") of American
Rivet Company, Inc. ("American") in a transaction to be accounted for as a
purchase which is expected to close in the fourth quarter of 1996. The
allocation of purchase price is based on preliminary information currently
available and will be revised as necessary prior to the issuance of the 1996
financial statements, although no material adjustments are anticipated. The
following unaudited pro forma financial statements also give effect to the
exercise of 632,500 Class A Warrants, the issuance of 632,500 shares of Common
Stock and the application of the net proceeds therefrom.

The unaudited pro forma condensed consolidated balance sheet is based on
the June 30, 1996 balance sheets of IHI and American, included in the financial
statements of IHI and American appearing elsewhere in this Offering
Circular-Prospectus, and has been prepared to reflect the acquisition of
American as if the acquisition had been consummated at June 30, 1996. The
acquisition of MRMC, Inc's ("MRMC") Fastener Division ("CRivet") was completed
in December 1995 and its balance sheet as of June 30, 1996 is included in that
of IHI.

The unaudited pro forma condensed consolidated statements of operations
are based on the income statement of IHI appearing elsewhere in this Offering
Circular-Prospectus, and the income statement of American for the 12-month
period ended December 31, 1995 and the six-month period ended June 30, 1996 (not
presented separately herein). Additionally, the unaudited pro forma statement of
operations for the year ended December 31, 1995 is based on the Statement of
Direct Revenues and Direct Expenses of CRivet for the period from January 1,
1995 through December 7, 1995 (not presented separately herein). The unaudited
pro forma statements of operations combine the results of operations of IHI,
CRivet, and American for the year ended December 31, 1995, as if the
acquisitions had occurred on January 1, 1995 and combine the results of
operations of IHI and American for the six months ended June 30, 1996 as if the
acquisition had occurred on January 1, 1996.

These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of IHI,
CRivet and American included elsewhere in this Offering Circular-Prospectus.

<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- -------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................ $ 245 $ 798 $ (607)(d) $ 436
Marketable securities ............... -- 1,648 (1,648)(d) --
Accounts receivable-trade ........... 6,730 1,316 8,046
Inventories ......................... 9,346 584 570(a) 10,500
Property and equipment held for sale 100 250(c) 350
Advances to shareholders ............ 17 17
Notes receivable, current portion 307 307
Other current assets ................ 425 66 109(g) 600
-------- -------- -------- --------
Total current assets ........... 17,170 4,412 (1,326) 20,256

Property and equipment, net ............. 9,683 1,901 3,499(a) 14,833
(250)(c)
Notes receivable ........................ 1,278 1,278
Other assets ............................ 119 470 (200)(g) 389
Goodwill, net ........................... 1,876 118 3,004(b) 4,998
-------- -------- -------- --------

Total assets ................... $ 30,126 $ 6,901 $ 4,682 $ 41,754
======== ======== ======== ========
</TABLE>
25
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- -------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................... $ 6,668 $ -- $ 5,195 $ 8,168
(3,695)(f)
Accounts payable-trade .......... 5,689 237 -- 5,926
Accrued expenses and other ...... 1,005 423 -- 1,428
Current portion of long-term debt 989 -- 430(d) 1,419
-------- -------- -------- --------
Total current liabilities ... 14,351 660 1,930 16,941

Long-term debt, less current portion 5,002 -- 3,570(d) 8,572
Deferred compensation payable ....... 427 80(a) 507
(91)(g)
Deferred income taxes payable ....... 772 -- 1,357(h) 2,038
-------- -------- -------- --------

Total liabilities .......... 20,125 1,087 6,846 28,058
Shareholders' equity
Net unrealized gain on marketable
securities ................... 177 (177)(e)
Common stock .................... 36 1,000 (1,000)(e) 43
-- -- 7(f)
Less: Treasury stock ........... (508) 508(e)
Additional paid-in capital ...... 9,390 -- 3,688(f) 13,078
Retained earnings ............... 575 5,145 (5,145)(e) 575
-------- -------- -------- --------
Total shareholders' equity . 10,001 5,814 (2,119) 13,696
-------- -------- -------- --------
Total liabilities and shareholder ... $ 30,126 $ 6,901 $ 4,682 $ 41,754
======== ======== ======== ========
</TABLE>
26
<PAGE>
Note 1 - The pro forma balance sheet reflects the acquisition of American for an
aggregate purchase price, including acquisition expenses, of $11,450,000, the
exercise of 632,500 Class A Warrants, the issuance of 632,500 shares of Common
Stock and the application of the net proceeds therefrom. Pro forma adjustments
are made to:

a. Adjust the assets and liabilities of American to the estimated fair
market values at the acquisition date.

b. Record goodwill on the purchase of American.

c. Reclassify a Florida condominium to property held for sale.

d. Record the issuance of a 12% bridge note payable in the amount of
$3,695,000, the drawdown of $1,500,000 on the Comerica Bank line of
credit, the issuance of a 9%, $4,000,000 term note and the
disbursement of $2,255,000 of American cash and marketable
securities to complete the purchase acquisition.

e. Eliminate the common stock, treasury stock, unrealized gains and
retained earnings of American.

f. Reflect the repayment of the 12% bridge note payable in the amount
of $3,695,000 with the net proceeds from the exercise of the 632,500
Class A Warrants and the related issuance 632,500 shares of Common
Stock. (See Note 2)

g. Reclassify spare parts inventory to other current assets and to net
the deferred tax asset against deferred tax adjustment.

h. Establish a net deferred tax liability for deferred taxes applicable
to differences in fair values and tax bases of assets acquired and
liabilities assumed.

NOTE 2 - If the balance sheet amounts were adjusted to assume the tender offer
did not occur, notes payable would increase by $3,695,000 to $11,863,000,
working capital would decrease by $3,695,000 to a $380,000 deficit and
shareholders' equity would decrease by $3,695,000 to $10,001,000.

27
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(000'S OMITTED)

HISTORICAL PRO FORMA
------------------- ---------------------
ACQUISITION
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
-------- ------- ----- --------
Sales ............................ $ 25,627 $ 4,739 $-- $ 30,366
Cost of sales .................... 19,937 3,535 (10)(a) 23,464
-- -- 8(b) --
-- -- (6)(c) --
-------- ------- ----- --------
Gross profit ..................... 5,690 1,204 8 6,902

Operating expenses:
Selling, general and .......... 4,033 755 (246)(a) 4,542
administrative

Depreciation and amortization . 187 19 70(b) 276
-------- ------- ----- --------

Total operating expense ....... 4,220 774 (176) 4,818
-------- ------- ----- --------
Income from operations ........... 1,470 430 184 2,084
Other income (expense)
Interest expense .............. (678) (248)(d) (926)
Interest income ............... 45 (45)(e)
Other income .................. 50 16 (16)(e) 50
-------- ------- ----- --------
Total other income (expense) .. (628) 61 (309) (876)
-------- ------- ----- --------
Income before income taxes ....... 842 491 (125) 1,208
Income tax expense ............... 286 196 (50)(i) 432
-------- ------- ----- --------
Net income ....................... $ 556 $ 295 $ (75) $ 776
======== ======= ===== ========
Earnings per share (j) ........... $ .14 -- -- $ .18

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

28
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
--------------------------------- ------------------------
IHI CRIVET AMERICAN CRIVET AMERICAN COMBINED
-------- ------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales ....................................... $ 38,983 $9,986 $ 8,718 $(1,122)(k) $ 56,655

Cost of sales ............................... 30,613 7,979 6,790 (557)(f) 43,832
(389)(g)
180 (h)
312 (b) 62
(1,122)(k)
(c) (13)
(a) (23)

Gross profit ................................ 8,370 2,007 1,928 454 (26) 12,733
Cost of sales
Selling, general and ..................... 6,512 779 1,461 210 8,492
administrative ....................... 100 (m)
(a) (570)
Depreciation and amortization ............ 413 40 (b) 142 595
-------- ------ ------- ------- ------- --------
Total operating expenses .............. 6,925 779 1,501 310 (428) 9,087
-------- ------ ------- ------- ------- --------
Income from operations ...................... 1,445 1,228 427 144 402 3,646
Other income (expense):
Interest expense ......................... (982) (523)(d) (495) (2,000)
Interest income .......................... 140 130 (e) (130) 140
Other income (expense) ................... 18 57 (e) (57) 18
-------- ------ ------- ------- ------- --------
Total other income
(expense) .......................... (824) 187 (523) (682) (1,842)

Income before income taxes .................. 621 1,228 614 (379) (280) 1,804
Income tax expense .......................... 76 0 238 335 (i) (112) 537
-------- ------ ------- ------- ------- --------

Net income .................................. $ 545 $1,228 $ 376 $ (714) $ (168) $ 1,267
======== ====== ======= ======= ======= ========

Earnings per share (j) ...................... $ .17 $ .33
======== ========
</TABLE>
29
<PAGE>
Note 1 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition outlined in Note 1 to the pro forma balance sheet:

a. Reduce cost of sales and selling, general and administrative expenses for
reductions in executive payrolls, reductions in professional fees,
elimination of directors fees, reduction in executive benefits,
elimination of profit sharing plan contributions and elimination of
expenses related to Florida condominium.

b. Record increased depreciation and amortization expense resulting from (i)
the increase in property, plant and equipment acquired as a result of the
allocation of the purchase price and (ii)amortization of goodwill acquired
over 20 years.

c. Reduce cost of sales for the effect of the difference in lifo and fifo
basis of accounting for inventory.

d. Reflect interest charges (i) for American on $4,000,000 of 9% term debt
and $1,500,000 line of credit and (ii) for CRivet on $1,000,000 of 12%
convertible notes, $2,800,000 of 9.85% term note and $1,400,000 line of
credit secured to finance the acquisition. (See Note 2)

e. Eliminate interest income and other income.

f. Reduce payroll expense for employees not hired upon acquisition of CRivet
and which are not needed to operate at historical levels of operations
when the operations of CRivet are combined with those of IHI. Proforma
production staffing levels are comparable to those at LEC and include 65
employees compared to 71 production employees at LEC. Proforma sales and
engineering staffing levels include 8 employees at CRivet compared to 8
employees at LEC. Substantially all other administrative functions will be
performed by LEC. These staffing reductions are as a result of LEC's more
efficient operating and management techniques. Proforma adjustments for
1995 include the elimination of an additional 32 production employees not
hired by LEC at acquisition.

g. Reverse the effect of the CRivet obsolescence reserve recorded in the
period ended December 7, 1995.

h. Increase expense for the rental of CRivet plant facility at $15,000 per
month.

i. Increase in income taxes as a result of the pro forma pretax earnings of
CRivet and American.

j. Increase in earnings per share as a result of pro forma earnings of CRivet
and American and increase in weighted average of common stock equivalents
(i) for American for the effect of 760,000 warrants sold in connection
with $3,695,000 bridge note and (ii) for CRivet for the effect of 400,000
warrants sold in connection with $1,000,000 convertible note.

k. Eliminate intercompany sales and cost of goods sold between CRivet and
LEC.

l. Increase CRivet general and administrative expenses for office supplies,
data processing, telephone, professional fees and travel and
entertainment. Proforma amounts based on LEC's historical usage, data
processing system to be implemented, number of telephones, estimated
additional audit and legal fees and travel anticipated between Houston and
Connecticut.

m. Increase CRivet commission expense by 1% to percentage expected to be paid
by LEC.

30
<PAGE>
Note 2 - If the pro forma financial statements were not adjusted to reflect the
repayment of the bridge note with the proceeds from the tender offer (i)
interest expense for the six months ended June 30, 1996 and twelve months ended
December 31, 1995 would be $222,000 and $443,000 greater, respectively; (ii) net
income for the six months ended June 30, 1996 and twelve months ended December
31, 1995 would be $133,000 and $266,000 less, respectively; and (iii) earnings
per share for the six months ended June 30, 1996 and twelve months ended
December 31, 1995 would be $.16 and $.31, respectively.

31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below are derived from
and should be read in conjunction with the Company's Consolidated Financial
Statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. This
information is in thousands except for shares and per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEARS ENDED DECEMBER 31
------------------------- ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales .............................. $ 25,627 $ 19,722 $ 38,983 $ 34,730 $ 35,113 $ 20,769 $ 16,878
Cost of sales ...................... 19,937 15,530 30,613 26,933 26,924 15,882 14,098
Gross profit ....................... 5,690 4,192 8,370 7,797 8,189 4,887 2,780
Operating expenses:
Selling, general &
administrative ................... 4,033 3,226 6,512 6,689 6,204 4,089 3,097
Depreciation & amortization ...... 187 200 413 485 478 434 249
Total operating expenses ......... 4,220 3,426 6,925 7,174 6,682 4,523 3,346
Operating income (loss) ............ 1,470 766 1,445 623 1,507 364 (566)
Other income (expense) ............. (628) (378) (824) (575) (666) (261) (432)
Income (loss) before income taxes .. 842 388 621 48 841 103 (998)
Income tax expense (benefit) ...... 286 34 76 16 78 (279) --
Net income (loss) .................. 556 354 545 32 763 382 (998)
Earnings (loss) per share .......... .14 .12 .17 .01 .27 .17 (1.39)
Weighted average common and
common equivalent shares
outstanding(1) ................... 3,868,158 3,080,010 3,149,579 3,029,574 2,828,635 2,101,503 716,239

<CAPTION>
JUNE 30 DECEMBER 31
--------------------- ---------------------------------------------------------

1996 1995 1995 1994 1993 1992 1991
--------- -------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) ..................... $ 2,819 $ 2,403 $ 1,459 $ 2,254 $ 1,164 $ 1,551 $(2,367)
Total assets .................................. 30,126 21,654 27,494 20,848 20,819 13,972 5,139
Long-term obligations(2) ...................... 5,002 3,236 5,891 3,568 3,229 3,242 218
Total liabilities ............................. 20,125 14,408 19,891 13,965 14,386 9,312 6,367
Shareholders' equity (deficit) ................ 10,001 7,246 7,603 6,883 6,433 4,660 (1,228)
</TABLE>
- ---------------
(1) Calculated on the basis of the weighted average number of common and
common equivalent shares outstanding pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83.

(2) Excludes deferred income taxes and deferred compensation.

32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company was formed in August 1989 and acquired IMSCO in December 1989,
PVS in January 1992, Landreth in October 1992, REX in April 1993 and CRivet in
December 1995.

RECENT DEVELOPMENTS

In July 1996, the Company signed a Letter of Intent to purchase all of the
outstanding stock of American Rivet Company, Inc. ("American"), a primary
competitor of LEC, for a purchase price of $11,125,000, subject to closing
adjustments (the "American Acquisition"). The Company and American are in the
process of negotiating a Stock Purchase Agreement and anticipate that the
closing will occur on or before October 15, 1996. While there is no assurance
that the American Acquisition will occur, the Company presently anticipates that
it will obtain approximately $3,695,000 of the purchase price with bridge
financing from a private source ("Bridge Financing"). If the American
Acquisition is consummated, the Company anticipates that it will use the
majority of the estimated $3,695,000 net proceeds from the exercise of the Class
A Warrants to repay the Bridge Financing. The remainder of the purchase price
will be funded with cash and marketable securities of American, an increase in
the Company's Demand Note secured by the inventory and receivables of American
and a term note secured by the real estate and equipment of American. In the
event that the proceeds from the exercise of the Class A Warrants are not
sufficient to repay the Bridge Financing, the Bridge Financing will be repaid
through other equity financing.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995.

SALES. On a consolidated basis, sales increased $5,904,533 or 30% for the
six months ended June 30, 1996 compared to the six months ended June 30, 1995.
This sales increase was primarily the result of the acquisition of CRivet and
the inclusion of a full six months of its operating results, coupled with an
increase in sales of machine tools by Regal. Additionally, the six months ended
June 30, 1995 included $1,036,580 in low-margin wire sales by Landreth to CRivet
prior to its acquisition by Landreth.

COST OF SALES. Cost of sales increased by $4,406,556 or 28% for the six
months ended June 30, 1996 compared to the six months ended June 30, 1995,
primarily as a result of the increase in sales for the comparable period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $806,639 or 25% for the six months ended June
30, 1996 compared to the six months ended June 30, 1995. This increase is
primarily attributable to the acquisition of CRivet and the inclusion of a full
six months of its operating results.

DEPRECIATION AND AMORTIZATION. There was no significant change in
depreciation and amortization included in operating expenses for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995.

33
<PAGE>
INTEREST EXPENSE. Interest expense increased $192,046 or 40% for the six
months ended June 30, 1996, compared to the six months ended June 30, 1995
primarily as a result of debt incurred in the acquisition of CRivet.

INCOME TAXES. The Company's effective tax rate was 34% for the six months
ended June 30, 1996 compared to 9% for the six months ended June 30, 1995. For
the six months ended June 30, 1996, there was a $40,000 reduction to the
deferred tax asset valuation allowance to reflect estimated deferred tax assets
used in that period compared to a $126,849 reduction in the valuation allowance
for the six months ended June 30, 1995, $16,250 of which reflected the estimated
deferred tax assets used in that period and $110,599 of which reflected the
recognition of a deferred tax asset based upon the expected utilization of net
operating loss carryforwards at REX.

NET INCOME. As a result of the foregoing factors, the Company had net
income of $556,063 for the six months ended June 30, 1996, compared to $354,086
for the six months ended June 30, 1995. This increase was primarily attributable
to the acquisition of CRivet and increased sales at Regal.

TOTAL ASSETS. Total assets were $30,125,368 at June 30, 1996 compared to
$27,493,556 at December 31, 1995. This increase was primarily attributable to an
increase in accounts receivable and inventory as a result of the acquisition of
CRivet in December 1995, in which no accounts receivable and below average
operating levels of inventory were acquired and at which accounts receivable and
inventory have reached average operating levels at June 30, 1996, as well as an
increase in inventory at Regal as a result of increased sales.

TOTAL LIABILITIES. Total liabilities were $20,124,480 at June 30, 1996,
compared to $19,890,563 at December 31, 1995. This increase was primarily
attributable to increased trade accounts payable as a result of the acquisition
of CRivet, in which below average operating levels of accounts payable were
assumed and at which accounts payable have reached average operating levels at
June 30, 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994.

SALES. On a consolidated basis, sales increased $4,252,731 or 12% in 1995
compared to 1994. This increase was primarily the result of increased sales in
the Company's New Machine Sales segment as a result of increased market demand
for machine tools.

COST OF SALES. Cost of sales increased $3,680,389 or 14% in 1995 compared
to 1994. Cost of sales as a percentage of sales was 78.5% in 1995 compared to
77.6% in 1994. The increase in cost of sales was attributable to the 12%
increase in sales in 1995 in comparison to 1994 and $1,036,580 in wire sales by
Landreth to CRivet in the first and second quarters of 1995. These sales to
CRivet were made at a lower than normal gross margin resulting in the increase
in cost of sales as a percentage of sales in 1995 compared to 1994.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $177,205 or 3% in 1995 compared to 1994.
Selling, general and administrative expenses were comparable between 1995 and
1994 as a result of the company's ability to add additional revenues without
additional overhead.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense included in operating expenses decreased $72,291 or 15% in 1995 compared
to 1994 because certain assets became fully depreciated at IMSCO.

34
<PAGE>
INTEREST EXPENSE. Interest expense increased $93,748 or 11% in 1995
compared to 1994 due to increases in debt at Landreth as a result of sales of
wire to CRivet on open credit which were not repaid and financing of new
equipment purchases.

OTHER INCOME. Other income decreased $165,655 or 14% in 1995 compared to
1994. This decrease was a result of a one time recognition of miscellaneous
income at REX in 1994 that did not recur in 1995.

FEDERAL INCOME TAXES. The Company's effective tax rate was 12% in 1995
compared to 34% in 1994. During 1995, the Company reduced its deferred tax asset
valuation allowance $223,000. A portion of the reduction, approximately $26,000,
was to reflect deferred tax assets used in 1995, the remainder was to recognize
a deferred tax asset of $197,000. Based on management's assessment of earnings
trends, expected revenues and cost reductions and the expiration dates of
carryforwards, management determined that is was more likely than not that these
assets would be realized.

NET INCOME. As a result of the foregoing factors, the Company had net
income of $545,147 in 1995 compared to net income of $31,702 in 1994.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993.

SALES. On a consolidated basis, sales decreased $382,517 or 1 % in 1994
compared to 1993. However, for 1994 in comparison to 1993, sales for the
Company's fastener manufacturing segment increased $1,516,364 or 14%, as a
result of an intensified marketing effort which added in excess of $1,050,000 in
sales to new customers in 1994. This increase was offset by decreases in sales
in the Company's other segments.

IMSCO's sales decreased $874,287 or 7% in 1994 compared to 1993, primarily
as a result of a general industry slowdown as petrochemical plants postponed
planned plant construction from 1994 to 1995. PVS' sales decreased $465,847 or
17% in 1994 compared to 1993. Although valve repair revenues remained constant
from 1993 to 1994, sales of used and surplus valves decreased due to an industry
slowdown, particularly in the first quarter of 1994.

Within REX, sales in the Company's export crating segment decreased by
$557,506 or 18% in 1994 compared to 1993 as the result of the loss of a major
customer. Sales in the used machinery segment decreased by $809,321 as a result
of completion of substantially all of a major contract which was not replaced in
1994. Sales in the new machinery and related services segment increased $738,263
or 14% in 1994 compared to 1993. However, if 1993 were annualized, 1994
represented a decrease in sales over 1993, primarily because a major machine
tool supplier was unable to deliver product to its distributors in the second
and third quarters of 1994.

COST OF SALES. There was no significant change in cost of sales in 1994
compared to 1993. However, cost of sales as a percentage of sales increased from
76.7% in 1993 to 77.5% in 1994. This increase in cost of sales as a percentage
of sales was primarily attributable to decreases in gross margin in the export
crating segment from 1993 to 1994 as a result of increased transportation costs
and salary expense which the Company was unable to pass on to its customers and
a decrease in margin in the used machine segment between 1993 and 1994 because
of overruns on cost estimates on contracts.

35
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $485,386 or 8% in 1994 compared to 1993. This
is primarily attributable to the inclusion of REX operations for twelve months
in 1994 as compared to nine months in 1993.

DEPRECIATION AND AMORTIZATION EXPENSE. There was no significant change in
depreciation and amortization included in operating expenses in 1994 as compared
to 1993.

INTEREST EXPENSE. Interest expense increased $31,913 or 4% in 1994 as
compared to 1993, primarily due to increases in interest rates which were not
completely offset by reductions in interest-bearing debt.

FEDERAL INCOME TAXES. The Company's effective tax rate was 34% in 1994 as
compared to 9.3% in 1993. The Company's 9.3% effective tax rate in 1993 was as
result of a reduction of $167,724 in its valuation allowance against deferred
tax assets of REX as those tax assets were realized. No material change in the
valuation allowance was recorded in 1994.

NET INCOME. As a result of the foregoing factors, the Company had net
income of $31,702 in 1994 as compared to $762,802 in 1993. This decrease in net
income was the result of a 1% decline in sales, a 1% decrease in gross margin as
a percentage of sales and an 8% increase in selling, general and administrative
expenses.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company had cash of $244,793 and additional
borrowing capacity under its line of credit of $1,536,352. The Company's
operations used cash of $322,578 during the six months ended June 30, 1996
compared to providing cash of $175,990 during the six months ended June 30,
1995. This increased use of cash was primarily attributable to increases in
accounts receivable and inventory as a result of the acquisition of CRivet and
an increase in inventory at Regal as a result of increased sales. The Company's
operations provided cash of $1,233,412 for 1995 compared to $353,914 for 1994
and $740,804 for 1993 primarily because of changes in net income between the
respective periods.

Capital expenditures for property and equipment increased 167% for the six
months ended June 30, 1996 compared to the six months ended June 30, 1995, and
increased 17% for 1995 compared to 1994 primarily as a result of the purchase of
new equipment and leasehold improvements for the Company's fastener
manufacturing operations. In 1995, the Company used cash of $826,003 to purchase
CRivet.

Financing activities provided cash of $1,190,009 for the six months ended
June 30, 1996, compared to $139,200 for the six months ended June 30, 1995.
During the six months ended June 30, 1996, the Company used $1,080,371 in
proceeds from the issuance of common stock to repay long-term debt and purchase
property and equipment for its fastener division. Additionally, net borrowing
under the revolving line of credit increased as a result of borrowings by CRivet
to fund increases in working capital. Financing activities provided cash of
$738,136 and $179,614 in 1995 and 1994 as the Company generated net proceeds
from the issuance of common stock of $275,116 and $418,278 in 1995 and 1994,
respectively. Financing activities used cash of $396,419 in 1993 as notes
payable and long-term debt were repaid.

In connection with the acquisition of Landreth, on October 7, 1992 the
Company issued to Renaissance Capital Partners II, Ltd. ("Renaissance"), a 12%
Convertible Debenture due October 1, 1999

36
<PAGE>
in the principal amount of $2,500,000 (the "Renaissance Debenture") , which was
secured by the capital stock of Landreth and the capital stock of IMSCO. At June
30, 1996, the outstanding principal balance was $1,875,000. The Renaissance
Debenture is convertible at a conversion price of $3.26 per share of common
stock, subject to adjustment in certain circumstances. The Renaissance Debenture
requires monthly interest payments and commencing on November 1, 1997, monthly
principal payments of $25,000. The terms of the Renaissance Debenture restrict
the ability of the Company and its subsidiaries to incur, assume or guarantee
any additional indebtedness, to enter into new lines of business, develop new
products or acquire companies other than in compliance with certain acquisition
guidelines promulgated by Renaissance, to consolidate or merge with another
corporation or to sell any of its properties.

Additionally, the Company has entered into a Demand Note dated November
30, 1995 among the Company, LEC, PVS and Comerica Bank-Texas ("Comerica"). The
Demand Note is in the principal amount of $8,000,000 or the lesser of a
borrowing base as defined, bearing interest at the prime rate of Comerica plus
3/4% and is payable on demand. This line of credit allows IMSCO, LEC, PVS and
REX to borrow funds based on 80% of eligible accounts receivable and 40% to 50%
of eligible inventory with various specified sublimits for each individual
subsidiary. At June 30, 1996, the borrowing capacity under the Demand Note was
$7,933,482 of which $6,397,130 was outstanding at that date. The Demand Note is
secured by all of the assets of the Company, LEC, IMSCO and REX and the
accounts, chattel paper, general intangibles and contract rights of PVS.

In connection with its acquisition of CRivet, in December 1995, the
Company entered into a 9.85% $2.8 million Term Loan with General Electric
Capital Corporation payable in seventy monthly installments of $53,620 through
November 1, 2001. The Term Loan is secured by the machinery and equipment of
CRivet. Additionally, the Company issued a 12% Promissory Note to St. James
Capital Partners, L.P. ("St. James"), $195,900 of which is currently outstanding
and payable December 1, 1996.

In March 1996, the Company completed a private placement of 300,000 shares
of Common Stock. Of the $1,020,000 in proceeds, the Company used $600,000 to
repay a portion of the Renaissance Debenture. In connection with this principal
payment, the Company issued to Renaissance warrants to purchase 50,000 shares of
common stock at $4 per share. Renaissance waived any prepayment penalties on the
repayment. The remaining proceeds will be used for the relocation of the
Landreth plant to the Company's REX facility and the CRivet plant to a new
location in Connecticut.

At June 30, 1996, the Company had working capital of $2,819,101, long-term
debt of $5,001,834 and shareholders' equity of $10,000,888. The Company
anticipates that its operating cash needs for fiscal 1996 can be met with cash
generated from operations, borrowings under its credit facilities with Comerica
and private placements of debt securities. In order to consummate the American
Acquisition, the Company intends to obtain Bridge Financing from a private
source for approximately $3,695,000 of the $11,125,000 purchase price. The
remainder of the purchase price will be funded with cash and marketable
securities of American, an increase in the Company's Demand Note secured by the
inventory and receivables of American and a term note secured by the real estate
and equipment of American. If the American Acquisition is consummated, the
Company anticipates that it will use the majority of the estimated $3,695,000
net proceeds from the exercise of the Class A Warrants to repay the Bridge
Financing. If the American Acquisition is not consummated, the Company intends
to use the net proceeds from the exercise of the Class A Warrants for working
capital purposes. Any acquisition of additional companies in connection with the
Company's acquisition strategy will require additional financing, which likely
would include a combination of debt and equity financing.

37
<PAGE>
INFLATION

Although the Company believes that inflation has not had any material
effect on operating results, there can be no assurance that the Company's
business will not be affected by inflation in the future.

SEASONALITY

The Company believes that its business is not subject to any significant
seasonal factors, and the Company does not anticipate significant seasonality in
the future. However, the business and operating results of the Company are
dependent on numerous economic and other factors affecting the industries to
which the Company provides products and services. An economic slowdown in these
industries could result in decrease in demand for the Company's products and
services, which could adversely affect the Company's operating results.

38
<PAGE>
BUSINESS

INTRODUCTION

Industrial Holdings, Inc. (including its subsidiaries, the "Company") was
incorporated in August 1989. The Company's principal executive offices are
located at 7135 Ardmore, Houston, Texas 77054, and its telephone number is (713)
747-1025.

The Company's business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth Engineering Company
("Landreth") and Connecticut Rivet ("CRivet"), acquired December 1995 and the
Energy Products and Services Division comprised of the Valve and Supplies Sales
Group which includes Pipeline Valve Specialty ("PVS") and Industrial Municipal
Supply Company ("IMSCO"); the New Machine Sales and Services Group which
includes Regal Machine Tools ("Regal") and Rex Machinery Movers ("RMM"); the
Export Crating Group which includes U.S. Crating ("USC"); and the Used Machine
Sales Group which includes Rex/Paul's Machine Sales ("RPMS").

The Fastener Manufacturing and Sales Division manufactures industrial
metal fasteners, including special cold-formed fasteners and threaded fastener
products for sale primarily to manufacturers in the home furniture, home
appliance and automotive industries. The Valve and Supplies Sales Group
remanufactures pipeline valves and distributes pipe, valves, fittings and other
products primarily to the petrochemical, chemical and petroleum refining
industries and to the pipeline transportation and product storage industries.
The New Machine Sales and Services Group sells new machine tools and conducts a
machine moving operation. The Export Crating Group provides international export
crating services. The Used Machine Sales Groups sells used machine tools.

STRATEGY

RECENT DEVELOPMENTS

In July 1996, the Company signed a Letter of Intent to purchase all the
outstanding common stock of American for $11.125 million, subject to certain
closing adjustments. The Company and American are

39
<PAGE>
in the process of negotiating a Stock Purchase Agreement and anticipate that the
closing will occur on or before October 15, 1996.

For information concerning each of the Company's industry segments, see
Note 13 of Notes to Consolidated Financial Statements.

FASTENER MANUFACTURING AND SALES DIVISION

PRODUCTS AND SERVICES. Landreth Engineering Company and CRivet,
(collectively "LEC") manufacture industrial metal fasteners, including special
cold-formed fasteners and threaded fastener products for sale to national
manufacturers primarily in the home furniture, home appliance and automotive
industries. LEC manufactures these fasteners in solid, semi-tubular, tubular or
multi-dimensional form. LEC has increasingly emphasized the manufacture of
special cold-formed fasteners (custom-produced rivets produced by header
machines) that are primarily targeted to more highly- engineered applications,
such as the automotive original equipment manufacturers ("OEM") and electronic
industries. Industrial metal fasteners, or rivets, are typically constructed of
low-carbon steel and can be plated with nickel, zinc or phosphate through LEC's
automatic plating process. LEC also uses plating services from third party
providers. These fasteners can also be made from aluminum, brass or stainless
steel. LEC manufactures these industrial fasteners in a variety of sizes, with
diameters ranging up to 5/8" and lengths up to 4".

CUSTOMERS AND MARKETING. LEC's customers are primarily national
manufacturing companies in the home furniture, home appliance and automotive
industries. LEC sells its products to over 1,250 different manufacturing
customers, with the 10 largest customers accounting for, in the aggregate, 46%
of LEC's sales for the year ended December 31, 1995. During 1995, sales to
Leggett & Platt, Inc.
accounted for approximately 12% of LEC's sales.

LEC manufactures and distributes its products from its facilities in
Houston, Texas and Milford, Connecticut. LEC conducts sales efforts and serves
its customers by using a combination of its employees and a national network of
manufacturer's sales representatives. LEC has engaged 12 manufacturer sales
representatives that work on a commission basis. These representatives are under
the supervision of LEC's direct regional sales manager and national sales
manager. The majority of LEC's products are sold pursuant to per-job orders. LEC
manufactures its products according to customer specifications, and accordingly,
does not maintain an extensive inventory of industrial fasteners. LEC inspects
all of its products at the time of production and mechanically inspects such
products prior to shipment to its customers. LEC also conducts, at the request
of its customers, statistical process control procedures.

SUPPLIERS. LEC purchases raw materials from both domestic and foreign
sources. LEC currently purchases steel wire from three principal suppliers, and
the Company believes that other acceptable sources are available. LEC has
encountered no difficulty in meeting its supply requirements of any raw
materials necessary for the manufacture of its products and maintains raw
materials inventory levels for approximately 30 days of operations.

COMPETITION. LEC generally is subject to competition primarily from
Chicago Rivet and American Rivet Company, Inc., either of which may have greater
financial resources than the Company. In the special cold-formed fastener market
that is concentrated primarily in the automotive and electronic markets, LEC
also faces competition from larger public companies and foreign manufacturers,
many of whom have greater financial resources than the Company. LEC believes
that its competitive advantages

40
<PAGE>
include its range of production capabilities, its emphasis on high volume and
low overhead production processes, its in-house tooling operations and its
national marketing strategy. The Company believes that LEC's ability to compete
effectively in the future will be primarily dependent on maintaining trained and
skilled production personnel and the highest possible level of product quality.

AMERICAN ACQUISITION

PRODUCTS AND SERVICES. American manufactures industrial metal fasteners of
the same type and using the same manufacturing process as LEC.

CUSTOMERS AND MARKETING. American's customers are primarily national
manufacturers in the office furniture, automotive and appliance industries.
American sells its products to a diversified customer base, with the 15 largest
customers accounting for, in the aggregate, 38% of American's sales for the
fiscal year ended August 31, 1995. During fiscal 1995, one automotive customer
accounted for 14% of American's sales.

American markets its products in the same manner as LEC through a network
of 17 manufacturer's sales representatives that work on a commission basis.
American maintains an inside sales staff to handle orders from repeat customers
and regularly advertises in trade journals.

SUPPLIERS. American purchases raw materials, primarily wire, from two
principal sources. American has had no difficulty in meeting its supply
requirements for raw materials.

COMPETITION. American competes with the same fastener manufacturers as
LEC.

EMPLOYEES. At June 30, 1996, American employed 95 people, none of whom are
covered by collective bargaining agreements.

PROPERTIES. American owns an 81,000 square foot manufacturing facility on
approximately four acres of land in Franklin Park, Illinois (a suburb of
Chicago), which is adequate to meet American's needs for the foreseeable future.

ENERGY PRODUCTS AND SERVICES DIVISION

VALVE AND SUPPLIES SALES

PRODUCTS AND SERVICES. IMSCO and PVS distribute pipe, valves and fittings,
as well as remanufacture or recondition used or malfunctioning pipeline valves
for subsequent sale in a remanufactured condition to companies in the
petro-chemical, chemical and petroleum refining industries for use in the
refining process and pipeline transportation and storage companies. The valve
and supplies market is primarily in the Gulf Coast area between Mobile, Alabama
and Brownsville, Texas.

PIPE is typically sold in 20-foot or 40-foot lengths, in sizes
ranging from 1/2" to 72" in diameter, for use in the refining process by
chemical plants and refineries. Pipe is sold in a variety of sizes and wall
thicknesses, depending on the nature (liquid or gas) and quantity of the product
to be transported or processed through the pipe as well as the desired pressure
levels for transporting and processing the product through the pipe.

41
<PAGE>
INDUSTRIAL VALVES are flow inhibitors used with pipe that are
typically constructed of either carbon or alloy steel and are manufactured and
sold in a variety of forms, including gate valves, globe valves, check valves,
ball valves, plug valves and butterfly valves. Valves sold by IMSCO range from
1/2" to 36" in diameter and are available threaded or with a socket-weld,
flanged or butt-weld end.

PIPELINE VALVES are manufactured to withstand greater pressure than
industrial valves. Pipeline valves also bear serial numbers that are traceable
to the OEM and permit each end-user to determine the OEM, the original purchaser
and the specifications of the valve, thereby allowing the end-users to verify
the specifications and quality of the valves. These valves are used to regulate
the flow and storage of natural gas and refined petroleum products. They range
in size from 2" to 60" in diameter, depending on the nature (liquid or gas),
quantity and desired speed of the flow of natural gas or refined petroleum
products regulated by the pipeline valve and are typically made of carbon steel.

CONTRACT REMANUFACTURING services are performed for certain customers.
These contract services typically consist of remanufacturing or modifying the
customer's existing pipeline valves by installing stem extensions and/or
mounting actuators on the valves, preparing such valves for underground or
underwater use and conducting performance testing of such valves.

ADDITIONAL PRODUCTS include gaskets, pipe hangers, steel, strainers,
swages, fasteners, tools, tubing and mill supplies. Mill supplies typically
consist of incidental construction-related items such as gloves, boots, ladders,
rope, blades, lubricants and other hardware items. These additional products are
typically used by IMSCO's customers who are also purchasing pipe, valves and
fittings.

CUSTOMERS AND MARKETING. IMSCO sells its products to over 400 different
customers, with the 10 largest customers accounting for, in the aggregate, 36%
of this segment's sales during the fiscal year ended December 31, 1995. These
customers consist primarily of chemical and petroleum refining plants and
construction companies performing services at the plant locations.

PVS sells its products to over 150 different customers primarily in the
pipeline transportation or product storage business with the 10 largest
customers accounting for, in the aggregate, 11% of this segment's sales in the
fiscal year ended December 31, 1995.

Distribution operations are conducted from Baytown, Texas headquarters and
two branch locations. All three locations have inventories for distribution of
products directly to customers. Remanufacturing and distribution of pipeline
valves are conducted from South Houston, Texas. At December 31, 1995, this
segment maintained a sales force of 13 employees. No customer amounted to over
10% of the segment's sales.

PVS sells new, used and remanufactured pipeline valves from its existing
inventory and pursuant to special customer orders. By maintaining a broad
inventory of types of pipeline valves, the Company believes that PVS is able to
timely respond to its customers' needs. Per-job orders account for substantially
all of the remanufacturing work performed and pipeline valves sold by PVS. In
the past, PVS has not entered into exclusive supply contracts with any
particular customer. PVS maintains an internal quality control program to help
ensure the quality of its remanufacturing process. Many of PVS' customers
monitor and approve its quality standards by sending quality assurance personnel
to PVS' facilities to ensure that the reconditioned valves meet their standards.
PVS also conducts seminars, often at the request of its customers, for training
field personnel in pipeline valve preventive maintenance.

42
<PAGE>
The majority of IMSCO's orders for products are filled with its purchases
from wholesale distributors or manufacturers rather than from IMSCO's existing
inventory. While IMSCO enters into blanket distribution contracts that provide
for the distribution of certain products at set prices with particular
customers, such contracts do not represent a material portion of IMSCO's
business. IMSCO primarily distributes products to customers located within 50
miles of its three office warehouse facilities.

SUPPLIERS. Most of the products distributed by IMSCO may be obtained from
numerous alternative sources of supply. Because the demand for pipe, valves and
fittings is particularly price and time sensitive, IMSCO has historically
elected to concentrate its efforts in establishing and maintaining relationships
with manufacturers or suppliers who can provide the lowest prices and quickest
delivery time. During the last fiscal year, an average of approximately 600
vendors supplied substantially all of IMSCO's purchases of pipe, valves and
fittings.

PVS acquires its pipeline valves from bid lists from approximately 75
suppliers including pipeline transportation companies, individual brokers and
from other remanufacturing companies or OEMs. PVS purchases the majority of its
pipeline valves from bid lists. Pipeline transportation companies construct new
pipelines and repair segments of existing pipelines. After completion of
original construction or repair, the new valves (consisting of excess pipeline
valves not utilized or used pipeline valves that require remanufacturing) are
sold to dealers through bid lists. PVS continuously receives and bids on these
bid lists, as do all other remanufacturers of pipeline valves. PVS also acquires
some of its products from individual brokers that buy and resell excess pipeline
valves. Typically, PVS places pipeline valves purchased from individual brokers
in its inventory because of favorable pricing. When PVS receives an order and
the products are not available in its inventory, it may also purchase the
ordered products from other remanufacturing companies or OEMs. Typically, a
majority of the valves purchased from brokers or other remanufacturing companies
were originally purchased from bid lists.

IMSCO and PVS warehouse certain products but purchase the majority of
their products on an as-needed basis, depending on demand or the availability of
inventory that can be acquired at favorable prices. IMSCO and PVS do not have
written contracts with any of their suppliers. Purchases from suppliers,
including credit arrangements, are negotiated on an order-per-order basis.
Accordingly, all arrangements are terminable by either party immediately or on
short notice. Relationships with suppliers are believed to be satisfactory and
no single vendor supplies 10% or more of the products purchased during the year.

The Company has implemented computerized inventory control procedures at
IMSCO, which the Company believes provide improved inventory controls and allow
IMSCO to more effectively manage inventory purchases and maintain appropriate
levels of inventory to maximize operating results. These inventory control
procedures also have improved IMSCO's inventory turn-over ratio and reduced its
quantity of slow-moving items in inventory.

COMPETITION. IMSCO faces competition based on pricing and the ability to
service customers and timely respond to their needs. IMSCO competes with
numerous larger and smaller distributors of pipe, valves and fittings, many of
whom have greater financial resources than the Company. Major competitors with
IMSCO include McJunkin Corp., Van Leeuwen, Wallace/Tyler Dawson, Vinson Supply
Co. and Piping & Equipment Inc. The Company believes that the level of customer
service provided by IMSCO is its primary competitive advantage. The Company
believes that for IMSCO to compete effectively, it must adhere to the "overall
quality program" instituted by the Company, maintain existing business

43
<PAGE>
relationships, respond to the needs of its customers through quality service and
provide price-competitive products to its customers.

PVS is subject to competition based primarily on pricing and customer
service. The Company believes that Oilfield Fabricating and Machine, Inc. is its
major competitor in the industry and that PVS is subject to competition from
less than ten similarly-sized remanufacturing businesses. PVS' management
believes that its broad inventory of pipeline valves and its remanufacturing
facility are its primary competitive advantages and that its ability to compete
effectively is dependent on maintaining its inventory levels, retaining existing
business relationships and responding to its customers' needs through timely
service and providing quality products.

NEW MACHINE SALES AND SERVICES

PRODUCTS AND SERVICES. Regal distributes new machine tools in South Texas
and Louisiana for certain manufacturers including Okuma Machinery, Inc.
("Okuma") on an exclusive basis, and other manufacturers on a non-exclusive
basis. Machine tools are used in various industries in the manufacturing process
to cut metal and are sold in a variety of sizes depending upon the task they are
designed to perform. In addition, Regal sells parts and services for machine
tools and contracts on a job-by-job basis to move machine tools, predominantly
in the South Texas region.

For the year ended December 31, 1995, the sale of new machine tools
accounted for 91% of Regal's revenues. Machine tool moving services accounted
for 9% of its revenues.

CUSTOMERS AND MARKETING. Regal sells its products and services to over
1,650 different customers, with its largest customer accounting for 7% of
Regal's sales in the year ended December 31, 1995. Regal conducts its sales
efforts from its Houston, Texas location. At December 31, 1995, Regal employed a
sales force of seven employees.

Per-job orders account for substantially all of the new machine sales.

SUPPLIERS. Regal has several exclusive distribution agreements, including
agreements with Okuma, for South Texas and Louisiana. All machines are purchased
on an order-by-order basis.

COMPETITION. New machine tool sales are subject to competition from
machine tool distributors of competitive machine tools manufacturers. Depending
upon the size and use of the product manufactured, the competitor will vary. The
Company believes Regal has a competitive advantage in its range of product
offerings. The Company believes Regal's ability to compete effectively in the
future is primarily dependent upon maintaining trained and skilled machine tool
personnel and the retention of its Okuma distribution lines.

Regal typically competes with four moving companies in its market. The
Company believes it has a competitive advantage in the size of its capacity and
the level of training of its personnel.

EXPORT CRATING

PRODUCTS AND SERVICES. USC provides crating services for a variety of
products for export. Typically, a freight forwarder or company exporting its own
product will contract with USC for a specified product to be crated. The
products are forwarded to the USC facility, where the crating services

44
<PAGE>
are performed. USC then forwards the crates to the shipping source, which is
typically an ocean-going vessel.

CUSTOMERS AND MARKETING. USC sells its services to over 250 different
customers, with its largest customer accounting for 9.5% of its revenues for the
year ended December 31, 1995. At December 31, 1995, USC employed two sales
people who conduct the Company's sales efforts from its Houston, Texas location.

COMPETITION. USC typically competes with five crating companies in the
Houston area and generally does not compete outside this region. The Company
believes it has a competitive advantage in this market because of its
facilities, personnel and experience and its proximity to Houston ports.

USED MACHINE SALES

PRODUCTS AND SERVICES. RPMS sells used machine tools primarily to large
corporations and machine shops in the Gulf Coast region. RPMS maintains an
inventory of used machine tools for sales to third parties and purchases used
machines for resale on an as-needed basis, depending upon demand.
Used machine tools are sold in a variety of sizes.

CUSTOMERS AND MARKETING. RPMS sells its products to over 250 different
customers. Weatherford Enterra and ESCO Incorporated accounted for 43% and 37%,
respectively of RPMS sales in the year ended December 31, 1995. At December 31,
1995, the Company employed one sales person.

Per-job orders account for substantially all of used machine sales. By
maintaining distribution relationships and inventories of used machine tools and
parts, the Company believes it is able to timely respond to customers that use
the products and services offered by RPMS.

SUPPLIERS. RPMS maintains an inventory of used machine tools. Typically,
these machine tools are purchased at auction or from used machine brokers. The
Company believes it has adequate inventory and sufficient access to auction
markets and brokers to satisfy its inventory requirements for used machine
tools.

COMPETITION. RPMS typically competes with other used machine tool dealers
on a national basis. The Company believes its inventory of used machines is a
competitive advantage and that its ability to compete effectively is dependent
on maintaining an adequate inventory level and continued access to purchasing
opportunities through brokers and auctions.

EMPLOYEES

At June 30, 1996, the Company employed a total of 263 people, four of whom
are corporate officers, 28 are employed by IMSCO, 24 are employed by PVS, 70 are
employed by Landreth, 78 are employed by CRivet and 60 are employed by REX. None
of the Company's employees are covered by collective bargaining agreements. The
Company believes its relationship with its employees is satisfactory.

45
<PAGE>
BACKLOG

As of June 30, 1996, LEC's backlog was approximately $5,347,000 compared
to $5,845,000 at December 31, 1995 and $2,200,000 at December 31, 1994. IMSCO,
PVS and REX have historically operated without backlog, which, because of the
nature of their business operations, is believed to be customary for their
industries.

REGULATION

The Company's business is affected by governmental regulations relating to
its industry segments in general, as well as environmental and safety
regulations that have specific application to the Company's business. The
Company does not believe that compliance with federal, state or local
environmental laws adversely affects its business, earnings or competitive
position. The Company cannot predict whether future legislation will have any
effect on its operations. The Company does not believe that environmental laws
have had a material impact on industry standards and/or quality control
procedures.

PROPERTIES

IMSCO's main facilities are located in Baytown, Texas, and include
approximately 2,000 square feet of office and approximately 18,000 square feet
of warehouse space, all of which is leased. IMSCO maintains two leased branch
offices, including an approximately 7,000 square foot facility in Freeport,
Texas, and an approximately 5,000 square foot facility in Mt. Belvieu, Texas.

PVS owns approximately 1.2 acres of real property in South Houston, Texas,
which includes approximately 4,500 square feet of warehouse facilities,
approximately 4,000 square feet of office facilities, approximately 9,000 square
feet of machine shop facilities, and approximately 22,500 square feet of open
outside storage.

LEC leases approximately four acres of real property in Houston, Texas,
including approximately 50,000 square feet of manufacturing facilities,
including a tooling shop, an automatic plating facility and an automatic
packaging and inspection area. LEC leases approximately 66,000 square feet of
manufacturing facilities in Waterbury, Connecticut.

REX leases approximately 13.32 acres of real property in Houston, Texas
which includes approximately 275,000 square feet of warehouse and office
facilities.

The Company maintains its principal executive offices at 7135 Ardmore,
Houston, Texas 77054 in the 275,000 square feet of warehouse and office
facilities leased by REX. The office facility portion of this property consists
of conventional office space and is, in the opinion of management, adequate to
meet the Company's needs for the foreseeable future. The Company believes that
all existing office and warehouse facilities leased or owned by its subsidiaries
are adequate to meet the needs of the Company for the foreseeable future and are
suitable for the business conducted therein.

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<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the
directors and executive officers of the Company:

NAME AGE POSITION(S) WITH THE COMPANY

Robert E. Cone 44 Chairman of the Board of Directors, President
and Chief Executive Officer
James H. Brock, Jr. 58 Executive Vice-President, President - Energy
Products and Services Division and Director
Thomas C. Landreth 47 Executive Vice-President, President -
Fastener Manufacturing and Sales Division
Christine A. Smith 43 Vice-President and Chief Financial Officer
Barbara S. Shuler 51 Secretary and Director
Charles J. Anderson 74 Director
William J. Argeroplos 49 Director
James W. Kenney 55 Director
John P. Madden 54 Director

ROBERT E. CONE has served as President, Chief Executive Officer and
Director of the Company since August 1989. From August 1987 to August 1989, Mr.
Cone served as Vice President of Broadcast Ventures, Inc ("BVI"), a partnership
formed to acquire radio stations through syndication. Mr. Cone's
responsibilities at BVI included the formation of business plans, corporate
development, financing and analysis of acquisition candidates. Mr. Cone received
a B.S. degree in accounting from the University of Houston - Downtown.

JAMES H. BROCK, JR. has served as Executive Vice President, since July
1991, President of the Energy Products and Services Division since June 1996, as
a Director of the Company since September 1991, as Chief Operating Officer from
July 1991 to June 1996 and as Chief Financial Officer from July 1991 through
December 1994. Mr. Brock served as Executive Vice President and Chief Financial
Officer of DRCA Medical Corporation ("DRCA") from August 1988 to October 1990.
DRCA, a public corporation listed on the American Stock Exchange, is a health
care company specializing in the rehabilitation of injured workers. From
December 1987 to July 1988, Mr. Brock acted as a consultant to DRCA and assisted
in formulating its business and financial plans. Mr. Brock served as Vice
President-Finance of National Healthcare Alliance, a full-service managed health
care service company, from November 1987 to May 1991. From 1977 to 1990, Mr.
Brock was Chairman of the Board of Directors of Quality Fasteners, Inc., a
distributor of construction supplies, and of Olde Time Ice, Inc., a manufacturer
and distributor of packaged ice. Mr. Brock has been engaged in the private
practice of public accounting since April 1972 and is a Certified Public
Accountant in Texas and Georgia.

THOMAS C. LANDRETH has served as Executive Vice President since September
1996. Mr. Landreth has served as President of Landreth Engineering Company since
1977 and as President of the Fastener Manufacturing and Sales Division since the
Company's divisional reorganization in June 1996. Mr. Landreth has worked in all
technical areas of LEC since 1967 and is responsible for numerous cold

47
<PAGE>
heading machine designs and improvements as well as numerous innovative tool and
die designs. He attended the University of Texas in Austin.

CHRISTINE A. SMITH has served as Chief Financial Officer of the Company
since January 1995. From April 1989 through December 1994, Ms. Smith was a
Principal at The Spinnaker Group, an investment banking firm providing services
primarily to manufacturing and distribution companies. Prior to joining The
Spinnaker Group, Ms. Smith, a certified public accountant, was a Senior Manager
with Ernst & Young.

BARBARA S. SHULER has served as Secretary of the Company since February
1992 and as a Director of the Company since September 1991. Since 1974, Ms.
Shuler has been self-employed in auction management, marketing, advertising and
promotional aspects of the equine industry, serving as President of Shuler, Inc.
Ms. Shuler received a degree in journalism from Northwestern University.

CHARLES J. ANDERSON has served as a Director of the Company since
September 1991. For the last six years, Mr. Anderson has been engaged in private
business investments. From 1955 to 1985, Mr. Anderson served as Senior Sales
Vice President and Director of Sales and was a partner of the Delaware
Management Company, the manager of the Delaware Group of Mutual Funds and
certain other private pension funds. Mr. Anderson received an economics degree
from the University of Pennsylvania.

WILLIAM J. ARGEROPLOS served as Secretary of the Company from August 1989
to February 1992 and has served as a Director of the Company since August 1989.
Mr. Argeroplos was employed in the securities industry from October 1981 to
December 1990. He served as Executive Vice President and national sales manager
of Equus Securities, Incorporated ("ESI") from February 1987 through December
1990. ESI is a subsidiary of Equus Capital Corp., a company participating in the
merger, acquisition and management buy-out of companies. His responsibilities at
ESI included the supervision of six regional vice presidents of sales, the
development of broker-dealers and the provision of sales assistance to
individual branch offices and registered representatives.

JAMES W. KENNEY has served as a Director of the Company since October
1992. Since October 1993, Mr. Kenney has served as Executive Vice President of
San Jacinto Securities, Inc. From February 1992 to September 1993, he served as
the Vice President of Renaissance Capital Group, Inc. Prior to that time, Mr.
Kenney served as Senior Vice President for Capital Institutional Services, Inc.
and in various executive positions with major southwest regional brokerage
firms, including Rauscher Pierce Refsnes Inc. and Weber, Hall, Sale and
Associates, Inc. Mr. Kenney is a director of AmeriShop Corporation, a company in
the incentive and membership merchandising industry; Consolidated Health Care
Associates, Inc., a company that operates physical rehabilitation centers; Prism
Group, Inc., a company that duplicates disks and packages software; Technol
Medical Products, a providor of disposable medical products; and Tricom
Corporation, a company that develops products and services for the
telecommunication industry.

JOHN P. MADDEN has served as a Director of the Company since October 1992.
From January 1992 to April 1993, Mr. Madden served as Chairman of the Board of
The Rex Group, Inc. ("REX") and as its President and Chief Executive Officer
from June 1963 to January 1992 and from December 1992 to April 1993. REX, a
private company based in Houston, Texas, which was acquired by the Company in
March 1993, is a distributor of new and used machine tool equipment and used
machines, conducts a machine moving operation and is engaged in the
international export crating business. Mr. Madden received a degree in finance
from the University of Notre Dame.

48
<PAGE>
BOARD AND COMMITTEE ACTIVITY: STRUCTURE AND COMPENSATION

The Company's operations are managed under the broad supervision of the
Board of Directors, which has ultimate responsibility for the establishment and
implementation of the Company's general operating philosophy, objectives, goals
and policies. During 1995, the Board of Directors convened on two regular
occasions. Each director attended all of the meetings held by the Board or
meetings of Board committees of which he was a member during his tenure in 1995,
except for Charles J. Anderson who attended no Board of Directors meetings and
all Committee meetings of which he was a member and Barbara Shuler who attended
one meeting of the Board of Directors and all Committee meetings of which she
was a member. During 1995, directors received no compensation for attendance at
Board or Committee meetings, but were entitled to reimbursement for reasonable
travel expenses incurred in attending such meetings. As of June 1996, the Board
approved the payment of a fee of $500 to each non-employee director for each
meeting attended. Employee directors are eligible to participate in the
Company's 1994 Amended and Restated Incentive Stock Plan (the "Incentive Plan").
Non-employee directors are entitled to participate in the Company's 1995
Non-Employee Director Stock Option Plan (the "Director Plan").

Pursuant to delegated authority, various Board functions are discharged by
the standing committees of the Board. The Audit Committee of the Board of
Directors, currently composed of Messrs. Brock and Anderson and Ms. Shuler,
makes recommendations to the Board of Directors concerning the selection and
engagement of the Company's independent public accountants and reviews the scope
of the annual audit, audit fees and results of the audit. The Audit Committee
also reviews and discusses with management and the Board of Directors such
matters as accounting policies, internal accounting controls and procedures for
preparation of financial statements. The Audit Committee convened on one
occasion in 1995. The Compensation Committee sets the compensation for
executive, managerial and technical personnel of the Company and administers the
Company's stock option and other compensation plans. The Compensation Committee
is currently composed of Mr. Madden, Mr. Anderson and Ms. Shuler and met on one
occasion in 1995.

49
<PAGE>
EXECUTIVE COMPENSATION

The following table provides certain summary information covering
compensation paid or accrued during the fiscal years ended December 31, 1995,
1994 and 1993 to the Company's Chief Executive Officer and the other executive
officers, whose annual compensation, determined as of the end of the last fiscal
year, exceeds $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ----------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
- ------------------------- -------- ---------- --------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Robert E. Cone.......... 1995 $160,000 -- -- --
President and 1994 $146,250 -- -- 50,000
Chief Executive Officer 1993 $126,749 $10,000 -- 65,000

James H. Brock, Jr...... 1995 $150,000 -- -- --
Executive Vice President 1994 $135,000 -- -- 20,000
1993 $110,433 $7,500 -- 65,000
</TABLE>
The following table provides certain information with respect to options
granted to the executive officers during the fiscal year ended December 31,
1995, under the Company's stock option plans:

OPTION/SAR GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SHARES OF PERCENT VALUE AT ASSUMED
COMMON OF TOTAL ANNUAL RATES OF STOCK
STOCK OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
- ----------------- ---------- ---------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Christine A. Smith 25,000 10.0% $3.31 01/01/05 $52,041 $131,882
Vice President and
Chief Financial
Officer
</TABLE>
(1) The options are fully vested at December 31, 1995.

(2) These calculations are based on the market value of the Common Stock on
the date of grant. The market value is calculated by averaging the closing
bid and ask price for the stock as quoted by Nasdaq National Market System
on the date of grant. The exercise price is determined by the same method,
which is equal to the market value on the date of grant.

50
<PAGE>
The following table sets forth information with respect to the unexercised
options to purchase shares of Common Stock which were granted to the executive
officers in 1995 or prior years under the Company's stock option plans. The
executive officers did not exercise any options outstanding under the Company's
stock option plans during the fiscal year ended December 31, 1995.

OPTION EXERCISES AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
HELD AT FISCAL YEAR END YEAR END(1)

EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Robert E. Cone 115,000 -- $152,500 --

James H. Brock, Jr. 85,000 -- $100,000 --

Christine A. Smith 25,000 -- $ 20,375 --
</TABLE>
(1) Represents the difference between the average of the closing bid and ask
price for the Common Stock as quoted by NMS on December 31, 1995 and any
lesser exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

For the fiscal year ended December 31, 1995, Mr. Madden, Mr. Anderson and
Ms. Shuler served on the Compensation Committee of the Board of Directors (the
"Committee"). Ms. Shuler has served as the Company's Secretary since February
1992.

51
<PAGE>
PERFORMANCE GRAPH

The following performance graph compares the performance of the Company's
Common Stock to the National Association of Securities Dealers Automated
Quotation System Composite Index and to the Index of Non-Financial Companies.
The graph covers the period from January 16, 1992 (the date on which the
Company's Common Stock was registered under Section 12(g) of the Exchange Act to
December 31, 1995.
<TABLE>
<CAPTION>
Nasdq Nasdq Nasdq Nasdq
Stock Mkt Non-financial IHII Stock Mkt Non-financial IHII
<S> <C> <C> <C> <C> <C> <C>
Jan 16, 1992 197.058 217.13 4.625 100.000 100.000 100.000
Jan 31, 1992 196.273 216.007 4.125 99.602 99.483 89.189
Dec 31, 1992 217.882 225.593 4 110.567 103.898 86.486
Dec 31, 1993 250.116 260.483 4.125 126.925 119.966 89.189
Dec 31, 1994 244.49 249.635 3.563 124.070 114.970 77.038
Dec 31, 1995 345.484 343.244 4.125 175.321 158.082 89.189
</TABLE>
52
<PAGE>
EMPLOYMENT AGREEMENTS

Effective July 1, 1991, the Company entered into employment agreements
with Messrs. Cone and Brock, which agreements were subsequently amended and
extended. Mr. Cone's amended employment agreement provides for an extended term
through December 31, 1998, as well as an automatic 12-month renewal for each
year beginning January 1, 1995, through January 1, 1998, unless sooner
terminated on Mr. Cone's (i) death, or (ii) inability to perform his duties by
reason of illness, injury or disability. The amended employment agreement also
provides for a 1996 base salary of $175,000, a 1997 base salary of $185,000, and
a base salary of $200,000 for 1998 through 2000, with guaranteed 7% increases in
base salary thereafter. Mr. Brock's amended employment agreement provides for an
extended term through December 31, 1998, with a 1996 base salary of $160,000, a
1997 base salary of $170,000, and a 1998 base salary of $180,000. Effective
October 1992, the Company entered into an employment agreement with Mr. Landreth
renewable annually and providing for a yearly salary of $110,000 and a bonus
based on pretax profits of LEC.

STOCK OPTION PLANS

1994 AMENDED AND RESTATED INCENTIVE STOCK PLAN

The Company has adopted the Industrial Holdings, Inc. 1994 Amended and
Restated Incentive Stock Plan (the "Incentive Plan"). Under the Incentive Plan,
the Company may issue Incentive Awards (as defined below) covering 500,000
shares of Common Stock. The Compensation Committee designated by the Board of
Directors may grant (i) incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) "non-qualified"
stock options, (iii) shares of restricted stock, (iv) shares of phantom stock,
(v) stock bonuses and (vi) cash bonuses (collectively, "Incentive Awards"). Key
employees, including officers (whether or not they are directors), of the
Company and its subsidiaries are eligible to participate in the Incentive Plan.
The Incentive Plan is intended to provide such persons with a continuing
proprietary interest in the Company and enable the Company to attract and retain
qualified personnel. At September 27, 1996, there were options covering 433,500
shares of Common Stock outstanding under the Incentive Plan.

The Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which is currently composed of Mr. Madden, Mr. Kenney and
Ms. Shuler. The Compensation Committee will determine which key employees
receive grants of Incentive Awards, the type of Incentive Award granted and the
number of shares subject to each Incentive Award. The Incentive Plan does not
prescribe any factors to be considered by the Compensation Committee in
determining the recipients and nature of Incentive Awards granted under the
Incentive Plan.

The Compensation Committee has the authority to interpret and construe any
provision of the Incentive Plan and to adopt such rules and regulations for
administering the Incentive Plan as it deems necessary. All decisions and
determinations of the Compensation Committee are final and binding on all
parties. Under the terms of the Incentive Plan, the Company will indemnify
members of the Compensation Committee against any cost, expenses or liability
arising out of any action, omission or determination relating to the Incentive
Plan, unless such action, omission or determination was taken or made in bad
faith and without reasonable belief that it was in the best interest of the
Company.

53
<PAGE>
Subject to the terms of the Incentive Plan, the Compensation Committee
also determines prices, expiration dates and other material features of the
Incentive Awards granted under the Incentive Plan. The Compensation Committee
may, in its absolute discretion, (i) accelerate the date on which an option
granted under the Incentive Plan becomes exercisable, (ii) extend the date on
which any option granted under the Incentive Plan ceases to be exercisable,
(iii) accelerate the date on which a share of restricted stock or phantom stock
vests and waive any conditions imposed by the Compensation Committee on the
vesting of a share of restricted stock or phantom stock, and (iv) grant
Incentive Awards to a participant on the condition that the participant
surrender to the Company for cancellation such other Incentive Awards
(including, without limitation, Incentive Awards with higher exercise prices) as
the Compensation Committee specifies.

The Company's Board of Directors may amend or terminate the Incentive Plan
at any time, except that the Incentive Plan may not be modified or amended,
without shareholder approval, if such amendment would materially increase the
benefits accruing to participants, increase the number of shares of Common Stock
which may be issued thereunder, except in connection with a recapitalization or
reclassification of the Common Stock, or materially modify eligibility
requirements for participation in the Incentive Plan.

A summary of the most significant features of the Incentive Plan and the
tax consequences to recipients thereof follows:

INCENTIVE AND NON-QUALIFIED STOCK OPTIONS. Except in limited cases
involving certain 10% shareholders or where the terms of the grant specify
otherwise, incentive stock options ("ISOs") and non-qualified stock options
("NQOs") must be exercised within ten years of the grant date (ISOs and NQOs are
sometimes referred to collectively herein as "Options"). The exercise price of
each ISO granted under the Incentive Plan may not be less than 100% (110% in the
case of certain 10% shareholders) of the fair market value of a share of Common
Stock on the date of grant. The Compensation Committee will have the discretion
to determine the exercise price of each NQO granted under the Incentive Plan. To
the extent that the aggregate fair market value of shares of Common Stock with
respect to which ISOs are exercisable for the first time by any individual
during any calendar year exceeds $100,000, such options must be treated as NQOs.

The purchase price for shares subject to an Option must be paid in full at
the time of exercise in cash or, subject to the approval of the Committee, in
any combination of cash or shares of Common Stock having a fair market value
equal to the amount due, subject to any limitations imposed by the federal
securities laws. No Option may be exercised for a fractional share of Common
Stock.

If an employee's employment with the Company is terminated other than for
cause (as defined in the Incentive Plan), or by reason of disability (as defined
in the Incentive Plan) or death, his vested Options, whether ISOs or NQOs, shall
remain exercisable for one month after such termination. If an employee's
employment with the Company is terminated by reason of disability or death, his
vested Options, whether ISOs or NQOs, shall remain exercisable for one year
following such termination. Provided, however, that no option shall be
exercisable after the expiration of its term, in any case. If an employees'
employment with the Company is terminated for cause, all outstanding Options,
whether vested or otherwise, shall expire at the commencement of business on the
date of such termination. Options are not transferable other than by will or by
the laws of descent and distribution.

Upon a change in control of the Company (a "Change in Control"), all
Options become immediately exercisable. The Incentive Plan defines Change in
Control to mean (i) a change in control

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as contemplated in the federal securities laws, (ii) the acquisition by any
Person, after the effective date of the Incentive Plan, of 20% or more of the
shares of voting securities of the Company (20% owners at the effective date
excluded), (iii) certain changes in the composition of the Board of Directors
(existing as of the effective date of the Incentive Plan) as a result of a
contested election for positions on the Board of Directors or (iv) an other
event which the Board of Directors determines to constitute a change in control
of the Company.

A participant in the Incentive Plan will not recognize any income at the
time an ISO is granted, nor on the qualified exercise of an ISO. If a
participant does not dispose of the shares acquired by exercise of an ISO within
two years after the grant of the ISO and one year after the exercise of the ISO,
the exercise is qualified and the gain or loss (if any) on a subsequent sale
will be a long-term capital gain or loss. Such gain or loss equals the
difference between the sum of the sales proceeds and the exercise price of the
Common Stock sold. The Company is not entitled to a tax deduction as a result of
the grant or qualified exercise of an ISO. However, if the shares acquired upon
the exercise of an ISO are disposed of at a gain prior to the above one-year and
two-year holding periods and the fair market value of the shares at the time of
exercise exceeds the exercise price, the exercise is not qualified and special
rules apply that require the participant to recognize ordinary income (at least
in part) at the time of such disposition. The Company is generally entitled to a
tax deduction at the same time and in the same amount as the ordinary income
recognized by the participant from such disposition.

Although the qualified exercise of an ISO will not produce ordinary
taxable income to the participant, it will produce an increase in the
participant's alternative minimum taxable income and may result in an
alternative minimum tax liability.

An optionee will not recognize any income for federal income tax purposes
at the time a NQO is granted, nor will the Company be entitled to a deduction at
that time. However, when any part of a NQO is exercised, the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the shares received and the exercise price of the NQO, and the
Company will generally recognize a tax deduction in the same amount.

RESTRICTED STOCK. A grant of shares of restricted stock represents the
promise of the Company to issue shares of Common Stock on a predetermined date
(the "Issue Date") to a participant, provided the participant is continuously
employed by the Company until the Issue Date. Vesting of the shares occurs on a
second predetermined date (the "Vesting Date") if the participant has been
continuously employed by the Company until that date. Prior to the Vesting Date,
the shares are not transferable by the participant and are subject to a
substantial risk of forfeiture. The Committee may, at the time shares of
restricted stock are granted, impose additional conditions to the vesting of the
shares, such as, for example, the achievement of specified performance goals.
Vesting of some portion, or all, of the shares or restricted stock may occur on
the termination of the employment of a participant other than for cause prior to
the Vesting Date. If vesting does not occur, shares of restricted stock are
forfeited. Immediately following a Change in Control, all shares of restricted
stock which have not vested or been forfeited will vest automatically.

A participant will not recognize any income for federal tax purposes at
the time shares of restricted stock are granted or issued, nor will the Company
be entitled to a tax deduction at that time. However, when either the transfer
restriction or the forfeiture risk lapses, such as on vesting, the participant
will recognize ordinary income in an amount equal to the fair market value of
the shares of restricted stock on the date on which they vest. A participant may
file an appropriate election under Section 83(b) of the

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Code with the Internal Revenue Service within 30 days of the Issue Date of the
restricted stock (the "Election"), which results in the participant's receipt of
deemed ordinary income in an amount equal to the fair market value of the shares
of restricted stock on the date on which they are issued. However, if a
participant files the Election and the restricted stock is subsequently
forfeited, such participant is not allowed a tax deduction for the amount
previously reported as ordinary income due to the Election. Gain or loss (if
any) from a disposition of restricted stock after the participant recognizes any
ordinary income (whether by vesting or an Election) will generally constitute
short- or long-term capital gain or loss. The Company will be entitled to a tax
deduction at the time the participant recognizes ordinary income on the
restricted stock, whether by vesting or an Election.

PHANTOM STOCK. A share of phantom stock represents the right to receive
the economic equivalent of a grant of restricted stock. Shares of phantom stock
are subject to the same vesting requirements as shares of restricted stock. On
vesting of a share of phantom stock, the holder is entitled to receive cash in
an amount equal to the sum of (i) the fair market value of a share of Common
Stock as determined on the vesting date and (ii) the aggregate amount of cash
dividends paid with respect to a share of Common Stock during the period
commencing on the date of grant and ending on the vesting date. The cash payment
for phantom stock is treated the same as a cash bonus for federal income tax
purposes and generally creates a tax deduction to the Company when paid. In
addition, the value of a share of phantom stock (whether or not vested) is paid
immediately on the occurrence of a Change in Control of the Company. The
Committee may not grant any cash bonus in connection with the grant of shares of
Phantom Stock.

STOCK AND CASH BONUSES. Bonuses payable in stock may be granted by the
Compensation Committee and may be payable at such times and subject to such
conditions as the Compensation Committee determines. On the receipt of a stock
bonus, a participant will recognize ordinary income for federal tax purposes in
an amount equal to the fair market value of the stock at the time it is
received. The Compensation Committee may grant, in connection with a grant of
shares of restricted stock, a cash "tax" bonus, payable when an employee is
required to recognize income for federal income tax purposes with respect to
such shares. The tax bonus may not be greater than the value of the shares of
restricted stock at the time the income is required to be recognized. Any such
bonus will result in ordinary income to the employee and generally a tax
deduction to the Company. The grant of a cash bonus shall not reduce the number
of shares of Common Stock with respect to which Options, shares of restricted
stock, shares of phantom stock or stock bonuses may be granted pursuant to the
Incentive Plan.

IN GENERAL. If any outstanding Option expires, terminates or is canceled
for any reason, the shares of Common Stock subject to the unexercised portion of
such Option shall again be available for grants under the Incentive Plan. If any
shares of restricted stock or phantom stock, or any shares of Common Stock
granted as a stock bonus, are forfeited or canceled for any reason, such shares
shall again be available for grants under the Incentive Plan. Shares of Common
Stock issued as a stock bonus or on the exercise of Options or on the vesting of
a grant of restricted stock are not available for future issuance under the
Incentive Plan.

The Incentive Plan provides for an adjustment in the number of shares of
Common Stock available to be issued under the Incentive Plan, the number of
shares subject to Incentive Awards, and the exercise prices of Options on a
change in the capitalization of the Company, a stock dividend or split, a merger
or combination of shares and certain other similar events. The Incentive Plan
also provides for the termination of Incentive Awards on the occurrence of
certain corporate events.

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The Incentive Plan provides that participants may elect to satisfy certain
federal income tax withholding requirements by remitting cash to the Company. In
addition, the Incentive Plan provides that, at the election of a participant, an
unrelated broker-dealer acting on behalf of the participant, may exercise
Options granted to the participant and immediately sell the shares so acquired
by such exercise to raise the funds to pay the exercise price of the Options and
the amount of any withholding tax that may be due on exercise.

1995 NON EMPLOYEE DIRECTOR STOCK OPTION PLAN

The Company has also adopted the Industrial Holdings, Inc. 1995
Non-Employee Director Stock Option Plan (the "Director Plan"). Options to
purchase a maximum of 105,000 shares of Common Stock may be issued under the
Director Plan to non-employee directors of the Company. The Director Plan
provides for the grant of non-qualified options. Pursuant to the Director Plan,
options to purchase 15,000 shares of Common Stock are granted to each person who
is not an employee of the Company upon his election for the first time as a
director of the Company. Options granted under the Director Plan expire 10 years
after the date of grant. As of September 27, 1996, options to purchase an
aggregate of 80,000 shares of Common Stock are issued and outstanding under the
Director Plan.

To the extent that any options are granted under the Incentive Plan or the
Director Plan, vest and are exercised by the holders thereof, exercising
Warrantholders could experience dilution.

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CERTAIN TRANSACTIONS

The Company enters into transactions with related parties only with the
approval of a majority of the independent and disinterested directors and only
on terms the Company believes to be comparable to or better than those that
would be available from unaffiliated parties. In the Company's view, all of the
transactions described below meet that standard.

In April 1993, the Company acquired The Rex Group, Inc. ("REX") for a
purchase price consisting of an aggregate of 450,606 shares of Common Stock.
John Madden, a member of the Company's Board of Directors since October 1992,
served as the President and Chief Executive Officer of REX from June 1963 to
January 1992 and from December 1992 to April 1993 and as Chairman of REX's Board
of Directors from January 1992 to April 1993. Of the aggregate consideration
paid by the Company to the former shareholders of REX, Mr. Madden received
99,868 shares of Common Stock, and members of Mr. Madden's family received
350,738 shares of Common Stock, as to which Mr. Madden disclaims beneficial
ownership. In addition to the aggregate consideration paid by the Company for
REX, an "earn-out" provision allowed the prior owners of REX in the aggregate to
earn additional shares of Common Stock of the Company based on the performance
of REX through 1995. The number of shares earned was also dependent upon the
Company's share price during such period. During 1993, the prior owners of REX
earned an additional 55,276 shares of Common Stock. No shares were earned for
fiscal 1994 and 1995. The Company also entered into a two-year employment
agreement with Mr. Madden which expired April 1995, pursuant to which the
Company paid Mr. Madden compensation in the amount of $16,154 in 1995. Under the
terms of his employment agreement with the Company, Mr. Madden received an
additional 10,000 shares of Common Stock in March 1994 and 14,000 shares of
Common Stock in March 1995.

In connection with the acquisition of PVS in January 1992, Mr. Jimmy W.
Ray acquired 115,650 shares of Common Stock and Mr. Rex W. Terry acquired
115,650 shares of Common Stock. In connection with their acquisition of these
shares at the time the Company completed its initial public offering, Messrs.
Terry and Ray contractually agreed (i) not to sell any shares of Common Stock
until January 1993 and (ii) not to sell more than an aggregate of 6,425 shares
in any 90-day period beginning January 1993. If either of Mr. Terry or Mr. Ray
gave the Company written notice of his intention to sell shares of Common Stock
no less than 10 days prior to the beginning of each 90-day period and in the
event that the closing bid price of the Common Stock on the trading day
preceding notice was less than or equal to $5.00 per share, the Company was
obligated to pay such holder the difference between $5.00 and the sale price of
the shares of Common Stock actually sold during each particular 90-day period.
In February 1996, Mr. Ray and Mr. Terry sold all remaining shares of Common
Stock under this agreement. There is no further obligation on the part of the
Company to make any payments under the agreement.

In October 1992, the Company entered into a noncancelable lease with the
former shareholders of Landreth . The lease expires in 2002, with an option by
the Company to renew for another five years. Rent payments to the former
shareholders of Landreth were $106,800 annually for the years 1995, 1994 and
1993. The Company has an option to purchase the leased premises at a price equal
to the outstanding indebtedness related to the leased premises at the time the
option is exercised. The Company may be obligated to purchase the leased
premises under certain conditions specified in the lease agreement.

In connection with the purchase of Landreth in October 1992, the former
Landreth shareholders are entitled to additional consideration based upon the
level of Landreth's pretax profits through September 1997, not to exceed
$500,000 in the aggregate. For the six months ended June 30, 1996 and for fiscal
1995, 1994 and 1993, the Company paid these shareholders $99,320, $207,863,
$64,859 and $79,800 as additional consideration.

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PRINCIPAL SHAREHOLDERS

The table below sets forth certain information regarding the beneficial
ownership of Common Stock at September 27, 1996 by (i) each person known to the
Company to beneficially own more than 5% of its Common Stock, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group.

NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS

Renaissance Capital Partners II, Ltd.
8080 North Capital Expressway
Suite 210, LB 59
Dallas, TX 75206-1857................ 375,153(2) 9.1%

St. James Capital Partners, L.P.
5599 San Felipe Suite 300
Houston, Texas 77056................ 295,000(3) 7.1%

Directors and Executive Officers:
Robert E. Cone....................... 337,548(4) 8.1%
James H. Brock, Jr................... 125,000(5) 3.0%
Thomas C. Landreth................... 90,445(6) 2.2%
Christine A. Smith................... 55,081(7) 1.3%
William J. Argeroplos................ 147,441(6) 3.6%
Charles J. Anderson.................. 77,000(6) 1.9%
Barbara S. Shuler.................... 77,393(8) 1.9%
John P. Madden....................... 180,083(9) 4.4%
James W. Kenney...................... 20,000(6) *
All officers and directors
as a group (9 persons) (4) - (9)... 1,109,991 25.1%

- ------------------------
* Less than one percent.

(1) Subject to community property laws where applicable, each person has sole
voting and investment power with respect to the shares listed, except as
otherwise specified. Each person is a United States citizen. This table is
based upon information supplied by officers, directors and principal
shareholders and Schedules 13D and 13G, if any, filed with the Securities
and Exchange Commission.

(2) Includes 325,153 shares that may be acquired on the conversion of a
currently exercisable $1.060 million convertible debenture at $3.26 per
share and the exercise of 50,000 warrants at $4.00 per share.

(3) Includes 80,000 shares that may be acquired upon the exercise of currently
exercisable warrants.

(4) Includes 115,000 shares that may be acquired upon the exercise of
currently exercisable stock options.

(5) Includes 25,000 shares that may be acquired upon the exercise of a warrant
and 65,000 shares that may be acquired upon the exercise of currently
exercisable stock options.

(6) Includes 20,000 shares that may be acquired upon the exercise of currently
exercisable stock options.

(7) Includes 45,000 shares that may be acquired upon the exercise of currently
exercisable stock options.

(8) Includes 15,000 shares that may be acquired upon the exercise of currently
exercisable stock options.

(9) Includes 15,000 shares that may be acquired upon the exercise of currently
exercisable stock options. Excludes 324,965 shares owned by persons
related to Mr. Madden, but as to which Mr. Madden disclaims beneficial
ownership.

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DESCRIPTION OF SECURITIES

Pursuant to the Company's Amended and Restated Articles of Incorporation
("Amended Articles"), the authorized capital stock of the Company consists of
7,500,000 shares of Common Stock, par value $.01 per share, and 7,500,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"). The
following description of certain of the Company's securities is a summary, does
not purport to be complete or to give effect to applicable statutory or common
law and is subject in all respects to the applicable provisions of the Company's
Amended Articles.

COMMON STOCK

At September 27, 1996, 4,057,580 shares of Common Stock were issued and
outstanding. Holders of Common Stock are entitled, among other things, to one
vote per share on each matter submitted to a vote of shareholders and, in the
event of liquidation, to share ratably in the distribution of assets remaining
after payment of liabilities. Holders of Common Stock have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding shares
have the ability to elect all of the directors. Holders of Common Stock have no
preemptive or other rights to subscribe for shares and are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.

PREFERRED STOCK

None of the authorized shares of Preferred Stock have been issued or are
outstanding. The Board of Directors has the authority to cause the Company to
issue up to the authorized number of shares of Preferred Stock in one or more
series, to designate the number of shares constituting any series, and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the shareholders. Because
the Board is authorized to issue Preferred Stock with such preferences and
rights as it determines, it may afford the holders of any series of Preferred
Stock preferences, rights or voting powers superior to those of holders of
Common Stock. The Company has no present plan to issue any shares of Preferred
Stock.

WARRANTS

On January 15, 1992, the Company consummated its initial public offering
of units ("Units"), each unit consisting of one share of Common Stock, one Class
A Warrant and one Class B Warrant. At September 27, 1996 there were 632,500
Class A Warrants and 632,500 Class B Warrants outstanding.

Each currently outstanding Class A Warrant and Class B Warrant entitles
the registered holder thereof to purchase from the Company one share of Common
Stock at an exercise price of $6.00 and $10.00 per share, respectively. The
Class A and Class B Warrants may be exercised through and including January 14,
1997. The Class A and Class B Warrants may be redeemed by the Company at $.05
per warrant, on not less than 30 days' written notice, if the closing price of
the Common Stock for a period of 20 consecutive trading days equals or exceeds
$8.00 and $12.00 per share, respectively. As of September 27, 1996, the closing
bid price of the Common Stock had equaled or exceeded $8.00 per share for 20
consecutive trading days, and the Company may redeem the Class A Warrants at any
time; provided, however, that notice of redemption must be mailed to the Class A
Warrantholders at least 30 days but no more than 60 days before the date on
which the Class A Warrants are called for redemption.

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The Class B Warrants and Class C Warrants to be issued in connection with
the Offer together with the currently outstanding Class A and Class B Warrants
(the "Warrants"), will entitle the registered holder thereof to purchase one
share of Common Stock at an exercise price of $10.00 and $15.00 per share,
respectively, and may be exercised through and including January 14, 1999. The
term of currently outstanding Class B Warrants, which are exercisable through
and including January 14, 1997, will, after the Expiration Date, automatically
be extended to January 14, 1999. The Company may redeem each of the Class B
Warrants and the Class C Warrants to be issued in the Offer at $.05 per Warrant
if the closing bid price of the Common Stock shall have equaled or exceeded at
least $12.00 and $17.00 per share, respectively, for a period of 20 consecutive
trading days. Notice of any redemption must be mailed to all holders of Warrants
at least 30 days but no more than 60 days before the date on which the Warrants
have been called for redemption.

The holders of Warrants do not have any voting or any other rights of
shareholders of the Company and are not entitled to receive dividends. In the
event of an adjustment in the number of shares issuable on exercise of the
Warrants, the Company will not issue fractional shares, but will, instead, pay
to the holder of the Warrants at the time of such exercise an amount in cash
equal to the same fraction of the current market value of a share of Common
Stock.

The exercise price and the number and kind of shares or other securities
purchasable on exercise of any Warrants and the number of Warrants are subject
to adjustment on the occurrence of certain events, including stock dividends,
reclassifications, reorganizations, consolidations and mergers. No adjustment in
the exercise price is required until cumulative adjustments amount to one
percent or more of the exercise price. If the Company effects any capital
reorganization, certain reclassifications of the Common Stock, any consolidation
or merger (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares), or sells all or
substantially all its properties and assets, the Warrants become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of the Company purchasable (at the time
of such reorganization, reclassification, consolidation, merger or sale) on
exercise of such Warrants would have been entitled on such reorganization,
reclassification, consolidation, merger, or sale.

The Warrants are not exercisable by a holder if (i) the shares issuable on
exercise of such Warrants have not been registered under the securities or blue
sky laws of the state of residence of such holder or (ii) a current prospectus
meeting the requirements of the laws of such state cannot be lawfully delivered
by or on behalf of the Company. Pursuant to the terms of the respective Warrant
agreements, the Company has agreed to use reasonable efforts to register such
shares in states in which holders of Warrants are known to reside and to
maintain a current prospectus relating thereto.

SPECIAL PROVISIONS OF THE ARTICLES OF INCORPORATION AND TEXAS LAW

ANTI-TAKEOVER EFFECT. The provisions of the Amended Articles summarized in
the succeeding paragraphs, may be deemed to have an anti-takeover effect or may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in such shareholder's best interest, including those attempts
that might result in a premium over the market price for the shares held by a
shareholder.

Pursuant to the Amended Articles, the Board of Directors may, by
resolution, establish one or more series of preferred stock, having such number
of shares, designation, relative voting rights, dividend rates, liquidation or
other rights, preferences and limitations as may be fixed by the Board of
Directors

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without any further shareholder approval. Such rights, preferences, privileges
and limitations as may be established could have the effect of impeding or
discouraging the acquisition of control of the Company.

LIMITATION OF DIRECTOR LIABILITY. Texas law authorizes a Texas corporation
to eliminate or limit the personal liability of a director to the Company and
its shareholders for monetary damages for breach of certain fiduciary duties as
a director. The Company believes that such a provision is beneficial in
attracting and retaining qualified directors, and accordingly, its Amended
Articles include a provision eliminating a director's liability for monetary
damages for any breach of fiduciary duty as a director, except: (i) for any
breach of the duty of loyalty to the Company or its shareholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any transaction from which the director
derived an improper personal benefit; or (iv) for certain other actions. Thus,
pursuant to Texas law, the Company's directors are not insulated from liability
for breach of their duty of loyalty (requiring that, in making a business
decision, directors act in good faith and in the honest belief that the action
was taken in the best interest of the Company), or for claims arising under the
federal securities laws. The foregoing provision of the Company's Amended
Articles may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from bringing a lawsuit
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited the Company and its
shareholders.

INDEMNIFICATION OF OFFICERS AND DIRECTORS. To the maximum extent permitted
by law, the Amended Articles and the Bylaws provide for mandatory
indemnification of directors, officers, employees and agents of the Company
against all expense, liability and loss to which they may become subject or
which they may incur as a result of being or having been a director, officer,
employee or agent of the Company. In addition, the Company must advance or
reimburse directors and officers and may advance or reimburse employees and
agents for expenses incurred by them in connection with indemnifiable claims.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock and Warrants and the
Warrant Agent for the Warrants is ChaseMellon Shareholder Services, Stock
Transfer Department, 85 Challenger Road, Overpeck Centre, Ridgefield Park, NJ
07660.

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SHARES ELIGIBLE FOR FUTURE SALE

As of September 27, 1996, the Company had 4,057,580 shares of Common Stock
outstanding. Of those shares, 2,982,629 are freely tradeable in the public
market except for any shares owned at the time by an "affiliate" of the Company
within the meaning of Rule 144 under the Securities Act, which shares would be
subject to the resale volume limitations discussed below. The 1,265,000 shares
of Common Stock underlying the currently outstanding Class A and Class B
Warrants and up to the 1,265,000 shares of Common Stock underlying the Class B
and Class C Warrants to be issued in the Offer will be similarly freely
tradeable without restriction or further registration under the 1933 Act, except
for any such shares owned at the time by an "affiliate" of the Company within
the meaning of Rule 144. The remaining 1,074,956 shares of Common Stock
outstanding are "restricted' securities" which were issued and sold by the
Company in private transactions in reliance upon one or more exemptions
contained in the Securities Act ("Restricted Shares") and may be publicly sold
only if registered under the Securities Act or sold pursuant to Rule 144. All of
such restricted securities are currently eligible for sale under Rule 144.

In addition, as of September 27, 1996, there are an aggregate of 533,500
shares subject to options that have been or may be granted under the Incentive
Plan and the Director Plan, 578,582 shares issuable upon the exercise of Other
Warrants, and 325,153 shares issuable upon the conversion of the Renaissance
Debenture. The sale or resale of the shares of Common Stock underlying the
Shareholder Options, Other Warrants and Renaissance Debenture have been
registered on Registration Statements on Forms S-8 and S-3. The resale of the
foregoing shares of Common Stock in the public market could adversely affect
prevailing market prices.

In general, under Rule 144 as currently in effect, any person including
persons who may be deemed "affiliates" of the Company, whose Restricted Shares
have been fully paid for and held for at least two years from the later of the
date of issuance by the Company or acquisition from an affiliate, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then-outstanding shares of Common Stock or the average
weekly trading volume of such shares during the four calendar weeks preceding
the date on which notice of the proposed sale is sent to the Securities and
Exchange Commission. After three years from the later of the date of issuance by
the Company or acquisition from an affiliate, a person who is not deemed an
"affiliate" of the Company may sell such shares under Rule 144 without regard to
the volume limitations described above. Sales under Rule 144 are also subject to
certain sale provisions, notice requirements and the availability of current
public information about the Company.

No predictions can be made of the effect, if any, of future public sales
of restricted shares of Common Stock or the availability of restricted shares of
Common Stock for sale in the public market. Sales of substantial amounts of
restricted Common Stock under Rule 144 could adversely affect prevailing market
prices.

LEGAL MATTERS

Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for the Company by Norton, Jacobs, Kuhn &
McTopy, L.L.P., Houston, Texas.

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ADDITIONAL INFORMATION

The Company has filed with the Commission (the "SEC") a Registration
Statement on Form S-1 under the Securities Act with respect to the securities
offered hereby, as well as a Schedule 13e-4 (the "Schedule 13e-4") under the
Exchange Act. This Offering Circular-Prospectus does not contain all of the
information set forth in such Registration Statement, the Schedule 13e-4 and
exhibits thereto, certain parts of which were omitted in accordance with the
rules and regulations of the SEC. For further information with respect to the
Company and to the securities offered hereby, reference is made to such
Registration Statement, including the exhibits thereto. Statements contained in
this Offering Circular-Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and such exhibits and any schedules
attached to the Registration Statement may be inspected free of charge at the
Commission's public reference facilities at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. Any interested party may obtain copies of
all or any part of the Registration Statement and its exhibits at prescribed
rates from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, Room 1024, Washington, D.C. 20549.

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INDEX TO FINANCIAL STATEMENTS

INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES PAGE

Report of Independent Accountants ....................................... F-2
Report of Independent Public Accountants ................................ F-3
Consolidated Balance Sheet at June 30, 1996 (unaudited) and
December 31, 1995 and 1994 ........................................... F-4
Consolidated Statement of Income For the Six Months Ended
June 30, 1996 and 1995 (unaudited) and the Years Ended
December 31, 1995, 1994 and 1993 ..................................... F-5
Consolidated Statement of Cash Flows For the Six Months Ended
June 30, 1996 and 1995 (unaudited) and the Years Ended December 31,
1995, 1994 and 1993 .................................................. F-6
Consolidated Statement of Shareholders' Equity For the Six Months
Ended June 30, 1996 (unaudited) and the Years Ended December 31,
1995, 1994 and 1993 .................................................. F-7
Notes to Consolidated Financial Statements .............................. F-8

MRMC, INC. FASTENER DIVISION (CRIVET)

Accountant's Letter ..................................................... F-21
Statement of Assets Sold and Liabilities Assumed at June 30, 1995 ....... F-22
Statement of Direct Revenues and Direct Expenses for the Years
Ended June 30, 1995, 1994 and 1993 ................................... F-23
Notes to Statement of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses ..................... F-24
Statement of Assets Sold and Liabilities Assumed at December 7,
1995 (unaudited) ..................................................... F-26
Statements of Direct Revenues and Direct Expenses for the Period
from July 1, 1995 through December 7, 1995 (unaudited) ............... F-27
Notes to Statements (unaudited) ......................................... F-38

AMERICAN RIVET COMPANY, INC .............................................

Independent Auditors' Report ............................................ F-29

Balance Sheets at June 30, 1996 (unaudited) and August 31, 1995 and 1994 F-30
Statements of Operations and Retained Earnings for the Ten Months Ended
June 30, 1996 and 1995 (unaudited) and for the Years Ended August 31,
1995, 1994 and 1993 ................................................. F-32
Statements of Cash Flows for the Ten Month Ended June 30, 1996 and
1995 (unaudited) and for the Years Ended August 31, 1995, 1994
and 1993 ............................................................ F-33
Notes to Financial Statements ........................................... F-34

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Industrial Holdings, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Industrial
Holdings, Inc. and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Houston, Texas
February 29, 1996, except as to the last paragraph of Note 11, which is as of
March 19, 1996

F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Industrial Holdings, Inc.

We have audited the accompanying consolidated statement of income, shareholders'
equity and cash flows of Industrial Holdings, Inc. (a Texas corporation), and
subsidiaries for the year ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Industrial
Holdings, Inc., and subsidiaries for the year December 31, 1993, in conformity
with generally accepted accounting principles.

Arthur Andersen LLP

Houston, Texas
March 23, 1994

F-3
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -------------------------------
1996 1995 1994
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................................. $ 244,793 $ 428,430 $ 188,627

Accounts receivable - trade, net ..................................... 6,729,562 5,640,253 4,419,263

Inventories .......................................................... 9,345,904 7,945,871 6,658,895

Equipment held for sale .............................................. 100,000 275,000

Advances to shareholders ............................................. 17,436 65,210 192,750

Notes receivable, current portion .................................... 306,627 259,452 180,158

Other current assets ................................................. 425,055 267,330 367,548
----------- ----------- ------------

Total current assets ............................................. 17,169,377 14,881,546 12,007,241

Property and equipment, net ............................................. 9,683,180 9,125,422 5,400,497

Notes receivable, less current portion .................................. 1,277,748 1,475,956 1,623,323

Other assets ............................................................ 119,458 127,658 115,369

Goodwill and other, net ................................................. 1,875,605 1,882,974 1,701,482
----------- ----------- ------------

Total assets ....................................................... $30,125,368 $27,493,556 $ 20,847,912
=========== =========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Notes payable ........................................................ $ 6,668,030 $ 6,688,570 $ 4,908,933

Accounts payable - trade ............................................. 5,688,523 4,748,339 3,608,200

Accrued expenses and other ........................................... 1,004,872 1,213,176 715,136

Current portion of long-term debt .................................... 988,851 772,858 520,729
----------- ----------- ------------

Total current liabilities ....................................... 14,350,276 13,422,943 9,752,998

Long-term debt, less current portion ................................. 5,001,834 5,890,849 3,567,954

Deferred income taxes payable ........................................ 772,370 576,771 644,193
----------- ----------- ------------

Total liabilities .............................................. 20,124,480 19,890,563 13,965,145
----------- ----------- ------------

Commitments and contingencies (Notes 3 and 9)

Shareholders' equity:

Common stock $.01 par value, 7,500,000 shares
authorized, 3,641,162, 3,091,162 and 2,997,750
shares issued and outstanding ..................................... 36,412 30,912 29,978

Additional paid-in capital ........................................... 9,389,994 7,553,662 7,379,517

Retained earnings (deficit) .......................................... 574,482 18,419 (526,728)
----------- ----------- ------------

Total shareholders' equity ................................... 10,000,888 7,602,993 6,882,767
----------- ----------- ------------

Total liabilities and shareholders' equity ................... $30,125,368 $27,493,556 $ 20,847,912
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.

F-4
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------- -----------------------------------------------
(unaudited)
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 25,627,328 $ 19,722,795 $ 38,983,070 $ 34,730,339 $ 35,112,856

Cost of sales ................................. 19,936,905 15,530,349 30,613,569 26,933,180 26,924,068
------------ ------------ ------------ ------------ ------------

Gross profit .................................. 5,690,423 4,192,446 8,369,501 7,797,159 8,188,788
------------ ------------ ------------ ------------ ------------

Operating expenses:
Selling, general and administrative ........ 4,032,846 3,226,207 6,511,969 6,689,174 6,203,788
Depreciation and amortization .............. 186,868 200,287 412,722 485,013 477,739
------------ ------------ ------------ ------------ ------------

Total operating expenses ................ 4,219,714 3,426,494 6,924,691 7,174,187 6,681,527
------------ ------------ ------------ ------------ ------------

Income from operations ........................ 1,470,709 765,952 1,444,810 622,972 1,507,261
------------ ------------ ------------ ------------ ------------
Other income (expense):

Interest expense ........................... (678,221) (486,175) (982,254) (888,506) (856,593)

Interest income ............................ 60,391 70,698 140,173 130,143 113,478

Other income (expense) ..................... (10,360) 37,952 17,882 183,537 76,419
------------ ------------ ------------ ------------ ------------

Total other income (expense) .......... (628,190) (377,525) (824,199) (574,826) (666,696)
------------ ------------ ------------ ------------ ------------

Income before income taxes .................... 842,519 388,427 620,611 48,146 840,565

Income tax expense ............................ 286,456 34,341 75,464 16,444 77,763
------------ ------------ ------------ ------------ ------------

Net income .................................... $ 556,063 $ 354,086 $ 545,147 $ 31,702 $ 762,802
============ ============ ============ ============ ============

Earnings per share ............................ $ .14 $ .12 $ .17 $ .01 $ .27
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.

F-5
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 556,063 $ 354,086 $ 545,147 $ 31,702 $ 762,802
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................... 642,763 406,776 865,241 840,234 741,081
Deferred income tax provision (benefit) .......... 195,599 34,341 (67,422) 20,430 71,763
Loss on sales of equipment ....................... -- 7,120 -- -- 12,998
Other ............................................ -- -- (12,289) 11,072 (84,343)
Changes in current assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders ............................... (1,050,358) (881,562) (1,234,064) 196,698 (593,496)
Inventories ................................. (1,400,033) 81,575 178,460 (454,923) (1,933)
Notes receivable ............................ 151,033 51,541 208,687 (27,600) 81,711
Other assets ................................ (149,525) (178,159) 18,148 (61,209) 86,015
Accounts payable ............................ 940,184 528,730 640,139 96,333 7,545
Accrued expenses ............................ (208,304) (228,458) 91,365 (37,620) (357,927)
Other liabilities ........................... -- -- -- (261,203) 14,588
----------- --------- ----------- ----------- -----------
Net cash provided (used) by
operating activities ..................... (322,578) 175,990 1,233,412 353,914 740,804

Cash flows from investing activities:
Purchase of property and equipment ................ (951,743) (349,704) (605,878) (517,896) (584,795)
Proceeds from disposal of property
and equipment ................................. -- -- 8,036 7,395 19,250
Purchase of CRivet ................................ -- -- (826,003) -- --
Cash obtained in purchase of REX .................. -- -- -- -- 322,572
Additional consideration paid to
former shareholders of LEC and PVS ............. (99,325) (88,515) (307,900) (64,859) (128,312)
----------- --------- ----------- ----------- -----------
Net cash used by investing activities ....... (1,051,068) (438,219) (1,731,745) (575,360) (371,285)
----------- --------- ----------- ----------- -----------

Cash flows from financing activities:
Net borrowings (repayments) under
revolving line of credit ...................... 876,131 285,086 442,065 176,473 (414,557)
Proceeds from notes payable and
long-term debt .................................. 184,422 -- 614,745 909,209 414,156
Principal payments on notes payable
and long-term debt ............................... (950,015) (145,886) (593,790) (1,324,346) (392,005)
Proceeds from issuance of common stock ............ 1,080,371 -- 275,116 418,278 37,500
Cash paid for offering costs ...................... -- -- -- -- (41,513)
----------- --------- ----------- ----------- -----------
Net cash provided (used) by
financing activities ............................. 1,190,009 139,200 738,136 179,614 (396,419)
----------- --------- ----------- ----------- -----------

Net increase (decrease) in cash and
equivalents ....................................... (183,637) (123,029) 239,803 (41,832) (26,900)

Cash and equivalents, beginning of period ............ 428,430 188,627 188,627 230,459 257,359
----------- --------- ----------- ----------- -----------

Cash and equivalents, end of period .................. $ 244,793 $ 65,598 $ 428,430 $ 188,627 $ 230,459
=========== ========= =========== =========== ===========

Supplemental disclosure of noncash
investing and financing activities:
Common stock issued in exchange for
REX shares and cancellation of debt .............. -- -- -- -- $ 1,013,863
Contingent consideration payable to
shareholders ..................................... -- -- -- -- 131,833
Accounts receivable reclassified to
notes receivable ................................. -- -- 140,614 -- --
Purchase of CRivet ................................ -- -- 4,798,316 -- --
Debt converted to equity .......................... $ 804,100 -- -- -- --

Supplemental disclosures of cash flow
information:
Cash paid for:
Interest ......................................... $ 267,020 $ 259,856 $ 1,012,880 $ 891,211 $ 820,341
Income taxes ..................................... 145,000 -- 786 2,014 --
</TABLE>
The accompanying notes are an integral part of this statement.

F-6
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- Additional Retained
Par paid-in earnings
SHARES VALUE CAPITAL (DEFICIT) TOTAL
--------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ........................ 2,262,664 $22,627 $ 5,958,740 $(1,321,232) $ 4,660,135

Issuance of common stock ........................ 473,105 4,731 1,005,119 -- 1,009,850

Net income ...................................... -- -- -- 762,802 762,802
--------- ------- ----------- ----------- ------------

Balance, December 31, 1993 ...................... 2,735,769 27,358 6,963,859 (558,430) 6,432,787

Issuance of common stock ........................ 261,981 2,620 415,658 -- 418,278

Net income ...................................... -- -- -- 31,702 31,702
--------- ------- ----------- ----------- ------------

Balance, December 31, 1994 ...................... 2,997,750 29,978 7,379,517 (526,728) 6,882,767

Issuance of common stock ........................ 93,412 934 274,182 -- 275,116

Shortfall on sale of stock
by former PVS shareholders-
Note 8 .......................................... -- -- (100,037) -- (100,037)

Net income ...................................... -- -- -- 545,147 545,147
--------- ------- ----------- ----------- ------------

Balance, December 31, 1995 ...................... 3,091,162 30,912 7,553,662 18,419 7,602,993

Issuance of common stock ........................ 335,000 3,350 1,077,021 -- 1,080,371
(unaudited)

Conversion of debt to equity .................... 215,000 2,150 801,950 -- 804,100
(unaudited)

Shortfall on sale of stock by
former PVS shareholders-
Note 8 (unaudited) .............................. -- -- (42,639) -- (42,639)

Net income (unaudited) .......................... -- -- -- 556,063 556,063
--------- ------- ----------- ----------- ------------

Balance, June 30, 1996 (unaudited) .............. 3,641,162 $36,412 $ 9,389,994 $ 574,482 $ 10,000,888
========= ======= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.

F-7
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION:

Industrial Holdings, Inc. (the Company), incorporated in August 1989, operates
five primary segments organized into two divisions: the Fastener Manufacturing
and Sales Division comprised of Landreth Engineering Company ("Landreth") and
Connecticut Rivet ("CRivet"), acquired in December 1995, (collectively "LEC")
which manufacture industrial metal fasteners for sale primarily to manufacturers
in the home furniture, home appliance and automotive industries and the Energy
Products and Services Division comprised of the Valve Supplies and Sales Group
which includes Industrial Municipal Supply Company, Inc. ("IMSCO") and Pipeline
Valve Specialty ("PVS") which remanufacture pipeline valves and distribute pipe,
valves, fittings and other products primarily to the petrochemical, chemical and
petroleum refining industries and to pipeline transportation and storage
industries; the New Machine Sales and Service Group which sells new machine
tools and provides machine moving services; the Export Crating Group which
provides international export crating services; and the Used Machine Sales Group
which sells used machine tools. The New Machine Sales and Service, Export
Crating and Used Machine Sales Groups comprise The Rex Group ("REX").

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Industrial
Holdings, Inc. and its wholly-owned subsidiaries (the Companies), LEC, IMSCO,
PVS and REX. Significant intercompany balances and transactions have been
eliminated upon consolidation. The financial statements include the results of
operations of REX and CRivet as of April 1, 1993 and December 7, 1995,
respectively (see Note 3).

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation is computed
on straight-line and accelerated methods over the estimated useful lives of the
related assets (3 to 15 years for automobiles, furniture and equipment and 31
years for buildings and certain leasehold improvements). Maintenance and repairs
are charged to expense as incurred; major renewals and betterments are
capitalized.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Earnings are charged with a provision for doubtful accounts based on a current
review of the collectibility of the accounts. Accounts deemed uncollectible are
applied against the allowance for doubtful accounts. The allowance for doubtful
accounts was $80,072 and $62,476 at December 31, 1995 and 1994, respectively.

CREDIT RISK

The Company extends credit to its customers in the normal course of business and
generally does not require collateral or other security. The Company performs
ongoing credit evaluations of its customers' financial condition and
historically has not incurred significant credit losses. Notes receivable are
collateralized by land and equipment.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes, where applicable, manufacturing labor and overhead.

F-8
<PAGE>
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair market value
of net tangible assets acquired. Goodwill is amortized over 20 years. At
December 31, 1995, goodwill was $2,201,916, net of amortization of $423,424. At
each balance sheet date, the Company evaluates the realizability of goodwill
based on undiscounted cash flows from operations and operating income for
subsidiaries having material goodwill balances. Other intangible assets consist
primarily of loan origination fees and are amortized over periods not exceeding
seven years.

INCOME TAXES

The Company utilizes the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable.

REVENUE RECOGNITION

Revenues are recognized upon shipment of the product or as the services are
performed.

EARNINGS PER SHARE

Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding. For the six months ended June
30, 1996 and 1995 and for fiscal 1995, 1994 and 1993, the weighted average
common and common equivalent shares were 3,868,158, 3,080,010, 3,149,579,
3,029,574 and 2,828,635 for the purpose of computing primary earnings per share.
Fully diluted earnings per share for these periods were the same as primary
earnings per share, since the effects of the conversion of the debentures and,
in 1993, contingently issuable shares was anti-dilutive.

STATEMENT OF CASH FLOWS

For purposes of the consolidated statement of cash flows, cash equivalents
include all highly liquid investments with original maturities of three months
or less. Changes in assets and liabilities are presented net of the effect of
the purchase of the CRivet in 1995 and of REX in 1993.

ESTIMATES

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates made in connection with these financial statements
are reasonable.

RECENT ACCOUNTING PRONOUNCEMENTS

In 1995 Financial Accounting Standards No. 121 (FAS 121), Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of, was issued and is effective
for fiscal years commencing after December 15, 1995. The future adoption of FAS
121 is not expected to have a material effect on the Company's consolidated
financial position or operating results.

Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
Compensation was also issued in 1995. FAS 123 becomes effective beginning with
the Company's first quarter of 1996, and will not have a material effect on the
Company's financial position or results of operations. Upon adoption of FAS 123,
the Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value

F-9
<PAGE>
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees and will provide pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by FAS 123 has been applied
in measuring compensation expense.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management has determined that the fair value of the Company's financial
instruments is equivalent to the carrying amount of such instruments as
presented or disclosed in the financial statements.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior-year amounts to conform to
the current-year classification.

INTERIM FINANCIAL DATA

The financial data as of June 30, 1996 and for the six months ended June 30,
1996 and 1995 is unaudited; however, in the opinion of Management, the interim
data includes all adjustments consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position and operating results
for the interim periods.

NOTE 3 - BUSINESS ACQUISITIONS:

In December 1995, the Company acquired substantially all the fastener
manufacturing assets and assumed certain liabilities of the fastener
manufacturing division of MRMC, Inc. ("CRivet"). In April 1993, the Company
acquired all of the outstanding common stock of REX. The total purchase prices
at acquisition were $3,744,229 and $1,013,863, respectively, plus the assumption
of certain liabilities. The REX purchase agreement included certain
contingencies which can result in adjustments to the purchase prices.
Concurrently, the Company entered into employment agreements and noncompetition
agreements with certain former shareholders of REX (see Note 9).

These acquisitions have been accounted for by the purchase method of accounting
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition as follows:

REX
APRIL 1, 1993

Fair value of assets acquired $ 7,008,205
Liabilities assumed 2,027,095
Notes assumed 3,967,247
Common stock issued to sellers at acquisition 1,013,863

CRivet
DECEMBER 7, 1995
Fair value of assets acquired:
Inventory $ 1,465,436
Equipment 4,101,329
Other current assets 57,554
Liabilities assumed or incurred:
Accounts payable 500,000
Accrued expenses 406,675
Notes payable or long-term debt 3,891,641
MRMC accounts payable to LEC 586,003
Out of pocket expenses 240,000

F-10
<PAGE>
The following is a pro forma summary (unaudited) of the combined results of
operations for the years ended December 31, 1995 and 1994, assuming the CRivet
acquisition had occurred on January 1, 1994 (in 000's):

1995 1994
=========== =======
Sales .................................... $ 47,847 $46,546
=========== =======

Net income ............................... $ 1,059 $ 522
=========== =======

Earnings per share ....................... $ .33 $ .17
=========== =======

The pro forma financial information combine the operating results of IHI for
1994 and 1995 with the results of operations for CRivet for the twelve months
ended December 31, 1994 and the period from January 1, 1995 through December 6,
1995. The pro forma financial information does not purport to be indicative
either of results of operations that would have occurred had the purchase been
made at January 1, 1994 or future results of operations of the combined
companies.

NOTE 4 - INVENTORIES:

Inventories consist of the following:
JUNE 30, DECEMBER 31,
--------------------------- ----------
1996 1995 1994
---------- ---------- ----------
(unaudited)
Raw materials ............... $1,220,205 $ 593,396 $ 398,102
Finished goods .............. 6,818,586 6,246,340 5,875,807
Other ....................... 1,307,113 1,106,135 384,986
---------- ---------- ----------
$9,345,904 $7,945,871 $6,658,895
========== ========== ==========

NOTE 5 - NOTES RECEIVABLE:

Notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------- -------------------------
1996 1995 1994
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Mortgage note receivable with interest at
9.53% due in monthly installments of
$15,166 through February 2007 secured by
land and building $1,215,972 $1,248,138 $1,308,067

Note receivable from asset sale due in
monthly installments of $3,790 through
July 1999, unsecured 125,925 139,624 170,645

Various installment notes and leases
receivable from equipment inventory sales
due through 2000, secured by equipment 142,327 239,565 313,697

Other notes receivable 100,151 108,081 11,072
---------- ---------- -----------
1,584,375 1,735,408 1,803,481
Less current portion 306,627 259,452 180,158
---------- ---------- ----------

$1,277,748 $1,475,956 $1,623,323
========== ========== ==========
</TABLE>
F-11
<PAGE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

JUNE 30, DECEMBER 31,
------------ --------------------------
1996 1995 1994
------------ ------------ -----------
(unaudited)
Land ............................... $ 243,892 $ 243,892 $ 243,892

Leasehold improvements ............. 487,677 451,869 394,223

Buildings .......................... 882,127 882,127 882,127

Machinery and equipment ............ 8,708,967 8,309,897 4,105,155

Office equipment, furniture and
fixtures ........................ 593,528 579,726 513,821

Transportation equipment ........... 526,271 545,633 570,486

Construction in progress ........... 817,043 158,091 105,430

Property under capital leases ...... 121,068 121,068 121,068
------------ ------------ -----------

12,380,573 11,292,303 6,936,202

Less - accumulated depreciation
and amortization ................ (2,697,393) (2,166,881) (1,535,705)
------------ ------------ -----------

$ 9,683,180 $ 9,125,422 $ 5,400,497
============ ============ ===========

NOTE 7 - NOTES PAYABLE:
Notes payable consists of the following:

JUNE 30, DECEMBER 31
---------- ---------------------
1996 1995 1994
---------- ---------- ----------
(unaudited)
Revolving line of credit to a bank
which provides for borrowings up to the
lesser of a defined borrowing base or
$8,000,000 at December 31, 1995,
$1,536,352, $1,236,304 available at June
30, 1996 and December 31, 1995, principal
due on demand, interest payable monthly
at prime plus 1%, secured by substantially
all assets of the Companies ................ $6,397,130 $5,520,999 $4,778,933

12% convertible promissory note with
principal and interest due December 1,
1996, secured by substantially all assets
of the Companies. Principal of $804,100
was converted into IHI common stock at
$3.74 per share in May 1996. The remaining
principal and accrued interest is not
convertible ................................ 195,900 1,000,000 --

Non-interest bearing note payable to MRMC,
Inc., principal due in weekly installments
of $5,143 through May 1996 ................. -- 92,571 --

Notes payable to individuals, principal
due on demand, interest payable monthly at
12%, secured by certain notes receivable ... 75,000 75,000 130,000
---------- ---------- ----------

$6,668,030 $6,688,570 $4,908,933
========== ========== ==========

F-12
<PAGE>
NOTE 8 - LONG-TERM DEBT:

Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31
---------- ---------------------
1996 1995 1994
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
9.85% term loan payable in monthly installments
of $53,620 including interest, maturing December
1, 2001 and secured by CRivet machinery and
equipment acquired .............................. $2,670,090 $2,800,000 --

12% convertible debenture due October 1, 1999,
with principal of $25,000 commencing November 1,
1997 and interest payable monthly. Guaranteed by
PVS and secured by the common stock of IMSCO and
LEC. Debenture is convertible into IHI common
stock at $3.26 per share ........................ 1,875,000 2,475,000 $2,500,000

Note payable to bank with monthly principal
payments of $6,240 plus interest at prime
(8.5% at December 31, 1995) plus 1/2%,
maturing on December 1, 2004, secured by
real estate property ............................ 616,108 653,548 734,668

Note payable to a bank with monthly principal
payments of $13,333 plus interest at prime
(8.5% at December 31, 1995) plus 2%, maturing
on November 1, 1997, secured by substantially all
assets of LEC, IMSCO and PVS .................... 186,784 266,783 440,117

Notes payable to a bank, payable in monthly
installments of $6,351 plus interest at 9%
to 10.5%, maturing through November 1, 1999,
secured by certain equipment .................... 451,659 187,237 99,245

Non-interest bearing notes payable to certain
former vendors of CRivet, principal due in
monthly installments of $5,475 through
December 1997 ................................... 109,084 141,936 --

Various installment notes, payable in monthly
installments through 1999, including interest
ranging from 9% to 11.7%, secured by
transportation and other equipment .............. 81,960 139,203 314,653
---------- ---------- ----------
5,990,685 6,663,707 4,088,683
Less - current portion .......................... 988,851 772,858 520,729
---------- ---------- ----------
$5,001,834 $5,890,849 $3,567,954
========== ========== ==========
</TABLE>
F-13
<PAGE>
The aggregate maturities of long-term debt at December 31, 1995 are as follows:

Year ended December 31:
1996, including prepayment
(see below) $1,372,858
1997 812,682
1998 862,141
1999 2,117,379
2000 619,208
Thereafter 879,439

$6,663,707

The convertible debenture agreement contains restrictive covenants which, among
other things, requires the Company and its subsidiaries to maintain minimum
amounts of net worth, debt-to-equity ratios, working capital, interest coverage
and fixed charge coverage. The Company is also required to notify the holder if
a material adverse change occurs, and the ability of subsidiaries to declare
dividends to the Company is restricted.

The 12% convertible debentures are subject to redemption at the Company's option
at a rate of 115 percent, 110 percent and 105 percent of the notes in the 12
months ending October 1, 1996, 1997 and 1998. If common stock is issued for
consideration per share less than the $3.26 conversion price of the debentures,
then the conversion price of the debentures is reduced to the consideration per
share received by the Company. In March 1996, the Company paid $600,000 to the
holder of the 12% convertible debentures in payment of current and future
principal payments totaling that amount. The holder waived any prepayment
penalty associated with this prepayment. Additionally, the holder agreed not to
convert any debentures into common stock in 1996. The Company issued to the
holder warrants to purchase 50,000 shares of common stock at $4.00 per share.
Additionally, at December 31, 1995 the Company has classified $350,000 of the
convertible debenture due within one year as long-term debt since in March 1996
the Company had repaid all current amounts through monies raised through the
sale of common stock (See Note 11). For the majority of the Company's debt,
certain events of default occur if the Company defaults on any other
indebtedness.

F-14
<PAGE>
NOTE 9- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:

The Companies have entered into noncancelable operating leases with related
parties (former shareholders of Landreth) and other third parties expiring in
various years through 2002. Rent payments to the former shareholders of Landreth
were $106,800 annually for the years 1995, 1994 and 1993. Operating leases
relate to offices, buildings and certain equipment. Aggregate rent expense on
such leases amounted to $657,328, $592,589 and $486,431 for the years 1995, 1994
and 1993. Future minimum lease payments at June 30, 1996 are as follows:

Year ended December 31:
1996 (from July 1 to Dec. 31) $ 408,277
1997 691,461
1998 666,565
1999 648,311
2000 271,346
Thereafter 242,800

$2,928,760

The lease with the former shareholders of Landreth is for a period of ten years
through 2002 with an option to renew for a further five years. The Company has
an option to purchase the leased premises at a price equal to the outstanding
indebtedness at the time the option is exercised. In addition, the Company may
be obligated to purchase the leased premises under certain conditions specified
in the lease agreement.

In connection with the purchase of PVS, the former PVS shareholders agreed not
to sell their shares except in accordance with an agreement with the Company.
The Company was obligated to pay two of the former PVS shareholders the
difference between $5 and the proceeds they receive upon sale of their common
stock. During 1993, the Company paid the former PVS shareholders $48,512 for
shares sold pursuant to this agreement. At December 31, 1995 and 1994, the
Company had advances to these shareholders of $48,750 and $192,750, which were
secured by 9,750 and 38,550 shares, respectively. The number of shares remaining
under this obligation is 89,950 at December 31, 1995. At June 30, 1996, the
Company had no advances to these shareholders and there was no further
obligation under this agreement.

In connection with the purchase of Landreth, the former Landreth shareholders
are entitled to additional consideration based upon the level of Landreth's
pretax profits through September 1997, not to exceed $500,000 in the aggregate.
For the six months ended June 30, 1996 and 1995 and for fiscal 1995, 1994 and
1993, the Company paid these shareholders $99,320, $88,515, $207,863, $64,859
and $79,800 as additional consideration.

In connection with the purchase of REX, the Company granted the former
shareholders of REX the right to receive additional shares of common stock based
on target levels of after-tax earnings, as defined in the purchase agreement,
for 1995, 1994 and 1993. For 1993, REX met this target level of after-tax
earnings, and included in payable to shareholders at December 31, 1993 is
$131,833 related to 55,276 shares which were distributed to these shareholders
in 1994. The target level was not met for 1994 or 1995.

In addition, the Company had an employment agreement with a former REX
shareholder that expired in 1995. Under the agreement, the former shareholder
earned 10,000 shares of common stock in 1993, 11,667 shares of common stock in
1994 and 2,333 shares of common stock in 1995.

In 1993, the Company sold approximately $396,000 of land, buildings and accounts
receivable in partial settlement of liabilities totaling approximately $487,000
to a shareholder of the Company. The Company issued 33,205 shares of common
stock in 1994 to settle the remaining $91,000 liability to this shareholder.

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

F-15
<PAGE>
NOTE 10 - INCOME TAXES:

The provision for income taxes is as follows:

Six Months ended Year ended
JUNE 30, DECEMBER 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- ------- -------
(unaudited)

Current .................. $ 90,857 $142,886 $ (3,986) $ 6,000

Deferred ................. 195,599 $ 34,341 (67,422) 20,430 71,763
-------- -------- -------- ------- -------

Income tax expense ....... $286,456 $ 34,341 $ 75,464 $16,444 $77,763
======== ======== ======== ======= =======

The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1995, the Company has net operating loss (NOL) carryforwards of
approximately $1,715,000 for income tax purposes which expire in 2005 through
2007. These losses may presently be offset against the future income of the
applicable subsidiary only. Due to the significant change in ownership as a
result of the initial public offering, the Company is restricted in the amount
of net operating losses that can be utilized annually in reducing future taxable
income, such amount being approximately $401,000 per year.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax purposes, primarily resulting
from the acquisitions of PVS, LEC and REX. During 1995, the Company reduced the
deferred tax asset valuation allowance to reflect the deferred tax assets used
in 1995 (approximately $26,000) and to recognize a deferred tax asset of
$197,000. The recognized deferred tax asset is based upon expected utilization
of net operating loss carryforwards and reversal of certain temporary
differences. The Company has assessed its past earnings history and trends and
that of its subsidiary, REX, as well as expected revenues, cost reductions and
expiration dates of carryforwards and has determined that it is more likely than
not these deferred tax assets will be realized. The remaining valuation
allowance is maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The Company will
continue to review this valuation allowance on a quarterly basis and make
adjustments as appropriate.

The major components of deferred income tax assets and liabilities are as
follows:

JUNE 30, DECEMBER 31,
----------- -------------------------
1996 1995 1994
----------- ----------- -----------
(unaudited)

Deferred income tax liabilities:
Depreciation ................... $(1,180,718) $(1,125,378) $(1,103,576)
Other .......................... (194,789) (194,789) (197,495)
----------- ----------- -----------

Total deferred income
tax liabilities ............ (1,375,507) (1,320,167) (1,301,071)

Deferred income tax assets:
Net operating loss
carryforwards ................. 406,054 582,613 677,554
Other ........................... 395,956 399,656 441,307
----------- ----------- -----------

Total deferred
income tax assets .......... 802,010 982,269 1,118,861
----------- ----------- -----------

Deferred income tax assets
valuation allowance ................ (198,873) (238,873) (461,983)
----------- ----------- -----------
Deferred income taxes payable ........ $ (772,370) $ (576,771) $ (644,193)
=========== =========== ===========

F-16
<PAGE>
A reconciliation of income tax computed at statutory rates to income tax expense
is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Tax at statutory rate .......................... $ 286,456 $ 132,065 $ 211,008 $ 16,370 $ 285,792

Effect of permanent differences ................ 40,000 29,125 58,249 47,587 28,090

Reduction in valuation
allowance ................................... (40,000) (126,849) (223,110) (2,500) (167,724)

Other .......................................... 29,317 (45,013) (68,395)
--------- --------- --------- -------- ---------

$ 286,456 $ 34,341 $ 75,464 $ 16,444 $ 77,763
========= ========= ========= ======== =========
</TABLE>
NOTE 11 - SHAREHOLDERS' EQUITY:

The Company has authorized 7,500,000 shares of $.01 par value preferred stock.
No shares are issued or outstanding.

WARRANTS TO ACQUIRE COMMON STOCK

The following table sets forth the outstanding warrants to acquire 1,895,000 and
1,830,000 shares of common stock as of June 30, 1996 and December 31, 1995:

Number of
COMMON SHARES
-------------------
June 30 December
SECURITY 1996 31, 1995
- ------------------------------------------------------- ---------- -------
(unaudited)
Class A redeemable warrants to acquire common stock at
$6.00 per share issued in connection with initial public
offering, currently exercisable, expiring on January 15,
1997, redeemable if closing bid equals or exceeds
$8.00 for 20 consecutive days ................................ 575,000 575,000

Class B redeemable warrants to acquire common stock at
$10.00 per share issued in connection with initial
public offering, currently exercisable, expiring on
January 15, 1997, redeemable if closing bid price equals
or exceeds $12.00 for 20 consecutive days .................... 575,000 575,000

Warrant to purchase 115,000 shares of common stock at
$6.15 per share issued in connection with initial public
offering, currently exercisable, expiring on January 15, 1997 115,000 115,000

Warrant to acquire common stock at $2.50 per share
issued to officer, currently exercisable, expiring
on December 31, 1998 ......................................... 25,000 25,000

Warrants to acquire common stock $4.00 per share,
currently exercisable, expiring on January 15, 1997 .......... 30,000 30,000

Warrant to acquire common stock at $5.00 per share
issued in connection with private financing,
currently exercisable, expiring on January 23, 1997 .......... 30,000 30,000

F-17
<PAGE>
Warrant to acquire common stock at $7.50 per share
issued in connection with private financing, currently
exercisable, expiring on January 23, 1997..................... 30,000 30,000

Warrant to acquire common stock at $3.27 per share
issued in connection with private financing,
currently exercisable, expiring on December 8, 2000........... 400,000 400,000

Warrant to acquire common stock at $3.80 per share,
currently exercisable, expiring on December 20, 1998.......... 50,000 50,000

Warrant to acquire common stock at $5.00 per share
currently exercisable, expiring on January 10, 1999........... 15,000

Warrant to acquire common stock at $4.00 per share
issued in connection with early payment of debt,
currently excisable expiring on March 31, 1998................ 50,000

No value was assigned to any of the above warrants as management deemed the
values to be immaterial at the respective dates issued.

STOCK OPTIONS ISSUED TO EMPLOYEES AND DIRECTORS.

Under various stock option plans, the Company may issue incentive and
nonqualified stock options covering 605,000 shares of common stock to employees
and directors. Awards under the plans are made at no less than fair market value
and are generally exercisable immediately to periods of up to six years. At
December 31, 1995, there were 211,080 shares of common stock available for
issuance of options under the plans. At June 30, 1996, there were no shares of
common stock available for issuance of options under the employee plan and
20,000 available under the directors plan.

Transactions of the plans are summarized as follows:
STOCK OPTIONS
------------------------------ EXERCISE
INCENTIVE NONQUALIFIED TOTAL PRICE
-------- ------- -------- ------------
Outstanding at January 1, 1993 ... 20,000 -- 20,000 $1.00-$4.00

Granted in 1993 ............... 158,000 -- 158,000 $ 3.125
Exercised in 1993 ............. (2,500) -- (2,500) $ 1.00
-------- ------- -------- ------------

Outstanding at December 31, 1993 . 175,500 -- 175,500 $1.00-$4.00

Granted in 1994 ............... 75,000 60,000 135,000 $ 2.375
Expired in 1994 ............... (5,000) -- (5,000) $ 3.125
Exercised in 1994 ............. (7,500) -- (7,500) $ 1.00
-------- ------- -------- ------------
Outstanding at December 31, 1994 . 238,000 60,000 298,000 $2.375-$4.00

Granted in 1995 ............... 25,000 -- 25,000 $ 3.31
Exercised in 1995 ............. (10,000) -- (10,000) $2.375-$3.125
-------- ------- -------- ------------

Outstanding at December 31, 1995 . 253,000 60,000 313,000 $2.375-$4.00

Granted in 1996 (unaudited) ... 211,000 25,000 236,000 $ 4.06
Expired in 1996 (unaudited) ... (3,000) -- (3,000) 3.125
Exercised in 1996 (unaudited) . (30,000) (5,000) (35,000) $2.375-$3.125
-------- ------- -------- -------------

Outstanding at June 30, 1996
(unaudited) ...................... 431,000 80,000 511,000 $2.375-$4.06
======== ======= ======== ============

F-18
<PAGE>
In May 1996, the holder of the 12% convertible promissory note converted
$804,100 of outstanding principal at $3.74 per share to 215,000 shares of common
stock (See Note 7).

In March 1996, the Company sold 300,000 shares of common stock in a private
placement. The proceeds from this sale were approximately $1,020,000. Of this
amount, $600,000 was used to prepay a portion of the 12% convertible debenture
(see Note 8).

NOTE 12 - SAVINGS PLAN:

On October 1, 1993, the Company implemented a 401(k) savings plan which permits
participants to contribute up to 18 percent of their compensation each year. The
Company will match at least 50 percent of a participant's contributions, up to a
maximum of 3 percent of gross pay. The Company's results of operations reflect
expenses associated with the plan of approximately $31,500, $30,500 and $11,500
for 1995, 1994 and 1993.

NOTE 13 - SEGMENT INFORMATION:

The Company has five operating business groups: manufacture and sale of
fasteners; valve and industrial supplies sales; new machine sales and related
services; export crating; and used machine sales. Summarized financial
information by business segment for 1995, 1994 and 1993 is presented below.

<TABLE>
<CAPTION>
ENERGY PRODUCTS AND SERVICES DIVISION
----------------------------------------------------------------
NEW USED
VALVE AND MACHINE SALES EXPORT MACHINE
FASTENERS SUPPLIES AND SERVICES CRATING SALES
-------------- ------------ -------------- ------------ -----------
1995
<S> <C> <C> <C> <C> <C>
Operating revenues ...................... $13,204,532 $13,449,344 $9,868,209 $ 1,817,877 $ 643,108

Operating profit (loss) ................. 1,235,367 687,475 280,274 (31,467) (88,958)

Identifiable assets ..................... 14,700,531 6,856,931 2,336,904 841,555 2,273,781

Depreciation and amortization ........... 330,462 189,462 59,997 106,318 6,071

Capital expenditures .................... 478,908 35,891 34,966 42,604 1,549

1994

Operating revenues ...................... $12,261,602 13,672,512 $5,918,642 $ 2,530,879 $ 346,704

Operating profit (loss) ................. 1,080,619 480,849 20,364 (107,957) (299,357)

Identifiable assets ..................... 8,199,794 7,066,646 2,274,256 722,887 2,265,664

Depreciation and amortization ........... 328,120 318,535 49,747 69,206 5,620

Capital expenditures .................... 248,102 66,968 22,279 157,395 1,194

1993

Operating revenues ...................... $10,745,238 $15,012,648 $5,142,004 $ 3,065,507 $ 1,147,459

Operating profit ........................ 414,819 450,651 47,960 374,499 30,360

Identifiable assets ..................... 7,733,334 7,601,787 2,426,918 1,239,091 2,597,135

Depreciation and amortization ........... 288,263 316,999 33,147 42,310 3,809

Capital expenditures .................... 531,765 24,359 3,517 9,395 15,760
</TABLE>
Operating profit (loss) is total revenues less cost of sales and operating
expenses. Corporate expenses and income taxes have not been included in the
computation of operating profit (loss) of individual segments.

F-19
<PAGE>
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized quarterly financial data for the quarters ended March 31, 1996 and
June 30, 1996 and for fiscal 1995 and 1994 are as follows (in thousands, except
per share data):

MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- -------- -----------
1996
Sales ....................... $12,015 $ 13,612 -- --
Gross profit ................ 2,718 2,973 -- --
Net income .................. 237 319 -- --
Earnings per share .......... 0.07 0.07 -- --

1995
Sales ....................... $10,406 $ 9,317 $ 9,072 $10,188
Gross profit ................ 2,043 2,149 2,094 2,084
Net income .................. 202 152 130 61
Earnings per share .......... 0.07 0.05 0.04 0.01

1994
Sales ....................... $ 9,148 $ 9,066 $ 7,575 $ 8,941
Gross profit ................ 2,200 2,113 1,857 1,627
Net income (loss) ........... 167 (142) (163) 170
Earnings (loss) per share ... 0.06 (0.05) (0.05) 0.05

Reclassifications of amounts have been made from selling, general and
administrative expenses to cost of sales for the quarters ended March 31, June
30 and September 30, 1995 to conform to the classification in the quarter ended
December 31, 1995.

F-20
<PAGE>
December 27, 1995

MRMC, Inc.
857 Bridgeport Ave.
Milford, CT 06460

Gentlemen:

We have audited the accompanying statement of assets sold and liabilities
assumed of MRMC, Inc.'s Fastener Division as of June 30, 1995, and the related
statements of direct revenues and direct expenses for the three years then
ended. These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets sold and liabilities assumed and
the related statement of direct revenues and direct expenses are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in these statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall presentation of these
statements. We believe that our audit provides a reasonable basis for our
opinion.

The accompanying statements were prepared for inclusion in the Securities and
Exchange Commission Current Report on Form 8-K of Industrial Holdings, Inc.
(IHI) as described in Note 2 and are not intended to be a complete presentation
of MRMC, Inc.'s financial position or results of operations.

In our opinion, the statements referred to above present fairly, in all material
respects the assets sold and liabilities assumed as of June 30, 1995 and the
direct revenues and direct expenses of MRMC, Inc.'s Fastener Division for the
three years then ended in conformity with generally accepted accounting
principles.

Respectfully submitted,

GOLDBERG and ZUFFELATO, P.C.

F-21
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED
JUNE 30, 1995
(000'S OMITTED)

Assets sold:
Inventory (Note 5) $ 1,537
Machinery and equipment 4,138
Less: Accumulated depreciation (1,542)
2,596
Total assets sold $ 4,133
=======
Liabilities assumed by IHI:
Accounts payable $ 1,217
Vacation accrual 107
-------
Total liabilities assumed $ 1,324
======

See Accountant's Letter and Notes to Statement
of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses

F-22
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES
(000'S OMITTED)

FOR THE YEAR ENDED JUNE 30
1995 1994 1993
------- ------- -------
Sales ...................................... $12,530 $10,550 $10,665

Direct expenses:
Cost of products sold-(Note 3) ........... 10,244 9,000 7,893
Engineering costs ........................ 177 216 207
Selling expenses ......................... 896 1,051 954
------- ------- -------
Total direct expenses ................... 11,317 10,267 9,054
------- ------- -------

Excess of direct revenues
over direct expenses ..................... $ 1,213 $ 283 $ 1,611
======= ======= =======

See Accountant's Letter and Notes to Statement
of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses

F-23
<PAGE>
MRMC, INC.'S FASTENER DIVISION
NOTES TO STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED
AND STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES

NOTE 1 DESCRIPTION OF BUSINESS AND ASSET PURCHASE
The MRMC, Inc. Connecticut Fastener Division (the "Division")
manufactures, sells and distributes cold formed rivets and other
fastening devices. On December 7, 1995, Landreth Engineering
Company, Inc. ("LEC"), a wholly owned subsidiary of IHI, acquired
certain assets and assumed certain liabilities of the Division.
The assets acquired included inventory and machinery and
equipment.

NOTE 2 BASIS OF PRESENTATION
The accompanying statements of assets sold and liabilities
assumed as of June 30, 1995 and direct revenues and direct
expenses for the three years then ended have been prepared for
the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Current
Report on Form 8-K of IHI.

The statement of assets sold and liabilities assumed includes the
amounts of certain assets and certain liabilities of the Division
at June 30, 1995. Assets sold and liabilities assumed are
specifically identified in Schedules of the Purchase Agreement by
and among IHI, LEC and MRMC, Inc. dated November 9, 1995.

The statement of direct revenues and direct expenses includes
only those revenues and expenses directly related to the
manufacture and sale of fasteners by the Division as well as an
allocation of certain expenses directly related to the
manufacture of fasteners (See Note 3). This statement does not
include depreciation and amortization, general and administrative
costs, interest expense or any other indirect expense.

NOTE 3 ALLOCATION OF EXPENSES
MRMC, Inc.'s Connecticut facility was shared by two divisions,
the Fastener Division and the Assembly Systems Division.
Historically, MRMC, Inc. has allocated certain shared expenses
relating to the facility to each of the divisions. These
allocated expenses which are included in the cost of products
sold are as follows for the year ended June 30.

1995 1994 1993
---- ---- ----

Utilities $ 328 $ 307 $ 270
Plant insurance 54 32 96
Property taxes 72 108 92
----- ---- ----
$ 454 $447 $ 458
====== ==== =====

NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories are valued at the lower of cost or market determined
by the first-in, first-out method.

Machinery and Equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful
lives of the assets or five to twelve years.

F-24
<PAGE>

NOTE 5 INVENTORIES
Inventories consist of the following at June 30, 1995:

Raw Materials $ 792
Work in Process 133
Finished Goods 612
-------
$1,537

F-25
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED (UNAUDITED)
DECEMBER 7, 1995
(000'S OMITTED)

DECEMBER 7,
1995
----------
Assets sold:

Inventory, net (Note B) ....................................... $ 948

Prepaid expenses .............................................. 28

Machinery and equipment ....................................... 4,138

Less: Accumulated depreciation ............................... (1,691)
-------
2,447
-------
Total assets sold .............................. $ 3,423
-------
Liabilities assumed:
$ 1,217
Accounts payable
Vacation accrual .............................................. 107
-------
Total liabilities assumed ...................... $ 1,324
=======

See notes to statements.

F-26
<PAGE>
MRMC, INC. FASTENER DIVISION
STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES (UNAUDITED)
FOR THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 7, 1995
(000'S OMITTED)

Sales ......................................................... $4,259
Direct expenses:
Cost of products sold - (Notes B and C) .................. 3,752
Engineering costs ........................................ 44
Selling expenses ......................................... 298
------
Total direct expenses ................................ 4,094

Excess of direct revenues
over direct expenses ..................................... $ 165
======

See notes to statements.

F-27
<PAGE>
MRMC, INC. FASTENER DIVISION
NOTES TO STATEMENTS (UNAUDITED)
DECEMBER 7, 1995

NOTE A BASIS OF PRESENTATION

The MRMC, Inc. Connecticut Fastener Division (the "Division")
manufactures, sells and distributes cold formed rivets and other
fastening devices. On December 7, 1995, Landreth Engineering
Company, Inc. ("LEC"), a wholly owned subsidiary of Industrial
Holdings, Inc. ("IHI"), acquired certain assets and assumed certain
liabilities of the Division. The assets acquired included inventory
and machinery and equipment.

The accompanying statements of assets sold and liabilities assumed
and direct revenues and direct expenses have been prepared for the
purpose of complying with the rules and regulations of the
Securities and Exchange Commission. 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. Results for the three month period from July 1, 1995
through December 7, 1995 are not necessarily indicative of the
results that may be expected for the twelve months ended December
31, 1995. For further information, refer to the financial statements
and footnotes thereto included in MRMC, Inc.'s Fastener Division
Statements for the year ended June 30, 1995.

The statement of direct revenues and direct expenses includes only
those revenues and expenses directly related to the manufacture and
sale of fasteners by the Division as well as an allocation of
certain expenses directly related to the manufacture of fasteners.
This statement does not include depreciation and amortization,
general and administrative costs, interest expense or any other
indirect expense.

NOTE B INVENTORY

Inventory consists of the following:
December 7,
1995

Raw materials ............................................. $260
Finished goods ............................................. 465
Work in process ............................................ 223
----
$948

The December 7, 1995 inventory amounts include a $389,000 reserve
for nonmerchantible inventory. Accordingly, a $389,000 charge is
included in cost of products sold for the period ended December 7,
1995.

NOTE C ALLOCATION OF EXPENSES

MRMC, Inc.'s Connecticut facility was shared by two divisions, the
Fastener Division and the Assembly Systems Division. Historically,
MRMC, Inc. has allocated certain shared expenses relating to the
facility to each of the divisions. These allocated expenses which
are included in the cost of products sold are as follows for the
period presented.
1994

Utilities .................................................. $145
Plant insurance ............................................ 25
Property taxes ............................................. 25
----
$195

F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
American Rivet Company, Inc:

We have audited the accompanying balance sheets of American Rivet Company, Inc.
as of August 31, 1995 and 1994, and the related statements of operations and
retained earnings and cash flows for each of the years in the three-year period
ended August 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Rivet Company, Inc. as
of August 31, 1995 and 1994 and the results of its operations and its cash flows
for the years in the three-year period ended August 31, 1995.

As discussed in notes 1 and 2 to the financial statements, the Company changed
its method of accounting for investments classified as available-for-sale, as of
September 1, 1994.

KPMG Peat Marwick LLP

October 13, 1995

F-29
<PAGE>
AMERICAN RIVET COMPANY, INC.

Balance Sheets

June 30, 1996, August 31, 1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 798,380 1,105,816 596,353
Marketable securities 1,647,598 1,706,113 1,634,497
Accounts and notes receivable:
Trade, net of allowance of $20,000 in 1996,
1995 and 1994 1,315,473 1,155,708 1,122,315
Officer and employee receivables -- 16,163 25,299
Other 1,104 2,514 432
Income taxes receivable -- -- 2,594
Inventories 584,125 669,280 616,788
Prepaid expenses 608 18,214 27,264
Deferred income taxes 64,164 64,164 48,642
- ----------------------------------------------------------------------------------------------------------
Total current assets 4,411,452 4,737,972 4,074,184
- ----------------------------------------------------------------------------------------------------------
Other assets:
Deferred income taxes 26,793 26,793 15,915
Deposits 148,443 152,113 541
Cash surrender value of officers' life insurance 121,715 107,405 90,235
- ----------------------------------------------------------------------------------------------------------
296,951 286,311 106,691
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated
depreciation 1,900,960 1,487,915 1,388,268
Intangible assets:
Goodwill 117,254 117,254 117,254
Organizational expense 958 958 958
- ----------------------------------------------------------------------------------------------------------
118,212 118,212 118,212
- ----------------------------------------------------------------------------------------------------------
Deferred charges 173,225 155,237 165,500
- ----------------------------------------------------------------------------------------------------------
$ 6,900,800 6,785,647 5,852,855
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.

F-30
<PAGE>
AMERICAN RIVET COMPANY, INC.

Balance Sheets

Accrued liabilities:

Salaries, wages, and commissions 53,071 90,099 78,698

Property taxes 132,140 150,519 81,895

Profit-sharing trust 51,167 106,554 96,725

Payroll taxes 6,241 23,626 12,219

Deferred compensation 22,928 21,597 19,942

Dividends -- 78,000 39,000

Insurance 70,674 70,674 71,047

Income taxes 39,206 87,706 --

Waste removal 42,000 42,000 6,000

Other 6,045 924 654
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 660,239 868,031 477,338
- -----------------------------------------------------------------------------------------------------------

Deferred compensation 427,301 418,616 405,161
- -----------------------------------------------------------------------------------------------------------
Total liabilities 1,087,540 1,286,647 882,499
- -----------------------------------------------------------------------------------------------------------

Stockholders' equity:

Net unrealized gain on marketable securities 176,743 122,846 --

Common stock, par value $10 per share. Authorized
1,000,000 shares; issued 100,000 shares 1,000,000 1,000,000 1,000,000

Retained earnings 5,144,637 4,884,274 4,478,476
- -----------------------------------------------------------------------------------------------------------

6,321,380 6,007,120 5,478,476

Less common stock held in treasury, at cost, 22,000
shares 508,120 508,120 508,120
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,813,260 5,499,000 4,970,356
- -----------------------------------------------------------------------------------------------------------
$ 6,900,800 6,785,647 5,852,855
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>

F-31
<PAGE>
AMERICAN RIVET COMPANY, INC.

Statement of Operations and Retained Earnings

Cost of sales 5,735,347 5,885,455 6,880,036 6,590,781 6,052,038
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 1,643,833 2,003,173 2,270,394 2,045,197 1,866,557

Selling and administrative expenses 1,252,994 1,274,924 1,520,403 1,445,371 1,367,909
- ----------------------------------------------------------------------------------------------------------------------

Income from operations 390,839 728,249 749,991 599,826 498,648
- ----------------------------------------------------------------------------------------------------------------------

Other income (expense);
Investment income, net 86,962 93,950 113,514 88,634 77,926
Deferred compensation expense (7,242) (7,694) (9,281) (7,590) (14,141)
Realized gain (loss) on securities
transactions, net 21,129 (4,678) 7,871 105 11,196
Gain on sale of property, plant, and
equipment 5,000 54,093 54,093 500 --
Unclassified (825) 1,722 1,510 638 13,261
- ----------------------------------------------------------------------------------------------------------------------

105,024 137,393 167,707 82,287 88,242
- ----------------------------------------------------------------------------------------------------------------------

Income before income taxes 495,863 865,642 917,698 682,113 586,890

Income tax expense 196,500 329,800 355,900 253,200 219,700
- ----------------------------------------------------------------------------------------------------------------------

Net income 299,363 535,842 561,798 428,913 367,190

Retained earnings at beginning of year 4,884,274 4,478,476 4,478,476 4,166,563 4,002,173

Cash dividends paid or accrued per share of
$.50, $2.00, $1.50 and $2.60 in 1996,
1995, 1994 and 1993 respectively (39,000) (78,000) (156,000) (117,000) (202,800)
- ----------------------------------------------------------------------------------------------------------------------
Retained earnings at end of year $ 5,144,637 4,936,318 4,884,274 4,478,476 4,166,563
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.

F-32
<PAGE>
AMERICAN RIVET COMPANY, INC.

Statements of Cash Flows

Ten months ended June 30, 1996 and 1995, and years ended August 31, 1995,
1994 and 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
-------------------
June June
1996 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $299,363 535,842 561,798 428,913 367,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 196,871 169,442 217,700 214,860 227,909
Deferred income taxes -- -- (26,400) (38,800) (17,700)
Deferred compensation 27,774 27,771 15,110 14,918 18,971
Gain on sale of property, plant, and equipment (5,000) (54,093) (54,093) (500) (17,514)
Gain on sale of marketable securities (21,129) 4,678 (7,871) (105) (11,196)
Changes in assets and liabilities:
Increase in accounts and notes receivable (142,192) (64,153) (26,339) (75,958) (72,377)
Decrease (increase) in inventories and prepaid
expenses 102,761 (94,675) (43,442) 132,424 (174,605)
Increase (decrease) in income taxes (48,500) 102,206 90,300 (2,594) 19,293
Decrease (increase) in other noncurrent assets (32,298) (21,884) (6,907) (16,749) 7,306
Increase (decrease) in accounts payable and
accrued liabilities other than deferred
compensation and income taxes (160,623) 122,445 301,332 (20,183) 96,685
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 217,027 727,579 1,021,188 636,226 443,962
- -------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Additions to property, plant, and equipment (609,916) (285,801) (324,259) (109,336) (96,775)
Proceeds from sale of property, plant, and
equipment 5,000 61,005 61,005 12,810 17,909
Proceeds from sale of marketable securities 571,665 148,491 358,863 74,151 325,861
Purchase of marketable securities (438,124) (416,277) (299,762) (675,211) (443,820)
Decrease (increase) in deposits 3,670 (148,116) (151,572) 4,661 (4,777)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (467,705) (640,698) (355,725) (692,925) (201,602)
- -------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Dividends paid to stockholders (39,000) (78,000) (156,000) (117,000) (202,800)
Principal payments on long-term deferred
compensation (17,758) (14,803) -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (56,758) (92,803) (156,000) (117,000) (202,800)
- -------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents(307,436) (5,922) 509,463 (173,699) 39,560
Cash and cash equivalents at beginning of year 1,105,816 596,353 596,353 770,052 730,492
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 798,380 590,401 1,105,816 596,353 770,052
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information cash paid during the year for
income taxes, net of
refunds received $ 245,000 208,000 292,000 373,000 139,701
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.

F-33
<PAGE>
AMERICAN RIVET COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

August 31, 1995, 1994, and 1993
- --------------------------------------------------------------------------------

(1) Significant Accounting Policies

DESCRIPTION OF BUSINESS

American Rivet Company (Company) is a national manufacturer of rivets with
approximately 35% of its annual net sales derived from the automotive
industry. Approximately 14% of the Company's net sales were provided by one
customer for the years ended August 31, 1995 and 1994.

INTERIM UNAUDITED FINANCIAL STATEMENTS

The unaudited interim financial data as of June 30, 1996 and for the ten
months ended June 30, 1996 and 1995 reflects all normal recuring adjustments,
which are, in the opinion of management, necessary for a fair presentation of
financial ????????? and operating results for the interim periods.

MARKETABLE SECURITIES

The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities,"
effective September 1, 1994. The cumulative effect of the adoption of SFAS
115 resulted in an increase in stockholders' equity of $63,451. In accordance
with SFAS 115, prior years' financial statements have not been restated to
reflect the change in accounting method. At August 31, 1995 marketable
securities were classified as available-for-sale and were reported at the
lower of aggregate amortized cost or fair value.

Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the
Company does not have the intent or ability to hold to maturity are
classified as available-for-sale, along with the Company's investment in
equity securities. Securities available for sale are carried at fair value,
with unrealized gains and losses reported in a separate component of
shareholders' equity. At August 31, 1995, the Company had no investments that
qualified as trading or held to maturity.

The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest
are included in interest income. Realized gains and losses are
shown separately. The cost of securities sold is based on the
specific identification method.

At August 31, 1995, the Company's investments in debt and equity securities
were classified as marketable securities. These investments are diversified
among high credit quality securities in accordance with the Company's
investment policy.

F-34
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
- --------------------------------------------------------------------------------

INVENTORIES

Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method is used to determine cost for the rivet business inventories,
and the first-in, first-out (FIFO) method is used to determine cost for the
automatic rivet setting machine parts inventories.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are carried at cost less accumulated
depreciation. Depreciation is generally calculated using accelerated methods
over the estimated useful lives of the respective assets. When assets are
retired or otherwise disposed of, the cost and related depreciation are
removed from the accounts, and any gain or loss is recognized in income for
the period. The cost of maintenance is charged to income as incurred;
significant renewals and betterments are capitalized.

INCOME TAXES

The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

GOODWILL AND ORGANIZATIONAL EXPENSE

The goodwill and organizational expense which arose in 1953 is not being
amortized, as it has no determinable life.

DEFERRED CHARGES

Deferred charges consist of certain tools and factory supplies which are
charged to operations as they are used in production.

DEFERRED COMPENSATION

The Company has deferred compensation contracts with certain past and present
key executives. Periodic accrual is being made, over the projected active
term of employment of present executives, of an amount equivalent to the
present value of the benefits at the date of retirement.

LEASING OPERATIONS

Revenues from rentals of rivet setting machines are reported on the operating
method. Rents are billed annually and income is recognized on a monthly basis
over the rental period.

F-35
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
- --------------------------------------------------------------------------------

PROFIT-SHARING PLAN

The Company maintains a qualified noncontributory profit-sharing plan for
full-time employees who satisfy minimum age and service requirements.
Contributions to the plan are at the discretion of the Board of Directors.
The Board of Directors authorized contributions of $88,000, $90,000, and
$40,000 for 1995, 1994, and 1993 respectively.

The Company amended the plan, effective September 1, 1993, to add a 401(k)
provision in addition to the existing plan. The 401(k) offers two investment
options: the Balanced Fund and Fixed Income Fund. In 1994 the Company matched
$0.50 on the dollar for employee contributions of up to $400. In 1995 and
1996 the Company will match $0.75 on the dollar for employee contributions of
up to $500. The Company matched contributions at a cost of $15,277 and $6,725
for the years ended August 31, 1995 and 1994, respectively.

CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.

(2) MARKETABLE SECURITIES AND CASH EQUIVALENTS

In accordance with SFAS 115, the Company's marketable securities have been
classified as available-for-sale securities and are reported at their fair
value of $2,037,282 compared to a historical cost of $1,914,436 for August
31, 1995 with the net unrealized gains of $122,846 reported as a separate
component of stockholders' equity.

A summary of the Company's investment securities follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1996 (Unaudited)
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 975,731 1,137,784 167,407 5,354
Corporate bonds 86,919 95,744 10,825 2,000
U.S. Treasury notes 405,219 414,070 8,851 --
- ----------------------------------------------------------------------------------------------------------
1,467,869 1,647,598 187,083 7,354

Cash equivalents 56,983 56,983 -- --
- ----------------------------------------------------------------------------------------------------------
$1,524,852 1,704,581 187,083 7,354
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1995
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $1,104,544 1,205,200 104,981 4,325
Corporate bonds 74,517 76,163 2,371 725
U.S. Treasury notes 404,206 424,750 20,544 --
---------- --------- ------- ------

1,583,267 1,706,113 127,896 5,050
Cash equivalents 331,169 331,169 -- --
---------- --------- ------- ------

$1,914,436 2,037,282 127,896 5,050
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
1994
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
Equity securities $ 709,925 759,316 78,262 21,871
Corporate bonds 67,167 66,876 1,931 2,222
U.S. Treasury notes 864,405 871,756 7,351 --
---------- --------- ------- ------

1,634,497 1,697,948 87,544 24,093
Cash equivalents 186,003 186,003 -- --
---------- --------- ------- ------

$ 1,820,500 1,883,951 87,544 24,093
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of debt securities (Corporate bonds and U.S.Treasury
notes) at August 31, 1995 are shown below:

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
Due in:
1996 $ -- --
1997 - 2000 199,956 211,282
2001 - 2005 231,225 239,718
2006 and later 47,542 49,913
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

F-37
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements

- --------------------------------------------------------------------------------
Proceeds, gross realized gains, and gross realized losses during the years ended
August 31, 1995 and 1994 were as follows:

- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Proceeds from sales 358,863 74,151
Gross realized gains 22,074 11,610
Gross realized losses 14,203 11,505
- --------------------------------------------------------------------------------

For the purposes of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.

For those securities that have been included in the separate component of
stockholders' equity during the period, the net change has been a $33,094
increase in net unrealized holding gains for the year ended August 31, 1995.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) INVENTORIES

Inventories at June 30, 1996, and August 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rivet business:
Raw materials $ 638,160 704,109 626,603
Work in process and finished goods 488,903 548,770 527,751
- -----------------------------------------------------------------------------------------------------------

1,127,063 1,252,879 1,154,354
Less LIFO reserve 570,331 616,000 583,000
- -----------------------------------------------------------------------------------------------------------

556,732 636,879 571,354
Automatic rivet setting machine parts 27,393 32,401 45,434
- -----------------------------------------------------------------------------------------------------------
$ 584,125 669,280 616,788
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
If the Company had valued rivet business inventories under the FIFO method,
net income would have increased by approximately $6,000, $19,000 and $9,000
for 1996, 1995, and 1994, respectively, and decreased by $21,000 for 1993 and
retained earnings would have been higher by $369,000, $363,000, $344,000 and
$335,000 in 1996, 1995, 1994 and 1993, respectively.

F-38
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
- --------------------------------------------------------------------------------
(4) PROPERTY, PLANT, AND EQUIPMENT

Major categories of property, plant, and equipment at August 31, 1995 and
1994 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 229,631 227,371
Building and building improvements 1,653,817 1,653,817
Machinery and equipment 7,617,114 7,560,977
Automatic rivet setting machines - leased 42,482 42,482
Office furniture, fixtures, and equipment 337,925 326,526
Automobiles 147,312 104,497
Condominium, including furnishings 211,647 38,267
- -------------------------------------------------------------------------------------------------------

10,239,928 9,953,937
Less accumulated depreciation 8,752,013 8,565,669
- -------------------------------------------------------------------------------------------------------

$ 1,487,915 1,388,268
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for 1995, 1994, and 1993 amounted to $217,700, $214,860
and $227,909, respectively.

(5) INCOME TAX EXPENSE

The Company adopted Statement 109, "Accounting for Income Taxes," as of
September 1, 1993. The Cumulative effect of this change on pretax income and
net income during the year ended August 31, 1994 was not material.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1995 1995 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 313,000 243,700 198,600
State 69,300 48,300 38,800
- -----------------------------------------------------------------------------------------------------------

382,300 292,000 237,400
Deferred (26,400) (38,800) (17,700)
- -----------------------------------------------------------------------------------------------------------

$ 355,900 253,200 219,700
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the statutory U.S. Federal income tax rate of 34% in 1995
and 1994 to the Company's effective tax rate for the corresponding periods is
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax at 34% $ 312,000 231,900 199,543
Add (deduct) tax effect of:
State taxes, net of federal tax effect 45,700 31,900 23,545
Dividend exclusion (4,300) (3,200) (3,030)
Tax-exempt interest (6,800) (4,600) (4,077)
Officers' life insurance premiums 2,500 2,600 5,789
Travel and entertainment 9,500 6,800 --
Other, net (2,700) (12,200) (2,070)
- -----------------------------------------------------------------------------------------------------------

Provision for income taxes $ 355,900 253,200 219,700
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1995 and
1994 are presented as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 170,010 164,175
Health insurance accrual 27,294 27,438
Accounts receivable 7,724 7,724
Waste removal accrual 16,220 2,317
Other 4,585 3,445
- -------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 225,883 205,099

Deferred tax liability - property,
plant, and equipment (134,876) (140,542)
- -------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 90,957 64,557
- -------------------------------------------------------------------------------------------------------
</TABLE>
A valuation allowance has not been provided for deferred tax assets at August
31, 1995 or 1994 as management believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.

F-40
<PAGE>
AMERICAN RIVET COMPANY, INC.

Notes to Financial Statements
- --------------------------------------------------------------------------------

(6) RELATED PARTIES

Deferred compensation relates to agreements with certain key past and present
officers of the Company. These agreements are in the form of annuities
beginning at age 65 and continuing over a ten year period. Amounts accrue
straight-line to the date of retirement and all agreements are fully funded.
The current portion of the accrual at August 31, 1995 and 1994 represents
payments due within the next twelve months for a past officer's beneficiary.
Deferred compensation expense was approximately $28,000 in 1996, $33,000 in
1995 and 1994, and $36,000 in 1993.

(7) COMMITMENTS AND CONTINGENCIES

At August 31, 1995, the Company has an outstanding agreement to purchase a
header machine at a cost of $682,000. The initial deposit of $145,935 was
paid during fiscal 1995 and is included in deposits on the balance sheet at
August 31, 1995. The delivery date and balance due on the machinery is
expected to occur in January, 1996.

F-41
<PAGE>
THE EXCHANGE AGENT:

ChaseMellon Shareholder Services
Stock Transfer Department
35 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660

TABLE OF CONTENTS

PAGE
Available Information....................... 3
Summary..................................... 4
Summary Consolidated Financial Data......... 8
Risk Factors................................ 9
The Offer................................... 12
Use of Proceeds............................. 20
Price Range of Common Stock and Warrants.... 20
Dividend Policy............................. 21
Capitalization.............................. 22
Dilution.................................... 23
Pro Forma Condensed Consolidated Financial
Statements.............................. 24
Selected Consolidated Financial Data........ 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 33
Business................................... 39
Management................................. 47
Certain Transactions....................... 58
Principal Shareholders..................... 59
Description of Securities.................. 60
Shares Eligible for Future Sale............ 63
Legal Matters.............................. 63
Additional Information..................... 64
Index to Financial Statements.............. F-1

NO DEALER, SALESPERSON, REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS AND THE LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS OFFERING CIRCULAR-PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS OFFERING
CIRCULAR-PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Expenses payable in connection with the issuance and distribution of the
securities to be registered, other than underwriting discounts and commissions,
are estimated as follows:

Securities and Exchange Commission filing fee .................. $ 6,303

Nasdaq listing fee ............................................. 20,663

Transfer Agent, Warrant Agent and Registrar fees ............... 10,000*

Printing expenses .............................................. 10,000*

Legal fees and expenses ........................................ 25,000*

Accounting fees and expenses ................................... 25,000*

Miscellaneous .................................................. 3,034*
--------

TOTAL ................................................... $100,000
========
- --------------------------
* Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article 2.02 of the Texas Business Corporation Act (the "TBCA") provides
that a Texas corporation shall have the power to indemnify directors, officers,
employees and agents and to purchase and maintain liability insurance for those
persons. Article 2.02-1 of the TBCA empowers the Company to indemnify any
director or officer for expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred in the defense
of any action, suit or proceeding in which such director or officer is a party
by reason of his position. In no event however, shall a director or officer be
entitled to indemnification in any action, suit, or proceeding in which such
director shall have been found not to have acted in good faith and in the
reasonable belief that his conduct as such director was in the Company's best
interests; and, in the case of an officer of the Company, that such officer did
not act in good faith and in the reasonable belief that his conduct was at least
not opposed to the Company's best interests; and in the case of any criminal
proceeding, such director or officer had no reasonable cause to believe his
conduct was unlawful. Moreover, no director shall be indemnified for any
obligations arising from any action, suit, or proceeding in which (i) such
director is found liable on the basis that personal profit was improperly
received by him, whether or not the action resulted from an action taken in his
official capacity, or (ii) such director is found liable to the Company.

The Company's Amended and Restated Bylaws ("Bylaws") provide that the
Company shall indemnify each director or former director and each officer or
former officer of the Company and each person who is or who may have served at
its request as a director or officer of another corporation in which it owned
shares of stock or of which it is a creditor, or as a partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
partnership, joint venture, sole proprietorship, trust, employee benefit plan,
or other enterprise against judgments, settlements, penalties and reasonable
expenses (including court costs and attorneys' fees) incurred by him in
connection with any claim made against him or any action, suit, or proceeding in
which he is or is threatened to be made a named defendant or respondent by
reason of his being or having been such director or officer.

II-1
<PAGE>
The Company shall indemnify such director or officer to the greatest
extent permitted by law for reasonable expenses incurred in connection with any
action, suit, or proceeding in which such director or officer has been wholly
successful in the defense of the proceeding, on the merits or otherwise, except
that if such action, suit, or proceeding was brought by or on behalf of the
Company, indemnification shall be limited to reasonable expenses actually
incurred by such director or officer with respect to such proceeding; provided,
however, that such indemnity shall be conditioned on the prior determination by
a majority of the Board of Directors or a committee thereof who are not named
defendants or respondents in such action, suit, or proceeding, or special legal
counsel appointed thereby, or, solely in the event the Board of Directors is not
able to act and unable to select special legal counsel, by vote of those
shareholders who are not also directors named as defendant or respondent in such
action, suit, or proceeding, that such director or officer has acted in good
faith and in the reasonable belief as to the best interests of the Company.

If any pending, threatened, or completed proceeding is settled, amounts
paid as indemnification of the settlement shall not exceed costs, fees and
expenses that would have been reasonably incurred if the action, suit or
proceeding had been litigated to a conclusion. The determination by the Board of
Directors, or by independent counsel, and the payment of amounts by the Company
on the basis thereof, shall not prevent a shareholder from challenging such
indemnification by appropriate legal proceedings. Neither shall a determination
by the Board of Directors, a committee thereof, or special legal counsel
appointed thereby, that indemnification is not permissible, prevent a director
or officer from challenging such determination by appropriate legal proceedings.
Reasonable expenses of a director or officer who was, is, or is threatened to be
made a named defendant or respondent in any proceeding shall be paid in advance
before any final disposition following appropriate written request to the
Company.

The Company may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Company as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan, or other
enterprise, against any liability asserted against him in such a capacity or
arising out of his status as such a person, whether or not the Company would
have the power to indemnify him against that liability.

The foregoing rights and indemnification shall be construed in
accordance with the laws of the State of Texas presently in force and as
hereinafter amended. In all events, the Company's Bylaws shall be deemed to
grant the Company's directors and officers the maximum protection consistent
with law and shall be deemed amended from time to time to reflect any changes in
such law. The foregoing shall not be exclusive of any private contractual right
of indemnification, nor shall it limit the same; provided, however, such
contractual agreement shall not be inconsistent with the TBCA presently in force
or hereafter enacted.

The Company's Articles of Incorporation, as amended, contain provisions
eliminating or limiting the liability of a director for an act or omission in
his capacity as director; however, those provisions do not eliminate or limit
the liability of a director for: (i) a breach of a director's duty of loyalty to
the Company or its shareholders; (ii) an act or omission not in good faith or
that involves intentional misconduct or a knowing violation of the law; (iii) a
transaction from which a director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office; (iv) an act or omission from which the liability of a director is
expressly provided for by statute; or (v) an act related to an unlawful stock
repurchase or payment of a dividend.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Prior to its initial public offering in January 1992, and in connection
with a Private Placement of 12% Subordinated Notes in the aggregate principal
amount of $219,000, to certain accredited investors ("Bridge Investors"), the
Company issued Common Stock purchase warrants (the "Bridge Warrants") to
purchase an aggregate of 205,000 shares of Common Stock, at an exercise price of
$1.00 per share for 195,000 shares and

II-2
<PAGE>
$2.50 per share for 10,000 shares. Bridge Investors exercised 76,000 of these
warrants in a series of transactions from November 1993 to October 1994. The
remaining 29,000 unexercised Bridge Warrants expired October 31, 1994.

In September 1995, the Company consummated a private placement of 69,412
shares of Common Stock at $3.26 per share to certain accredited investors for
aggregate consideration of $226,283. The proceeds from this private placement
were used for working capital for LEC.

In December 1995, the Company issued warrants to purchase 400,000 shares
of Common Stock ("St James Warrants") at an exercise price of $3.27 per share in
connection with the Company's private placement of a 12% Convertible Promissory
Note ("Promissory Note") in the amount of $1,000,000 to St. James Capital
Partners, L.P. ("St. James") a portion of the proceeds of which was used to fund
the acquisition of CRivet. $804,100 of the Promissory Note was convertible into
common stock at $3.74 per share. In May 1996, St. James converted $804,100 of
the Promissory Note to 215,000 shares of Common Stock. St. James subsequently
distributed 320,000 of the St. James Warrants to its limited partners. In July
and September 1996, Guadalupe Funding Company, a limited partner of St. James,
exercised 50,418 of its St. James Warrants.

In December 1995 and January 1996, the Company issued warrants (the
"Consulting Warrants") to purchase 65,000 shares of Common Stock at $3.80 to
$5.00 per share to Michael Cunniff and McBlue Corporation in exchange for
consulting services performed for the Company. In August 1996, McBlue
Corporation exercised Consulting Warrants to purchase 1,000 shares of Common
Stock at $3.80 per share.

In March 1996, the Company issued warrants to purchase 50,000 shares of
Common Stock at an exercise price of $4.00 per share to Renaissance Capital
Partners II Ltd. ("Renaissance") in exchange for the agreement by Renaissance to
waive any prepayment penalty on the $600,000 early repayment of its 12%
Convertible Debenture in the principal amount of $2,500,000 (the "Renaissance
Debenture"). In September 1996, Renaissance converted $815,000 of the
Renaissance Debenture at $3.26 per share to 250,000 shares of Common Stock.

In March 1996, the Company consummated the private placement of 300,000
shares of Common Stock at $3.40 per share to certain accredited investors for
aggregate consideration of $1,020,000. The proceeds from this private placement
were used to retire $600,000 of the Renaissance Debenture and to provide funds
for the relocation of Landreth and CRivet to new facilities in Houston, Texas
and Waterbury, Connecticut.

All of the foregoing securities were issued pursuant to the exemption
from registration contained in Section 4(2) of the Securities Act and Regulation
D promulgated thereunder.

II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
------ ------------------------- ----
<S> <C> <C>
3.1* -- Restated Articles of Incorporation of the Company. Ex-1
3.2* -- Amended and Restated Bylaws of the Company. Ex-2
4.1 -- Specimen Certificate of Common Stock, $.01 par value, of the Company.
Exhibit 4.1 to the Company's Registration Statement on Form S-1 (No. 33-
43169) dated October 7, 1991 (the "Registration Statement"), as amended, is
incorporated herein by reference.
4.2 -- Form of Class A Redeemable Warrant Agreement and specimen of Class A
Redeemable Warrant Certificate. Exhibit 4.2 to the Company's Registration
Statement is incorporated herein by this reference.
4.3 -- Form of Class B Redeemable Warrant Agreement and specimen of Class B
Redeemable Warrant Certificate. Exhibit 4.3 to the Company's Registration
Statement is incorporated herein by this reference.
4.4 -- Form of Class C Redeemable Warrant Agreement and specimen of Class C
Redeemable Warrant Certificate.(1)
5 -- Opinion of Norton, Jacobs, Kuhn & McTopy, L.L.P.(1)
10.1* -- Second Amendment to Employment Agreement of Robert E. Cone. Ex-3
10.2* -- Second Amendment to Employment Agreement of James H. Brock, Jr. Ex-4
10.3* -- Employment Agreement of Thomas C. Landreth, dated October 26, 1992. Ex-5
10.4 -- 1995 Non-Employee Director Stock Option Plan incorporated herein by
reference to the Proxy Statement dated May 26, 1995.
10.5 -- 1994 Amended and Restated Incentive Stock Plan. Incorporated herein by
this reference to the Proxy Statement dated May 25, 1994.
10.6 -- Stock Purchase Warrant Agreement dated September 27, 1991, from the
Company in favor of James H. Brock, Jr. Exhibit 10.6 to the Company's
Registration Statement is incorporated herein by this reference.
10.7 -- Promissory Note dated December 6, 1995, by and among the Company,
Landreth Engineering Company and General Electric Corporation. Exhibit
10.1 to the Company's Current Report on Form 8-K dated December 7,
1995 is incorporated herein by this reference.
10.8 -- 12% Convertible Promissory Note dated December 8, 1995, by and among
the Company and St. James Capital Partners, L.P. ("St. James"). Exhibit
10.1 to the Company's Amendment A2 to its Current Report on Form 8-K
dated December 7, 1995 is incorporated herein by this reference.
10.9 -- Stock Purchase Warrant Agreement dated December 7, 1995, from the
Company in favor of St. James. Exhibit 10.4 to the Company's Current
Report on Form 8-K dated December 7, 1995 is incorporated herein by this
reference.
10.10 -- Registration Rights Agreement dated December 7, 1995, between the
Company and St. James. Exhibit 10.5 to the Company's Current Report on
Form 8-K dated December 7, 1995 is incorporated herein by reference.
10.11 -- Purchase Agreement dated December 7, 1995 by and between the Company,
MRMC, Inc. and David Melina. Exhibit 2.1 to the Company's Current
Report on Form 8-K dated December 7, 1995 is incorporated herein by this
reference.

II-4
<PAGE>
10.12 -- Stock Purchase Agreement dated October 26, 1992, by and
among the Company, Thomas Landreth, Linda Landreth, Michael
Reiland, Pamela Reiland, Michael Reiland as Custodian for
Jennifer Reiland TUGMA and Michael Reiland as Custodian for
Nicholas Reiland TUGMA. Exhibit 2.1 to the Company's
Current Report on Form 8-K dated October 26, 1992 is
incorporated herein by this reference.
10.13 -- Convertible Debenture Loan Agreement date October 8, 1992, by and
among the Company, Pipeline Valve Specialty, Inc. ("PVS") and
Renaissance Capital Partners II, Ltd. Exhibit 2.2 to the Company's Current
Report on Form 8-K dated October 26, 1992 is incorporated herein by this
reference.
10.14 -- Line of Credit Facility and Demand Note dated November 30, 1995, by and
among the Company, PVS, Landreth Engineering Company, Imsco and
Comerica Bank-Texas. Exhibit 10.2 to the Company's Current Report on
Form 8-K dated December 7, 1995 is incorporated herein by this reference.
11* -- Statement regarding computation of per share earnings. Ex-6
21* -- Subsidiaries of the Company. Ex-7
23.1* -- Consent of Price Waterhouse LLP Ex-8
23.2* -- Consent of Arthur Andersen LLP Ex-9
23.3* -- Consent of Goldberg and Zuffelato, P.C. Ex-10
23.4* -- Consent of KMPG Peat Marwick LLP Ex-11
23.5 -- Opinion of Norton, Jacobs, Kuhn & McTopy, L.L.P. (included in its opinion
filed as Exhibit 5 hereto).
24.1 -- Power of Attorney (included as part of the signature page of this
Registration Statement).
- ------------------------
</TABLE>
*Filed herewith.

(1) To be filed by amendment.

(b) Financial Statement Schedules.

All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the "1933 Act");

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;

II-5
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement;

(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on October 2, 1996.

INDUSTRIAL HOLDINGS, INC.

S/CHRISTINE A. SMITH
Christine A. Smith
Vice President and
Chief Financial Officer

We, the undersigned directors and officers of the Company do hereby
constitute and appoint Robert E. Cone and Christine A. Smith, and each of them
singly, our true and lawful attorney and agent, to do any and all acts and
things in our name and on our behalf in our capacities as directors and
officers, and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem necessary or
advisable to enable said corporation to comply with the Securities Act of 1933,
as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the filing of this Registration
Statement, including specifically, without limitation, power and authority to
sign for us or any of us, in our names in the capacities indicated below, any
and all amendments hereto; and we do hereby ratify and confirm all that said
attorneys and agents or any of them, shall do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this to the
Registration Statement has been signed by the following persons in the
capacities indicated on October 2, 1996.

SIGNATURE TITLE

S/ROBERT E. CONE Director, Chairman of the Board of Directors,
Robert E. Cone President and Chief Executive Officer (Principal
Executive Officer)

S/JAMES H. BROCK, JR. Executive Vice-President, Director and President -
James H. Brock, Jr. Energy Products and Services Division

S/CHRISTINE A. SMITH Vice President and Chief Financial Officer
Christine A. Smith (Principal Accounting Officer and Principal
Financial Officer)

S/BARBARA S. SHULER Director, Secretary
Barbara S. Shuler

S/WILLIAM J. ARGEROLOS Director
William J. Argeroplos

S/CHARLES J. ANDERSON Director
Charles J. Anderson

S/JAMES W. KENNEY Director
James W. Kenney

S/JOHN P. MADDEN Director
John P. Madden

II-7
<PAGE>

EXHIBIT 3.1

RESTATED
ARTICLES OF INCORPORATION
OF
INDUSTRIAL HOLDINGS, INC.

ARTICLE ONE

Industrial Holdings, Inc., pursuant to the provisions of Article 4.07 of
the Texas Business Corporation Act, hereby adopts Restated Articles of
Incorporation which accurately copy the Articles of Incorporation and all
amendments thereto that are in effect to date and which contain no other change
in any provision thereof.

ARTICLE TWO

The Restated Articles of Incorporation of the corporation were adopted
by resolution of the Board of Directors of the corporation on August 13, 1996.

ARTICLE THREE

The Articles of Incorporation and all amendments and supplements thereto
are hereby superseded by the following Restated Articles of Incorporation
attached hereto as EXHIBIT A, which accurately copy the entire text thereof.

DATED: August 13, 1996

INDUSTRIAL HOLDINGS, INC.

S/ROBERT E. CONE
Robert E. Cone, President
<PAGE>
EXHIBIT A

RESTATED ARTICLES OF INCORPORATION
OF
INDUSTRIAL HOLDINGS, INC.

ARTICLE I

The name of the Corporation is Industrial Holdings, Inc.

ARTICLE II

The Corporation shall have perpetual existence.

ARTICLE III

The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Texas Business
Corporation Act.

ARTICLE IV

(A) The maximum number of shares of all classes of stock which
the Corporation is authorized to have outstanding at any one time is
15,000,000 shares, 7,500,000 of which shall be common stock, $.01 par
value per share ("Common Stock") and 7,500,000 shares shall be preferred
stock, $.01 par value per share ("Preferred Stock"), issuable in one or
more series. All or any part of the Common Stock and the Preferred Stock
may be issued by the Corporation from time to time and for such
consideration as the Board of Directors may determine. All of such
shares, if and when issued, and upon receipt of such consideration by
the Corporation, shall be fully paid and nonassessable.

(B) The Board of Directors is authorized at any time and from
time to time to divide the Preferred Stock into one or more series and
to fix and determine the relative rights, preferences, qualification,
limitations and restrictions of the shares of any series so established.
All shares of any one series of Preferred Stock shall be identical,
except as to the dates of issue and the dates from which dividends on
shares of the series issued on different dates will cumulate, if
cumulative. The Board of Directors is hereby expressly authorized to
adopt a resolution establishing and designating each such series,
determine the number of shares which shall constitute such series, and
determining the relative rights, preferences, qualifications,
limitations and restrictions thereof, which relative rights,
preferences, qualifications, limitations and restrictions may differ
with respect to each series as to:

A-1
<PAGE>
(i) The rate or manner of dividends, including whether and
to the extent such dividends shall be cumulative, participating,
or both, the conditions and dates upon which such dividends shall
be payable, and the preference or relation which such dividends
shall bear to the dividends payable on any other class or classes
of stock or any other series of any class or classes of stock of
the Corporation;

(ii) Whether the shares of such series shall be subject to
redemption by the Corporation, and if so, the redemption price,
the time or times of redemption and the terms and conditions of
redemption, which price, times of redemption and terms and
conditions may differ in the event of mandatory redemption or
permissive redemption;

(iii) The amount payable upon shares of such series
in the event of voluntary or involuntary liquidation, dissolution
or winding up of the Corporation;

(iv) Sinking fund provisions, if any, for the redemption
or purchase of shares of such series;

(v) Whether the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes of
stock or any other series of any class or classes of stock of the
Corporation, and if provision be made for conversion or exchange,
the times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange;

(vi) The restrictions, if any, on the issue of any
additional. shares or reissue of shares of such series of
Preferred Stock;

(vii) Voting rights if any; and

(viii) Any other such relative rights, preferences,
qualifications, limitations or restrictions for such series which
Texas law now or hereafter empowers or permits the Board of
Directors to determine.

(C) Except as otherwise required by law, each holder of Common
Stock shall be entitled to one (1) vote for each share of such Common
Stock standing in his name on the books of the Corporation. Subject to
the rights and the preferences of the Preferred Stock, if any is
outstanding, holders of the Common Stock are entitled to such dividends
as may be declared by the Board of Directors out of funds lawfully
available therefor. Upon liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, holders of
the Common Stock are entitled to receive pro rata the remaining assets
of the Corporation.

A-2
<PAGE>
ARTICLE V

No stockholder of the Corporation shall, by reason of his holding shares
of any class of stock or series of any class of stock, have any preemptive or
preferential right to purchase or subscribe for any shares of stock of the
Corporation, now or hereafter authorized, any notes, debentures, bonds or other
securities convertible into or carrying warrants, rights or options to purchase,
shares of any class of stock or series of any class of stock of the Corporation,
now or hereafter authorized, or any warrants, rights or options to purchase,
subscribe to or otherwise acquire any such new or additional shares of any class
of stock or series of any class of stock of the Corporation, now or hereafter
authorized, whether or not the issuance of such shares, such notes, debentures,
bonds or other securities or such warrants, rights or options would adversely
affect the dividend, voting or any other rights of such stockholder.

ARTICLE VI

Cumulative voting for the election of directors shall not be permitted.

ARTICLE VII

The holders of any bonds, debentures or other obligations outstanding or
hereafter issued by the Corporation shall have no power to vote in respect to
corporate affairs and management of the Corporation by reason thereof, nor shall
such holders by reason thereof have any right of inspection of the books,
accounts and other records of the Corporation and any other rights which the
stockholders of the Corporation have by reason of the Texas Business Corporation
Act as the same exists or may hereafter be amended.

ARTICLE VIII

The Board of Directors is expressly authorized to alter, amend or repeal
the Bylaws of the Corporation or to adopt new Bylaws.

ARTICLE IX

A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the Texas Business Corporation Act as
the same exists or may hereafter be amended. Any repeal or modification of the
foregoing provision by the stockholders of the Corporation shall not adversely
affect any right or protection of any director of the Corporation for or with
respect to any action or omission of such person occurring prior to such repeal
or modification.

A-3
<PAGE>
ARTICLE X

The Board of Directors of the Corporation may, if it deems advisable,
oppose a tender or other offer for the Corporation's securities, whether the
offer is in cash or in the securities of another corporation or otherwise. When
considering whether to oppose an offer, the Board of Directors may, but is not
legally obligated to, consider any pertinent issues; by way of illustration, but
not of limitation, the Board of Directors may, but shall not be legally
obligated to, consider all or any of the following:

(i) Whether the offer price is acceptable based on the
historical and present operating results or financial condition of the
Corporation;

(ii) Whether a more favorable price could be obtained for the
Corporation's securities in the future;

(iii) The impact which an acquisition of the Corporation would
have on the employees, customers, suppliers and creditors of the
Corporation and its subsidiaries and the communities which they serve;

(iv) The reputation and business practices of the offeror and its
management and affiliates as they would affect the employees, customers,
suppliers and creditors of the Corporation and its subsidiaries and the
future value of the Corporation's stock by the value of the securities,
if any, that the offeror is offering in exchange for the Corporation's
securities, based on an analysis of the worth of the Corporation as
compared to the offeror or any other entity whose securities are being
offered, and the financial condition of the offeror or such other
entity; and

(v) Any antitrust or other legal or regulatory issues that are
raised by the offer.

ARTICLE XI

The Corporation shall indemnify every director or officer, their heirs,
executors and administrators, in accordance with Article 2.02-1 of the Texas
Business Corporation Act, against expenses actually and reasonably incurred by
him, as well as any amount paid upon a judgment in connection with any action,
suit or proceeding, civil or criminal, to which he may be made a party by reason
of his being or having been a director or officer of the Corporation, or at the
request of the Corporation, having been a director or officer of any other
corporation of which the Corporation was at such time a shareholder or creditor
and from which other corporation he is not entitled to be indemnified, except in
relation to matters as to which he is found liable on the basis that personal
benefit was improperly received by him, or in which he shall be found liable to
the Corporation. In the event of a settlement, indemnification shall be provided
only in connection with such matters covered by the settlement as to which the
Corporation is advised

A-4
<PAGE>
by its special legal counsel that the person to be indemnified did not commit
such a breach of duty. The foregoing shall not be exclusive of other rights to
which the officer or director may be entitled.

ARTICLE XII

No contract or other transaction between the Corporation and any other
corporation shall be affected by the fact that one (1) or more of the directors
or officers of this Corporation is interested in or is a director or officer of
such other corporation and any director or officer individually may be a party
to or may be interested in any contract or transaction of this Corporation. No
contract or transaction of this Corporation with any person or persons, firm or
association shall be affected by the fact that any director or officer of this
Corporation is a party to or interested in such contract or transaction, or in
any way connected with such person or persons, firm or association, provided
that the interest in any such contract or other transactions of any such
director or officer shall be fully disclosed and that such contract or other
transaction shall be authorized or ratified by the vote of a sufficient number
of Directors of the Corporation not so interested. In the absence of fraud, no
director or officer having such adverse interest shall be liable to the
Corporation or to any shareholder or creditor thereof, or to any other person
for any loss incurred by it under or by reason of such contract or transaction,
nor shall any such Director or Officer be accountable for any gains or profits
realized thereon. In any case described in this Article XII any such director
may be counted in determining the existence of a quorum at any meeting of the
board of directors which shall authorize or ratify any such contract or
transaction.

ARTICLE XIII

The number of directors of the Corporation shall not be less than one
(1) nor more than twenty-five (25), and my be increased or decreased from time
to time in the manner provided by law or the By-Laws of the Corporation.
Directors need not be residents of the State of Texas or shareholders of the
Corporation.

The initial By-Laws of the Corporation shall be adopted by its board of
directors. The board of directors shall have the power to alter, amend or repeal
the By-Laws from time to time, subject to the reserved power of the Shareholders
at any meeting of shareholders to alter, amend or repeal any provision of the
By-Laws or to adopt new By-Laws.

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The names of the persons who are to serve as directors of the Corporation until
their successors are elected and qualified are:

Robert E. Cone
James H. Brock, Jr.
Barbara S. Shuler
William J. Argeroplos
Charles T. Anderson
John P. Madden
James W. Kenney

The address of all of the directors named above is 7135 Ardmore, Houston, Texas
77054.

ARTICLE XIV

The Corporation will not commence business until it has received for the
issuance of its shares consideration of a value of at least ONE THOUSAND AND
NO/100 DOLLARS ($1,000.00) consisting of money, labor done or property actually
received.

ARTICLE XVI

(A) No director of the Corporation shall be liable to the
Corporation or any of its stockholders for monetary damages for an act
or omission in the director's capacity as a director; provided that this
Article shall not eliminate or limit the liability of a director of the
Corporation:

(i) for any breach of such director's duty of loyalty
to the Corporation or its stockholders;

(ii) for acts or omissions not in good faith that
constitute a breach of duty of the director to the Corporation or
that involve intentional misconduct or a knowing violation of
law;

(iii) for any transaction from which such director derived
an improper personal benefit, whether the benefit resulted from
an action taken within the scope of the director's office; or

(iv) for an act or omission for which liability of a
director is expressly provided by an applicable statute.

(B) If Article 1302-7.06 of the Texas Miscellaneous Corporation
Laws Act ("TMCLA") hereafter is amended to authorize the further
elimination or limitation of the liability of directors of the
Corporation, then the liability of a director of the Corporation shall
be limited to the fullest extent permitted by the

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TMCLA, as so amended, and such limitation of liability shall be in
addition to, and not in lieu of, the limitation on the liability of a
director of the Corporation provided by the foregoing provisions of this
Article.

(C) Any repeal of or amendment to this Article shall be
prospective only and shall not adversely affect any limitation on the
liability of a director of the Corporation existing at the time of such
repeal or amendment.

ARTICLE XVII

Special meetings of the shareholders may be called by (i) the president,
the board of directors, or (ii) the holders of not less than thirty percent
(30%) of shares entitled to vote at the proposed special meeting.

ARTICLE XVIII

Any action required by the TBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual or
special meeting of shareholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holder or holders of shares bearing
not less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
actions were present and voted.

A-7

EXHIBIT 3.2

AMENDED AND RESTATED BYLAWS OF

INDUSTRIAL HOLDINGS, INC.
<PAGE>
AMENDED AND RESTATED BYLAWS OF

INDUSTRIAL HOLDINGS, INC.

TABLE OF CONTENTS

ARTICLE I
SHAREHOLDERS...................................... 1

1.1 Annual Meeting....................................................... 1
1.2 Special Meeting...................................................... 1
1.3 Manner and Place of Meeting.......................................... 1
1.4 Notice; Waiver of Notice............................................. 1
1.5 Quorum............................................................... 2
1.6 Proxies.............................................................. 2
1.7 Voting of Shares..................................................... 2
1.8 List of Shareholders................................................. 3
1.9 Action by Written Consent............................................ 3
1.10 Record Date.......................................................... 4

ARTICLE II
BOARD OF DIRECTORS................................... 4

2.1 Management. ......................................................... 4
2.2 Number............................................................... 4
2.3 Election; Term; Vacancies............................................ 4
2.4 Removal.............................................................. 5
2.5 Meetings of Directors................................................ 5
2.6 First Meeting........................................................ 5
2.7 Election of Officers................................................. 5
2.8 Regular Meetings..................................................... 5
2.9 Special Meetings..................................................... 5
2.10 Waiver of Notice..................................................... 6
2.11 Quorum and Voting.................................................... 6
2.12 Presumption of Assent................................................ 6
2.13 Action by Written Consent............................................ 6
2.14 Compensation......................................................... 6
2.15 Committees........................................................... 6
2.16 Interested Officers and Directors.................................... 7

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ARTICLE III
OFFICERS........................................ 8

3.1 Number; Titles; Term of Office....................................... 8
3.2 Removal.............................................................. 8
3.3 Vacancies............................................................ 9
3.4 Salaries............................................................. 9
3.5 Powers and Duties of the Officers.................................... 9
3.6 Bond................................................................. 10

ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS....................... 11

4.1 Corporate Indemnification............................................ 11
4.2 Indemnity Insurance. ................................................ 12

ARTICLE V
CAPITAL STOCK..................................... 12

5.1 Certificates of Shares............................................... 12
5.2 Issuance............................................................. 12
5.3 Payment for Shares................................................... 12
5.4 Preemptive Rights.................................................... 13
5.5 Transfer of Shares................................................... 13
5.6 Registered Shareholders.............................................. 13
5.7 Lost Certificate..................................................... 13
5.8 Regulations.......................................................... 14

ARTICLE VI
ACCOUNTS........................................ 14

6.1 Distributions; Share Dividends....................................... 14
6.2. Reserves. .......................................................... 14
6.3. Director's Annual Statement.......................................... 14
6.4. Checks............................................................... 14

ARTICLE VII
MISCELLANEOUS PROVISIONS................................ 15
7.1. Offices.............................................................. 15
7.2. Fiscal Year.......................................................... 15
7.3 Seal................................................................. 15
7.4 Amendment............................................................ 15
7.5 Resignations. ...................................................... 15
7.6 Securities of Other Entities......................................... 15

ii
<PAGE>
AMENDED AND RESTATED BYLAWS OF

INDUSTRIAL HOLDINGS, INC.
(a Texas corporation)

ARTICLE I

SHAREHOLDERS

1.1 ANNUAL MEETING. The annual meeting of Shareholders shall be held
during each calendar year on a date and at a time designated by the Board of
Directors for the purpose of electing Directors. Any business may be transacted
at an annual meeting, except as otherwise provided by law or by these Bylaws.
Failure to designate a time for the annual meeting or to hold the annual meeting
at the designated time shall not work a dissolution of the Corporation.

1.2 SPECIAL MEETING. A special meeting of Shareholders for any
purpose(s) shall be called at any time by (i) the Board of Directors, (ii) the
President or (iii) the holders of at least thirty percent (30%) of the
outstanding shares entitled to vote at such meeting. Only such business as is
stated or indicated in the notice of such meeting shall be transacted at a
special meeting.

1.3 MANNER AND PLACE OF MEETING. The annual meeting of Shareholders may
be held in any manner permitted by law or these Bylaws at any place within or
without the State of Texas as designated by the Board of Directors. Special
meetings of Shareholders may be held in any manner permitted by law or these
Bylaw at any place within or without the State of Texas as designated by the
President, if he shall call the meeting, or the Board of Directors, if it shall
call the meeting. Subject to the provisions herein regarding notice of meetings,
meetings of Shareholders may be held by means of conference telephone or similar
communications equipment by means of which all participants can hear each other.

1.4 NOTICE; WAIVER OF NOTICE. Written or printed notice stating the
place, day and hour of each meeting of Shareholders and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than ten (10) nor more sixty (60) days before the date of the
meeting. Whenever any notice is required to be given under the provisions of
these Bylaws, said notice shall be deemed to be sufficient if given by
depositing the same in the Untied States mail with prepaid postage, addressed to
the Shareholder at his address as reflected in the Corporation share transfer
books, and such notice shall be deemed to have been given on the day of such
mailing. A written waiver of notice, signed by the person or persons entitled to
said notice, whether before or after the time stated therein shall be deemed
equivalent thereto.

Notice required by these Bylaws need not be given, to a Shareholder if
(i) notice of two consecutive annual meetings and all notices of Shareholders
meetings held between those annual meetings, if any, or (ii) all (not less than
two) payments of distributions or interest on securities

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during, a twelve-month period have been mailed to the Shareholder, addressed to
the address reflected on the Corporation's share transfer books, and have been
returned undeliverable to the Corporation. If the shareholder sends written
notice of his current address to the Corporation, the requirement that notice be
given to that Shareholder shall be reinstated. Any action or meeting taken or
held without notice to such Shareholder shall have the same force and effect as
if the notice had been duly given, and if the action taken by the Corporation is
reflected in any articles or document filed with the Secretary of State of the
State of Texas, those articles or that document may state that notice was duly
given to all persons to whom notice was required to be given.

1.5 QUORUM. Except as otherwise required by law, the Articles of
Incorporation or these Bylaws, the holders of at least a majority of the
outstanding shares entitled to vote at a Shareholders' meeting, present in
person or by proxy, shall constitute a quorum. If a quorum is present and except
as otherwise required by law, the Articles of Incorporation or these Bylaws, the
act of the holders of the number of shares specified in Section 1.7 of these
Bylaws shall be the act of the Shareholders' meeting. If any Shareholder
subsequently withdraws from the meeting or refuses to vote, such withdrawal or
refusal shall not affect the presence of a quorum at the meeting. A majority of
the Shareholders present at any meeting, though less than a quorum, may adjourn
the meeting. No notice of adjournment, other than the announcement at the
meeting, need be given.

1.6 PROXIES. At all meetings of Shareholders, a Shareholder may vote
either in person or by proxy executed in writing by the shareholder or by his
duly authorized attorney-in -fact. Such proxies shall be filed with the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from he date of its execution unless otherwise provided in
the proxy. Each proxy shall be revocable unless irrevocability is expressly
provided therein or is otherwise made irrevocable by law.

1.7 VOTING OF SHARES

(a) Unless provided otherwise by the Articles of Incorporation or
the Texas Business Corporation Act, as amended from time to time (the "TBCA"),
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote at a meeting of the Shareholders.

(b) Unless otherwise provided by the Articles of Incorporation or
the TBCA, whenever any action requires or otherwise is submitted for the vote or
concurrence of the Corporation's Shareholders, the requisite vote or concurrence
of the Corporation's Shareholders required to approve or consent to such
proposed action shall be the vote or concurrence of the holders of at least a
majority of the issued and outstanding shares of the Corporation entitled to
vote on that action.
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<PAGE>
(c) Directors shall be elected by plurality of the votes cast by
the holders of shares entitled to vote in the election of Directors at a meeting
of the shareholders at which a quorum is present.

1.8 LIST OF SHAREHOLDERS. At least ten (10) days prior to each
Shareholders' meeting, a complete list of Shareholders entitled to vote thereat,
arranged in alphabetical order, indicating the address of, and number of shares
held by, each Shareholder shall be prepared by the officer or agent having
charge of the stock transfer books and filed at the registered office of the
Corporation. Each such list of Shareholders shall be subject to inspection by
any Shareholder during usual business hours for a period of ten (10) days prior
to such Shareholders' meeting, shall be produced at such meeting and shall be
subject to inspection by any Shareholder at all times during such meeting.

1.9 ACTION BY WRITTEN CONSENT. Subject to the provisions of Article
9.10(A) of the TBCA:

(a) If provided in the Articles of Incorporation, any action
required or permitted by the TBCA, the Articles of Incorporation or these Bylaws
to be taken at a meeting of Shareholders may be taken without a meeting, without
prior notice, and without a vote, if a written consent or consents, setting
forth the action so taken, shall be signed by the holder(s) of shares having not
less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
action were present and voted.

(b) Every written consent signed by the holders of less than all
the shares entitled to vote with respect to the action that is the subject of
the consent shall bear the date of signature of each Shareholder who signs the
consent. No written consent signed by the holders of less than all the shares
entitled to vote with respect to the action that is the subject of the consent
shall be effective to take the action that is the subject of the consent unless,
within 60 days after the date of the earliest dated consent delivered to the
Corporation in the manner required by this Section 1.9, a consent or consents
signed by the holder or holders of shares having not less than the minimum
number of votes that would be necessary to take the action that is the subject
of the consent are delivered to the Corporation by delivery to its registered
office, registered agent, principal place of business, transfer agent,
registrar, exchange agent or an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of Shareholders are
recorded. Delivery shall be by hand or certified or registered mail, return
receipt requested. Delivery to the Corporation's principal place of business
shall be addressed to the President or Chief Executive Officer of the
Corporation.

(c) A telegram, telex, cablegram, or similar transmission by a
Shareholder, or a photographic, photostatic, facsimile, or similar reproduction
of a writing signed by a Shareholder, shall be regarded as signed by the
Shareholder for purposes of this Section 1.9.

3
<PAGE>
(d) Prompt notice of the taking of any action by Shareholders
without a meeting by less than unanimous written consent shall be given to those
Shareholders who did not sign a written consent to the action.

(e) If any action by Shareholders is taken by written consent,
any articles or documents filed with the Secretary of State as a result of the
taking of the action shall state, in lieu of any statement required by the TBCA
concerning any vote of Shareholders, that written consent has been given in
accordance with the provisions of Article 9.10(A) of the TBCA has been given.

1.10 RECORD DATE. The Board of Directors may fix, in advance, a record
date for the purpose of determining shareholders entitled to notice of and to
vote at a meeting of the Shareholders, such record date to be not less than 10
nor more than sixty days prior to the meeting. Alternatively, the Board of
Directors may close the stock transfer books for the purpose of determining the
shareholders entitled to notice of and to vote at a meeting of the Shareholders,
such stock transfer books to be closed for not less than 10 nor more than sixty
days prior to the meeting. In the absence of any action by the Board of
Directors, the date on which the notice of such meeting is mailed shall be the
record date.

ARTICLE II

BOARD OF DIRECTORS

2.1 MANAGEMENT. The powers of the Corporation shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Corporation's Board of Directors. The Board
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not required to be exercised or done by the Shareholders by the
TBCA, the Articles of Incorporation or these Bylaws.

2.2 NUMBER. The number of Directors may be fixed from time to time by
resolutions duly adopted by the affirmative vote of a majority of the members of
the Board of Directors, but shall not consist of less than three members or more
than fifteen members. No decrease in the number of Directors hall have the
affect of shortening the term of any incumbent Director.

2.3 ELECTION; TERM; VACANCIES.

(a) At the first annual meeting of Shareholders and at each
annual meeting thereafter, the Shareholders shall elect the number of Directors
then constituting the Board of Directors of the Corporation, such Directors to
hold office until the next annual meeting of the Shareholders and until their
respective successors have been elected and qualified, unless removed in
accordance with these Bylaws. Directors need not be Shareholders or residents of
Texas.

4
<PAGE>
(b) Any vacancy occurring in the Board of Directors may be filled
by election at an annual or special meeting of Shareholders called for that
purpose, or by the affirmative vote of a majority of the remaining Directors,
though less than a quorum of the Board of Directors. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
Directors may be filled by election at an annual or special meeting of
Shareholders called for that purpose, or by the Board of Directors; provided,
however, that if such vacancy is filled by the Board of Directors, such Director
shall serve as a Director only until the next election of one or more Directors
by the Shareholders and provided further that the Board of Directors may not
fill more than two such Directorships during the period between any two
successive meetings of Shareholders.

2.4 REMOVAL. At any meeting of Shareholders called expressly for that
purpose, any director or the entire Board of Directors may be removed, with or
without cause, by the affirmative vote of the holders of a majority of the
shares then entitled to vote at an election of Directors present in person or by
proxy.

2.5 MEETINGS OF DIRECTORS. Meetings of Directors may be held within or
without the State of Texas. The Directors may hold their meetings in any manner
permitted by law, including by conference telephone or similar communications
equipment by means of which all participants can hear each other.

2.6 FIRST MEETING. Each newly-elected Board of Directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of the Shareholders, and no notice of such meeting shall be necessary.

2.7 ELECTION OF OFFICERS. At the first regular meeting of the Board of
Directors of each year at which a quorum shall be present, the Directors shall
elect the officers of the Corporation.

2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held in any manner permitted by law or these Bylaws and at such times and
places as shall be designated, from time to time, by resolution of the Board of
Directors. Notice of such regular meetings shall not be required.

2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President of the Corporation, with
notice given to each Director by mail at least 2 days prior to the special
meeting, or if notice is given in person, by telegram, telecopy of similar
transmission, 1 day prior to such special meeting. Special meetings of the Board
of Directors shall be held in any manner permitted by law or these Bylaws.
Neither the business to be transacted at, nor the purpose of, any special
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting. At any meeting at which every Director shall be present
in person or by participation, even though without any notice, any business may
be transacted.

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<PAGE>
2.10 WAIVER OF NOTICE. Whenever any notice is required to be given to
any Director, a written waiver thereof signed by such person(s) entitled thereto
(whether signed before or after the time required for such notice) shall be
equivalent to the giving of notice. Further, the attendance of a Director at any
meeting or the participation by a Director in a conference meeting shall
constitute a waiver of notice of such meeting, except when a Director attends a
meeting or participates in a conference meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.

2.11 QUORUM AND VOTING. Unless a greater number is required by law, the
Articles of Incorporation or these Bylaws, a majority of the number of Directors
fixed by, or in the manner provided in, the Articles of Incorporation or these
Bylaws shall constitute a quorum for the transaction of business. The act of the
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless the act of a greater number
is required by law, the Articles of Incorporation or these Bylaws. A majority of
the Directors present at any meeting, though less than a quorum, may adjourn the
meeting from time to time without further notice.

2.12 PRESUMPTION OF ASSENT. A Director of the Corporation who is present
at a meeting of the Board of Directors at which action on any corporate matter
is taken shall be presumed to have assented to the action so taken unless (i) he
shall cause his dissent to be entered in the minutes of the meeting, (ii) he
shall file his written dissent to such action with the person acting as
secretary of the meeting before the adjournment thereof or (iii) he shall
forward such dissent, in writing, by registered or certified mail, return
receipt requested, to the Secretary of the Corporation immediately after the
adjournment of the meeting. This right of dissent shall not apply to any
Director who voted in favor of such action.

2.13 ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken by the Board of Directors or any committee, under applicable law, the
Articles of Incorporation or these Bylaws, may be taken without a meeting if a
written consent, setting forth the action so taken, is signed by all the members
of the Board of Directors or committee thereof, as the case may be.

2.14 COMPENSATION. The Board of Directors may from time to time, by
resolution, determine to award reasonable expenses for attendance at meetings to
Directors, fixed sum for attendance at meetings or stated salaries to any
Director; provided further, that this provision shall not preclude any Director
from serving the Corporation in any other capacity or receiving compensation
therefor.

2.15 COMMITTEES.

(a) The Board of Directors, by resolution adopted by a majority
of the number Directors fixed by these Bylaws, may designate one or more
Directors to serve as members of one or more committees of the Board of
Directors. The Board of Directors shall have the power to fill any vacancies on
any of the committees so designated, change the membership of any of the
committees so designated and discharge any duly designated committees.

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<PAGE>
(b) Any such committee, to the extent provided in such resolution
and except as otherwise provided in this Section 2.15 or the TBCA, shall have
and may exercise all of the authority of the Board of Directors in the business
and affairs of the Corporation. The designation of a committee of the Board of
Directors and the delegation of authority thereto shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed on
it or him by law. Each committee of the Board of Directors shall keep regular
minutes of its proceedings and report the same to the Board when required.

(c) Unless otherwise provided by the resolution designating such
committee or other resolutions duly adopted by the Board of Directors, the
affirmative vote of a majority of the members of the committee, if comprised of
more than one member, shall be the action of the committee.

(d) Notwithstanding any other provision of this Section 2.15, no
committee of the Board of Directors shall have any authority of the Board of
Directors with respect to: (1) amending the Articles of Incorporation, except
that a committee may, to the extent provided in the resolution designating that
committee or in the Articles of Incorporation or these Bylaws, exercise the
authority of the Board of Directors vested in it in accordance with Article 2.13
of the TBCA; (2) proposing a reduction of the stated capital of the Corporation
in the manner permitted by Article 4.12 of the TBCA; (3) approving a plan of
merger or share exchange of the Corporation; (4) recommending to the
Shareholders the sale, lease, or exchange of all or substantially all of the
property and assets of the Corporation other than in the usual and regular
course of its business; (5) recommending to the Shareholders a voluntary
dissolution of the Corporation or a revocation thereof; (6) amending, altering
or repealing the Bylaws of the Corporation or adopting new Bylaws of the
Corporation; (7) filling vacancies in the Board of Directors; (8) filling
vacancies in or designating alternate members of any such committee; (9) filling
any Directorship to be filled by reason of an increase in the number of
Directors; (10) electing or removing officers of the Corporation or members or
alternate members of any such committee; (11)fixing the compensation of any
members or alternate members of such committee; (12) altering or repealing any
resolution of the Board of Directors that by its terms provides that it shall
not be so amendable or repealable; or (13) authorizing a distribution or the
issuance of shares of the Corporation unless the resolution designating a
particular committee, the Articles of Incorporation or these Bylaws expressly so
provide.

2.16 INTERESTED OFFICERS AND DIRECTORS.

(a) No contract or transaction between the Corporation and one or
more of its Directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its Directors or officers are Directors or officers or have a financial
interest, shall be void or voidable solely for this reason, solely because the
director or officer is present at or participates in the meeting of the Board or
committee thereof that authorizes the contract or transaction, or solely because
his or their votes are counted for such purpose, if:

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(1) The material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee, in good faith,
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested Directors, even thought the disinterested Directors be less
than a quorum; or

(2) The material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the
Shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the Shareholders; or

(3) The contract or transaction is fair to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof, or the Shareholders.

(b) Common or interested Directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee that authorizes the contract or transaction.

(c) The foregoing provisions shall not be construed to invalidate
a contract or transaction that would be valid in the absence of these
provisions.

ARTICLE III

OFFICERS

3.1 NUMBER; TITLES; TERM OF OFFICE. The officers of the Corporation
shall be a President and a Secretary, and such other officers as the Board of
Directors may from time to time elect or appoint, including, without limitation,
a Chairman of the Board, a Chief Executive Officer, a Chief Financial Officer,
Chief Operating Officer, a Treasurer, and one or more Vice Presidents. No
officer need be a Shareholder, Director or resident of the State of Texas. Each
officer shall hold office until his successor shall have been duly elected by
the Board and qualified, until his death or until he shall resign or shall have
been removed in the manner provided herein. One person may hold more than one
office. None of the officers, except the Chairman of the Board, need be a
director. Except as may be explicitly provided for in these Bylaws, each duly
elected or appointed officer of the Corporation shall have such powers and
duties, not inconsistent with the powers and duties prescribed by these Bylaws,
as may from time to time be prescribed by duly adopted resolution of the Board
of Directors.

3.2 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever, in its judgement,
the best interests of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or agent shall not of itself
create contract rights.

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3.3 VACANCIES. A vacancy in the office of any officer may be filled by
the requisite vote of the Board of Directors for the unexpired portion of the
term.

3.4 SALARIES. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors.

3.5 POWERS AND DUTIES OF THE OFFICERS.

(a) CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected; shall preside at all meetings of the Board of Directors and
Shareholders, and shall have such other powers and duties as may from time to
time be prescribed by duly adopted resolution of the Board of Directors.

(b) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if one
is elected, shall be either the Chairman of the Board or the President of the
Corporation, as determined from time to time by duly adopted resolution of the
Board of Directors. The Chief Executive Officer, if one is elected, shall
preside at all meetings of the Board of Directors and Shareholders if there is
no Chairman of the Board, and shall have such other powers and duties as may
from time to time be prescribed by duly adopted resolution of the Board of
Directors.

(c) PRESIDENT. The President shall, subject to the Board of
Directors, have general executive charge, management and control of the
properties and operations of the Corporation in the ordinary course of its
business with all such powers with respect to such responsibilities, including
the powers of a general manager. The President shall preside at all meetings of
the Board of Directors and Shareholders if there is no Chairman of the Board or
the Chairman of the Board is absent or disabled from acting. The President shall
be ex-officio a member of all standing committees. The President may sign all
certificates for shares of capital stock of the Corporation, and the President
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The president shall have such other powers and duties as may from
time to time the prescribed by duly adopted resolution of the Board of
Directors.

(d) VICE PRESIDENTS. Each Vice President shall have such powers
and duties as may from time to time be prescribed by duly adopted resolution of
the Board of Directors or by the President. The Vice Presidents in the order of
their seniority, unless otherwise determined by the Board of Directors, shall,
if the President is absent or disabled from acting, have the authority, exercise
the powers and perform the duties of the President during the President's
absence or inability to act.

(e) CHIEF FINANCIAL OFFICER AND/OR TREASURER. If the Board of
Directors determines to elect both a Chief Financial Officer and a Treasurer,
both offices shall be held by the same person. The Chief Financial Officer, if
one is elected, and/or the Treasurer, if one is elected, shall have custody of
all the funds and securities of the corporation which come into his hands. When
necessary or proper, he may, on behalf of the Corporation, endorse for
collection checks, notes and other obligations, and shall deposit the same to
the credit of the Corporation

9
<PAGE>
in such bank or banks or depositories as shall be designated in the manner
prescribed by the Board of Directors, and he may sign all receipts and vouchers
for payments made to the Corporation, either alone or jointly with such other
office as is designated by he Board of Directors. Whenever required by the Board
of Directors, he shall render a statement of his cash account; he shall enter or
cause to have entered regularly in the books of the Corporation to be kept by
him for that purpose full and accurate accounts of all moneys received and paid
out on account of the Corporation; he shall perform all acts incident to the
position of Treasurer subject to the control of the Board of Directors; and he
shall, if required by the Board of Directors, give such bond for the faithful
discharge of his duties in such form as the Board of Directors may require. The
Chief Financial Officer and/or Treasurer shall have such other powers and duties
as may from time to time be prescribed by duly adopted resolution of the Board
of Directors or by the President.

(f) ASSISTANT-TREASURERS. Each Assistant Treasurer, if any is
elected, shall have the usual powers and duties pertaining to his office,
together with such other powers and duties as may from time to time be
prescribed by duly adopted resolution of the Board of Directors or by the
President. The Assistant Treasurers in the order of their seniority, unless
otherwise determined by the Board of Directors, shall, if the Chief Financial
Officer and/or Treasurer is absent or disabled from acting, have the authority
to exercise the powers and perform the duties of the Chief Financial Officer
and/or Treasurer during that officer's absence or inability to act.

(g) SECRETARY. The Secretary shall keep the minutes of all
meetings of the Board of Directors and the minutes of all meetings of the
Shareholders in books provided for that purpose or in any other form capable of
being converted into written form within a reasonable time; he shall attend to
the giving and serving of all notices; he may sign with the President in the
name of the Corporation all contracts of the Corporation and affix the seal of
the Corporation thereto; he may sign with the President all certificates for
shares of the capital stock of the Corporation; he shall have charge of the
certificate books, transfer books and stock ledgers, and such other books and
papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to the inspection of any Director on application at the
office of the Corporation during business hours; and he shall in general perform
all duties incident to the office of Secretary, subject to the control of the
Board of Directors.

(h) ASSISTANT SECRETARIES. Each Assistant Secretary shall have
the powers and duties pertaining to his office, together with such other powers
and duties as may from time to time be prescribed by duly adopted resolution of
the Board of Directors or by the president. The Assistant Secretaries in the
order of their seniority, unless otherwise determined by the Board of Directors,
shall, if the Secretary is absent or disabled from acting, have the authority to
exercise the powers and perform the duties of the Secretary during the
Secretary's absence or inability to act.

3.6 BOND. If required by the Board of Directors, any officer so required
shall give the Corporation a bond in such sum and with such surety or sureties
as shall be satisfactory to the

10
<PAGE>
Board of Directors for the faithful performance of the duties of his office or
for the restoration to the Corporation, in case of his death, resignation,
retirement, or removal from office, of any and all books, papers, vouchers,
money, and other property of whatever kind in his possession or under his
control belonging to the Corporation.

ARTICLE IV

INDEMNIFICATION OF DIRECTORS AND OFFICERS

4.1 CORPORATE INDEMNIFICATION. Each person who at any time is or was a
director or officer of the Corporation, and who was, is or is threatened,
pending or completed action, suit or proceeding whether civil, criminal,
administrative, arbitrative or investigative ( a "Proceeding," which shall
include any appeal in such a proceeding and any inquiry or investigation that
could lead to such a Proceeding), by reason of the fact that such person is or
was a director or officer of the Corporation, or is or was a director or officer
the Corporation serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic Corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other enterprise
shall be indemnified by the Corporation to the fullest extent authorized by the
Texas Business Corporation Act as the same exists or may hereafter be amended
from time to time, or any other applicable law as may from time to time be in
effect (but, in the case of any such amendment or enactment, only to the extent
that such amendment or law permits the Corporation to provide broader
indemnification rights that such law prior to such amendment or enactment
permitted the Corporation to provide), against judgments, penalties (including
excise and similar taxes), fines, settlements and reasonable expenses (including
court costs and attorneys' fees) actually incurred by such person in connection
with such Proceeding. The Corporation's obligations under this Section 4.1
include, but are not limited to, the convening of any meeting, and the
consideration of any matter thereby, required by statute in order to determine
the eligibility of any person for indemnification. Expenses incurred in
defending a Proceeding shall be paid by the Corporation in advance of the final
disposition of such Proceeding to the fullest extent permitted, and only in
compliance with, the TBCA or any other applicable laws as may from time to time
be in effect. The Corporation's obligation to indemnify or to prepay expenses
under this Section 4.1 shall arise, and all rights granted hereunder shall vest,
at the time of the occurrence of the transaction or event to which such
proceeding relates, or at the time of the occurrence of the transaction or event
to which such proceeding relates, or at the time that the action or conduct to
which such proceeding relates was first threatened, commenced or completed.
Notwithstanding any other provision of the Articles of Incorporation or these
Bylaws, no action taken by the Corporation, either by amendment of the Articles
of Incorporation or these Bylaws or otherwise, shall diminish or adversely
affect any rights to indemnification or prepayment of expenses granted under
this Section 4.1 which shall have become vested as aforesaid prior to the date
that such amendment or other corporate action is taken. The rights to
indemnification and prepayment of expenses that are conferred on the
Corporation's Directors and officers by this Section 4.1 may be conferred on any
employee or agent of the Corporation if, and to the extent, authorized by the
Board of Directors.

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<PAGE>
4.2 INDEMNITY INSURANCE. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise, against any liability asserted against him and
incurred by him in any such capacity or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the TBCA. Without limiting the power of
the Corporation to procure or maintain any kind of insurance or other
arrangement, the Corporation may, for the benefit of person indemnified by the
Corporation (1) create a trust fund, (2) establish any form of self insurance,
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation, or (4) establish a letter of credit,
guaranty or surety arrangement.

ARTICLE V

CAPITAL STOCK

5.1 CERTIFICATES OF SHARES. The certificates for shares of the capital
stock of the Corporation shall be in such form as shall be approved by the Board
of Directors. The certificates shall be signed by the President or a Vice
President, and also by the Secretary, an Assistant Secretary, the Treasurer or
an Assistant Treasurer and may be sealed with the seal of this Corporation or a
facsimile thereof. When any such certificate is countersigned by a transfer
agent, or registered by a registrar, either of which is other than the
Corporation itself or an employee of the Corporation, the signatures of the
President or Vice President and the Secretary, Assistant Secretary, Treasurer or
Assistant Treasurer may be facsimiles. The certificates shall be consecutively
numbered and shall be entered in the books of the Corporation as they are
issued. The certificates shall state that the Corporation is organized under the
laws of the State of Texas, shall exhibit the holder's name, the number and
class of shares and the designation of the series, if any, of the shares
evidenced thereby, shall state the par value of each share represented thereby
or state that such shares are without par value, and shall include any other
items required by law, including the legends required by Section 2.19(B) of the
TBCA.

5.2 ISSUANCE. Shares (both treasury and authorized but unissued) may be
issued for such consideration (not less than par value) and to such persons as
the Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as provided by law, has been
paid.

5.3 PAYMENT FOR SHARES

(a) KIND. Subject to any provision of the Constitution of the
State of Texas or the TBCA to the contrary, the Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or intangible
benefit to the Corporation, including cash,

12
<PAGE>
promissory notes, services performed, contracts for services to be performed, or
other securities of the Corporation.

(b) VALUATION. In the absence of fraud in the transaction, the
judgment of the Board of Directors as to the value of consideration received for
the issuance of shares shall be conclusive.

(c) EFFECT. When consideration, fixed as provided by law, has
been paid, the shares shall be deemed to have been issued and shall be
considered fully paid and nonassessable.

(d) ALLOCATION OF CONSIDERATION. The consideration received for
shares shall be allocated by the Board of Directors, in accordance with law,
between stated capital and surplus accounts.

5.4 PREEMPTIVE RIGHTS. No Shareholder shall be entitled, as a matter of
right, to subscribe for or purchase additional, unissued, or treasury shares of
the Corporation, or any bonds, debentures or other securities convertible into
shares, but any additional shares or other securities convertible into shares
may be issued or disposed of by the Board of Directors to such person and on
such terms as in its discretion it shall deem advisable.

5.5 TRANSFER OF SHARES. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives, on
surrender to the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and it shall be the duty of the Corporation to issue a new certificate
to the person entitled thereto for a like number of shares, to cancel the old
certificate and issue any balance certificate for shares not so transferred, and
to record the transaction on its books.

5.6 REGISTERED SHAREHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of the share to receive distributions or share dividends, and to vote as such
owner, and for all other purposes as such owner. Except as otherwise provided by
applicable law, the Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof.

5.7 LOST CERTIFICATE. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation that are alleged to have been
lost, destroyed or wrongfully taken, on the making of an affidavit of that fact
by the person claiming such certificates were lost, destroyed or wrongfully
taken, if such person so attests before the Corporation receives notice that the
underlying security has been acquired by a bona fide purchaser. When authorizing
such issue of a new certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, destroyed or wrongfully taken certificate or certificates or
his legal representative to advertise the same in such manner as it shall
require

13
<PAGE>
and/or give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, destroyed or wrongfully taken.

5.8 REGULATIONS. The Board of Directors shall have power and authority
to make all such rules and regulations, not inconsistent with these Bylaws, as
they may deem expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of the capital stock of the Corporation.

ARTICLE VI

ACCOUNTS

6.1 DISTRIBUTIONS; SHARE DIVIDENDS. Subject to restrictions imposed by
the Articles of Incorporation, the TBCA or other applicable law, the Board of
Directors may from time to time authorize, and the Corporation may make
distributions or pay share dividends. The Board of Directors may fix in advance
a record date for the purpose of determining the Shareholders entitled to
receive payment of any distribution or share dividend, such record date to be
not less than ten nor more than sixty days prior to the date of payment of any
such distribution or share dividend.

6.2 RESERVES. The Board of Directors may, by resolution, create a
reserve or reserves out of its surplus or designate or allocate any part of
surplus in any manner for any proper purpose or purposes, and may increase,
decrease or abolish any such reserve, designation, or allocation in the same
manner The Board of Directors may create such reserve(s) in their absolute
discretion at any time, including prior to the authorization of, or making or
paying any distribution or share dividend, and for any purpose(s) they deem
proper and conducive to the Corporation's interest, including, without
limitation, meeting contingencies, equalizing distributions or share dividends
and repairing or maintaining the Corporation's property.

6.3 DIRECTOR'S ANNUAL STATEMENT. The Board of Directors shall present at
each annual meeting of Shareholders a full and clear statement of the business
and financial condition of the Corporation. The officers of the Corporation
shall mail to any Shareholder of record, on written request, the latest annual
financial statement and the most recent interim financial statements, if any,
that have been filed in a public record or otherwise published.

6.4 CHECKS. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.

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<PAGE>
ARTICLE VII

MISCELLANEOUS PROVISIONS

7.1 OFFICES. Until the Board of Directors shall determine otherwise, the
registered office of the Corporation required by the TBCA to be maintained in
the State of Texas shall be that set forth in the Corporation's Articles of
Incorporation. The registered office may be changed from time to time by the
Board of Directors in the manner provided by law and need not be identical to
the principal place of business of the Corporation.

7.2 FISCAL YEAR. The fiscal year of the Corporation shall be December 31
of each year until such time as a different fiscal year is established by
resolution of the Board of Directors.

7.3 SEAL. The seal of the Corporation shall be such as from time to time
may be approved by resolution of the Board of Directors, but the use of a seal
shall not be essential to the validity of any agreement.

7.4 AMENDMENT. These Bylaws may be altered, amended or repealed or new
Bylaws may be adopted at any annual, regular or special meeting of the Board of
Directors by the affirmative vote of a majority of those Directors present at
such meeting; provided, however, that notice of any special meeting for the
purpose of such action, the notice shall state that Board will vote on the
alteration, amendment or repeal of the Bylaws and/or the adoption of new Bylaws.
The Shareholders may also alter, amend, repeal the Bylaws or adopt new Bylaws,
even though the Board of Directors may also take such action as provided herein.

7.5 RESIGNATIONS. Any director or officer may resign at any time. Such
resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt by
the President or Secretary. The acceptance of a resignation shall not be
necessary to make it effective, unless expressly so provided in the resignation.

7.6 SECURITIES OF OTHER ENTITIES. The President or such other officer(s)
of the Corporation as the Board of Directors may designate shall have the power
and authority to transfer, endorse for transfer, vote, consent or take any other
action with respect to any securities of another issuer that may be held or
owned by the Corporation and to make, execute and deliver any waiver, proxy or
consent with respect to any such securities.

Adopted by written consent of the Board of
Directors of Industrial Holdings, Inc. effective
as of March 15, 1993.

S/BARBARA S. SHULER
Barbara S. Shuler, Secretary

EXHIBIT 10.1

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

This amendment effective as of the 1st day of July, 1991, by and between
Industrial Holdings, Inc., a Texas corporation, hereinafter called the
"Corporation" or "Company" and Robert E.
Cone, hereinafter called the "Employee."

W I T N E S S E T H:

WHEREAS, the Corporation and the Employee entered into an employment
agreement effective July 1, 1991 (the "Employment Agreement"); and

WHEREAS, the Corporation and the Employee desire to amend the Employment
Agreement to be effective as of the effective date of the Employment Agreement;

NOW THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Employment Agreement is hereby amended as follows:

1. Paragraph 1 is hereby amended to read in full as follows:

"1 FOR SERVICES RENDERED BY THE EMPLOYEE AS HEREINBELOW REQUIRED,
THE EMPLOYER SHALL PAY THE EMPLOYEE AN ANNUAL BASE SALARY PAYABLE IN 12
EQUAL INSTALLMENTS AS FOLLOWS:

A) JUL. 1991 - DEC. 1994 - SEE AMENDMENT ONE
MAR. - DEC. 1994 BASE SALARY - $150,000
JAN. - DEC. 1995 BASE SALARY - $160,000
JAN. - DEC. 1996 BASE SALARY - $175,000
JAN. - DEC. 1997 BASE SALARY - $185,000
JAN. - DEC. 1998 BASE SALARY - $200,000

B) BONUS NOT TO EXCEED 60% OF BASE SALARY WITH A
GUARANTEE OF $400 PER ONE (1) CENT IN AUDITED
AFTER TAX EARNINGS.

2. Paragraph 2 is hereby amended to read in full as follows:

#2 THE TERM OF EMPLOYMENT SHALL BE FOR THE PERIOD BEGINNING ON
JULY 1, 1991 THROUGH DECEMBER 31, 1998 AND AUTOMATICALLY EXTENDING FOR
12 MONTHS AT THE END OF EACH CALENDAR YEAR BEGINNING DECEMBER 31, 1994.
EACH EXTENDED YEARS BASE PAY SHALL INCREASE 7% FROM THE PREVIOUS YEARS
BASE PAY UNLESS SOONER TERMINATED (A) FOR JUST CAUSE AS DEFINED BELOW
UPON SEVEN DAYS' NOTICE, (B) BY THE DEATH OF EMPLOYEE OR (C) AS
OTHERWISE MUTUALLY AGREED TO BY THE PARTIES IN WRITING.
<PAGE>
FOR PURPOSES OF THIS AGREEMENT, "JUST CAUSE" FOR
TERMINATION BY EMPLOYER SHALL BE STIPULATED TO INCLUDE SOLELY THE
FOLLOWING MATTERS:

(A) THE FAILURE AND INABILITY FOR ANY
REASON, OTHER THAN ILLNESS OR
TEMPORARY DISABILITY NOT EXCEEDING
90 CONSECUTIVE DAYS, OF EMPLOYEE TO
DEVOTE THE LESSER OF (I) 40 HOURS
PER WEEK OR (II) SUFFICIENT TIME TO
PERFORM THE DUTIES OF ANY CORPORATE
OFFICES HELD BY EMPLOYEE; OR

(B) EMPLOYEE'S CRIMINAL CONVICTION BY ANY STATE OR FEDERAL
COURT OF AN ILLEGAL OR CRIMINAL ACT, SAVE AND EXCEPT MINOR
TRAFFIC VIOLATIONS OR MINOR MISDEMEANORS.

IN THE EVENT OF TERMINATION OF EMPLOYEE'S EMPLOYMENT IN
ACCORDANCE WITH THIS SECTION PRIOR TO DECEMBER 31, 1996, EMPLOYEE SHALL BE
ENTITLED ONLY TO THE COMPENSATION AND ACCRUED BENEFITS, SUCH AS VACATION AND
SICK PAY, EARNED BY HIM AS OF THE DATE OF TERMINATION."

3. Except for this amendment, the Employment Agreement shall
remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to the Employment Agreement effective the day and year first written
above.

INDUSTRIAL HOLDINGS, INC.

By S/JAMES H. BROCK, JR.
JAMES H. BROCK, JR.
Executive Vice President

EMPLOYEE:

S/ROBERT E. CONE
ROBERT E. CONE

EXHIBIT 10.2

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

This amendment effective as of the 1st day of July, 1991, by and between
Industrial Holdings, Inc., a Texas corporation, hereinafter called the
"Corporation" or "Company" and James H.
Brock, Jr., hereinafter called the "Employee."

W I T N E S S E T H:

WHEREAS, the Corporation and the Employee entered into an employment
agreement effective July 1, 1991 (the "Employment Agreement"); and

WHEREAS, the Corporation and the Employee desire to amend the Employment
Agreement to be effective as of the effective date of the Employment Agreement;

1. Paragraph 1 is hereby amended to read in full as follows:

"1 FOR SERVICES RENDERED BY THE EMPLOYEE AS HEREINBELOW REQUIRED,
THE EMPLOYER SHALL PAY THE EMPLOYEE AN ANNUAL BASE SALARY PAYABLE IN 12
EQUAL INSTALLMENTS AS FOLLOWS:

A) JUL. 1991 - DEC. 1994 - SEE AMENDMENT ONE
MAR. - DEC. 1994 BASE SALARY - $140,000
JAN. - DEC. 1995 BASE SALARY - $150,000
JAN. - DEC. 1996 BASE SALARY - $160,000
JAN. - DEC. 1997 BASE SALARY - $170,000
JAN. - DEC. 1998 BASE SALARY - $180,000

B) BONUS NOT TO EXCEED 60% OF BASE SALARY WITH A
GUARANTEE OF $400 PER ONE (1) CENT IN AUDITED
AFTER TAX EARNINGS.

2. Paragraph 2 is hereby amended to read in full as follows:

#2 THE TERM OF EMPLOYMENT SHALL BE FOR THE PERIOD BEGINNING ON
JULY 1, 1991 THROUGH DECEMBER 31, 1998. UNLESS SOONER TERMINATED (A) FOR
JUST CAUSE AS DEFINED BELOW UPON SEVEN DAYS' NOTICE, (B) BY THE DEATH OF
EMPLOYEE OR (C) AS OTHERWISE MUTUALLY AGREED TO BY THE PARTIES IN
WRITING (THE "ORIGINAL TERM").
<PAGE>
FOR PURPOSES OF THIS AGREEMENT, "JUST CAUSE" FOR
TERMINATION BY EMPLOYER SHALL BE STIPULATED TO INCLUDE SOLELY THE
FOLLOWING MATTERS:

(B) EMPLOYEE'S CRIMINAL CONVICTION BY ANY STATE OR FEDERAL
COURT OF AN ILLEGAL OR CRIMINAL ACT, SAVE AND EXCEPT MINOR
TRAFFIC VIOLATIONS OR MINOR MISDEMEANORS.

3. Except for this first amendment, the Employment Agreement
shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to the Employment Agreement effective the day and year first written
above.

INDUSTRIAL HOLDINGS, INC.

By S/ROBERT E. CONE
ROBERT E. CONE
President

EMPLOYEE:

S/JAMES H. BROCK, JR.
JAMES H. BROCK, JR.

EXHIBIT 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement is made and entered into this 26th day of
October, 1992, by and between Landreth Engineering Company, a Texas corporation
(hereinafter referred to as the "Company," which term shall for all purposes be
deemed to include its successors and assigns), and Thomas C. Landreth (the
"Executive").

W I T N E S S E T H:

WHEREAS, the Executive has expertise in the business currently conducted
by the Company and was a shareholder, director and officer of the Company, prior
to the acquisition of all of the issued and outstanding shares of capital stock
of the Company by Industrial Holdings, Inc., a Texas corporation ("IHI"),
pursuant to the Stock Purchase Agreement dated October 26, 1992, by and among
IHI, the Executive and other shareholders of the Company (the "Stock Purchase
Agreement");

WHEREAS, in light of the foregoing, the Company desires to employ the
Executive as its President upon the terms and subject to the conditions set
forth herein, and the Executive desires to accept such employment.

NOW, THEREFORE, in consideration of the mutual covenants, promises and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

1. EMPLOYMENT.

(a) The Company hereby employs the Executive and the Executive
hereby accepts employment as the President of the Company, subject to the
direction of the Board of Directors and the Company's officers designated by the
Board of Directors, and shall perform and discharge well and faithfully the
duties and responsibilities which are assigned to him by the Board of Directors.
The authority, duties and responsibilities of the Executive shall be as
described in EXHIBIT A. Executive agrees to devote such of his time, attention
and energy to the business of the Company, and any of its subsidiaries or
affiliates, as may be required to perform the duties and responsibilities
assigned to him by the Board of Directors to the best of his ability and with
requisite diligence. If the Executive is elected or appointed a director or
officer of the Company or any subsidiary therefor during the term of this
Agreement, the Executive will serve in such capacity without further
compensation..

(b) The Executive agrees to comply in all material respects at
all times during the Executive Period with all applicable policies, rules and
regulations of the Company and IHI.

2. TERM. Subject to the terms hereof, this Agreement shall commence
on the date hereof (the "Execution Date" ) and shall terminate on the second
anniversary of the Execution Date; provided, that the Company and Executive
will have the option to renew this Agreement
<PAGE>
for successive one-year periods. Not less than thirty (30) days and not more
than sixty (60) days before the expiration of the term hereof the Company shall
deliver notice to the Executive of its intention to either (i) renew this
Agreement or (ii) allow this Agreement to terminate in accordance with its
terms. If the Company intends to renew this Agreement, the Executive shall have
ten (10) days after the receipt of such notice to inform the Company in writing
of his intention to accept or deny the Company's offer of renewal. If the
Company fails to send or to send timely notice to the Executive, then the
Company will be deemed to have sent such renewal notice 30 days prior to the
expiration of the term hereof. The term of this Agreement shall include any such
renewal periods, and shall be referred to herein as the "Executive Period."

3. COMPENSATION. (a) For all services rendered under this
Agreement, the Company agrees to pay to Executive during the Executive Period:

(i) an annual salary of $110,000, payable in equal semi-monthly
installments or on any other periodic basis consistent with the Company's
payroll procedures, subject only to such payroll and withholding deductions as
are required by law;

(ii) annual performance bonuses in the following dollar amounts
or percentages of certain levels of Before Tax Profits ("BTP") for the Company
for each fiscal year during the term of this Agreement in which the Company
equals or exceeds such level of BTP, (for purposes hereof, Before Tax Profits
shall mean net operating income without regard to or reduction for taxes,
interest expense, amortization of intangibles, overhead allocations,
intercompany service charges or the levy of any management fees by the Buyer or
its affiliates as such terms are defined by Generally Accepted Accounting
Principles ("GAAP"));

Annual Annual
BTP BONUS

$500,000 but less than $600,000.................. $5,000

$600,000......................................... an additional $5,000

Each dollar above $600,000.......................an additional 2% per dollar

Before Tax Profits shall be calculated quarterly by the independent auditors of
IHI and be determined in accordance with the usual accounting practices of IHI
and payments of any sums due under this paragraph shall be made quarterly upon
delivery of the Company's income statement for the preceding fiscal quarter, but
no later than 60 days after the end of such quarter;

(iii) reimbursement of all reasonable out-of-pocket expenses
incurred by him in the performance of his duties, subject to the submission of
appropriate documentation in accordance with the Company's expense reimbursement
policy as in existence from time to time;

(iv) 15 days vacation per year, excluding weekends and days which
the Company has recognized as holidays or on which the Company is not opened for
business, paid by the Company, if taken;

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<PAGE>
(v) (a) an automobile allowance of $500.00 per month and
reimbursement for routine operating and maintenance expenses, including, but not
limited to gas and oil, and (b) $100.00 per month for all costs and expenses of
ownership and operation incurred by the Executive in connection with the use of
Executive's mobile or portable telephone to be reimbursed to the Executive as
reasonable business expenses;

(vi) country club or health club dues for Executive in an
amount not to exceed $400 per month.

(b) During the Executive Period, the Executive shall be eligible to
participate in employee benefit plans or programs of the Company and/or its
parent IHI, if any, to the extent that his position, tenure, salary, age, health
and other qualifications make him eligible to participate, subject to the rules
and regulations applicable thereto.

(v) The Company shall provide health insurance for the Executive and his
dependents (spouse and children not over 21 years of age) which is uniform in
coverage with that provided to other employees of the Company and/or IHI. If, in
the sole discretion of the Executive, such coverage is deemed unsatisfactory or
inadequate, the Company shall pay to the Executive $400 per month to be used by
the Executive to obtain alternative coverage. The Company's obligation pursuant
to this Section 3(c) to provide health insurance or the alternative to the
Executive and his dependents shall survive termination of the employment of the
Executive pursuant to Section 6(b) hereof for the remainder of the Executive
Period.

4. DISCLOSURE OF INFORMATION.

(a) OBLIGATION OF EXECUTIVE. Executive hereby acknowledges, understands
and agrees that, all Confidential Information, as set forth in Paragraph 4(b),
is the exclusive and confidential property of the Company and shall be at all
times regarded, treated and protected as such in accordance with this Agreement,
until such Confidential Information comes into the public domain. Executive
acknowledges that all such Confidential Information is in the nature of a trade
secret. Failure to mark any writing confidential shall not affect the
confidential nature of such writing or the information contained therein.
Notwithstanding any provision herein to the contrary, for purposes of this
Section 4, the term "Company" shall refer to the Company and each of its parent
and subsidiary corporations, including, without limitation, IHI.

(b) DEFINITION OF CONFIDENTIAL INFORMATION. "Confidential Information"
shall mean information, which is used in Company's business and (1) is
proprietary to, about or created by the Company; (2) gives the Company some
competitive business advantage or the opportunity of obtaining such advantage or
the disclosure of which could be detrimental to the interest of the Company; (3)
is designated as Confidential Information by the Company, known by the Executive
to be considered confidential by the Company, or from all relevant circumstances
should reasonably be assumed by Executive to be confidential and proprietary to
the Company, except such information as required to be disclosed by Executive in
connection with the performance of his duties as set forth in this Agreement or
as necessary to comply with the applicable federal, state or local laws. Such
Confidential Information includes, but is not limited

3
<PAGE>
to, the following types of information and other information of a similar nature
(whether or not reduced to writing or designated as confidential);

(i) Internal Company personnel and financial information,
financial statements, projections, budgets, vendor information (including vendor
characteristics, customer lists, services, prices, lists and agreements),
purchasing and internal cost information and internal service and operational
manuals;

(iii) Marketing and development plans, price and cost data, price
and fee amounts, pricing and billing policies, quoting procedures, marketing
techniques, acquisition strategies and candidates, pending or future
acquisitions, forecasts and forecast assumptions and volumes, and future plans
and strategies of the Company which have been or are being discussed:

(iii) Names of customers and their representatives, contracts
and their contents and parties; and

(iv) Confidential and proprietary information provided to the
Company by any actual or potential customer, government agency, or other third
party (including businesses, consultants and other entities and individuals).

(c) COVENANTS OF EXECUTIVE. As a consequence of Executive's acquisition
or anticipated acquisition of Confidential Information, Executive will occupy a
position of trust and confidence with respect to the Company's affairs and
business. In view of the foregoing and of the consideration to be provided to
Executive, Executive agrees that it is reasonable and necessary that Executive
make the following covenants, which covenants shall survive for the term of this
Agreement and for three years thereafter, as follows:

(i) Executive will not disclose Confidential Information to any
person or entity, either inside or outside of the Company, other than as
necessary in carrying out duties on behalf of the Company, without first
obtaining the Company's prior written consent (unless such disclosure is
compelled pursuant to court order or subpoena and at which time Executive gives
prior written notice of such proceedings to the Company), or is necessary to
comply with applicable federal, state or local laws.

(ii) Executive will not use, copy or transfer Confidential
Information other than as necessary in carrying out his duties on behalf of the
Company, without first obtaining the Company's prior written consent.

(iii) Upon the termination of the Executive Period, the Executive
shall promptly deliver to the Company (or its designee) all written materials,
records and documents made by the Executive or coming into his possession prior
to or during the Executive Period concerning the business or affairs of the
Company, including all materials containing Confidential Information.

4
<PAGE>
(d) EXCEPTIONS. The obligations of this Section 4 shall not apply to
Confidential Information that (i) at the time of the Executive's employment by
the Company was in the public domain, (ii) is or becomes generally available in
the public domain other than pursuant to a breach by the Executive of this
obligation under this Section 4 or (iii) the Executive can show was acquired, or
is acquired after the date of this Agreement, from a third party and such third
party did not obtain such confidential information from the Executive subject to
or in violation of obligations similar to those set forth in this Section 4.

5. INSURANCE. The Company may, at its election and for its benefit,
insure the Executive against accidental loss or death, and the Executive shall
submit to a physical examination and supply such reasonable information as may
be required in connection therewith.

6. TERMINATION. (a) At any time during the Executive Period the Company
may, at its sole discretion, discharge the Executive with "cause." For purposes
of this Agreement, the following events shall constitute "cause": (i) the
conviction of the Executive by a court of competent jurisdiction of a crime
involving moral turpitude; or (ii) the commission, or attempted commission, by
the Executive of an act of fraud upon the Company; or (iii) the
misappropriation, or attempted misappropriation, by the Executive of any funds
or property of the Company; (iv) the continued and unreasonable failure by the
Executive to perform in any material respect his obligations under the terms of
this Agreement; (v) the knowing engagement by the Executive in any activity
which would (A) constitute a breach of the covenants not-to-compete of the
Executive set forth in that certain Non-Competition Agreement of even date
herewith, between the Executive and the Company (the "Non-Competition
Agreement"), or (B) result in any material injury to the financial condition of
the Company.

(b) At any time during the Executive Period, the Company may, in its
sole discretion, terminate the Executive without "cause" as that term is defined
in Section 6.2(a) hereof; provided, however, that if the Company should
terminate the Executive without "cause," the Company shall pay to Executive,
within 15 days of the date of termination, the sum of Executive's weekly salary
(pursuant to Section 3(a)(i) multiplied by the number of weeks remaining in the
Executive Period plus all other compensation earned or accrued as of the date of
termination pursuant to the provisions of paragraphs 3(a)(iii), (v) and (vi)
hereof.

(c) This Agreement will terminate automatically upon the earliest to
occur of: (i) the death or disability of the Executive (as used herein, the term
"disability" shall mean the inability of the Executive to perform his
obligations under this Agreement for a period of six months even if not
consecutive but arising form the same illness, which inability, and the cause
therefor, must be confirmed in writing by two licensed medical doctors, one of
which will be designated by the Company); (ii) the voluntary retirement of the
Executive; or (iii) the expiration of the Executive Period unless otherwise
renewed.

(d) At any time during the term of this Agreement, the Executive may
terminate this Agreement by giving at least six months written notice to the
Company of his intent to terminate this Agreement, with the date of termination
to be specified in such notice.

5
<PAGE>
(e) If this Agreement is terminated pursuant to Sections 6(a), 6(c) or
6(d) hereof, then the Company will have no obligation to pay any amount to the
Executive other than amounts earned or accrued as of the date of termination
pursuant to the provisions of paragraph 3(a)(i), (iii), (v) and (vi) hereof, but
which have not yet been paid as of the date of the termination of the Executive.

7. ASSIGNMENT BY EXECUTIVE. Except as otherwise expressly provided
herein, Executive agrees for himself, and on behalf of his executors and
administrators, heirs, legatees, distributees and any other person or persons
claiming any benefits under him by virtue of this Agreement, that this Agreement
and the rights, interests and benefits hereunder shall not be assigned,
transferred, pledged or hypothecated in any way by Executive or any executor,
administrator, heir, legatee, distributee or person claiming under Executive by
virtue of this Agreement and shall not be subject to execution, attachment or
similar process. Any attempt at assignment, transfer, pledge or hypothecation or
other disposition of this Agreement or of such rights, interests and benefits
contrary to the foregoing provisions, or the levy of any attachment or similar
process thereupon, shall be null and void and without effect.

8. SUCCESSORS OF THE COMPANY. This Agreement shall be binding upon and
inure to the benefit of any Successor (as hereinafter defined) of the Company
and any such Successor shall be deemed substituted for the Company under the
terms of this Agreement. As used in this Agreement, the term "Successor" shall
include any person, firm, corporation or other business entity which at any
time, whether by merger, purchase or otherwise, acquires all or substantially
all of the assets or businesses of the Company; but no such substitution shall
relieve such companies of their original obligations hereunder. This Agreement
may not otherwise be assigned by the Company without Executive's consent to any
person, firm, corporation, limited liability company, trust or other entity.

9. NOTICES. All notices or other communications which are required or
may be given under this Agreement shall be in writing and shall be deemed to
have been duly given when delivered in person, transmitted by telecopier or
mailed by registered or certified first class mail, postage prepaid, return
receipt requested to the parties hereto at the address set forth below (as the
same may be changed from time to time by notice similarly given) or the last
known business or residence address of such other person as may be designated by
either party hereto in writing.

If to the Company:

Landreth Engineering Company
c/o Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
Attn: Robert E. Cone

6
<PAGE>
If to the Executive:

Thomas C. Landreth
15923 Larkfield Street
Houston, Texas 77059

10. WAIVER OF BREACH. A waiver by the Company or the Executive of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.

11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.

12. SEVERABILITY. If any provisions of this Agreement shall, for any
reason, be held to violate any applicable law, and so much of said Agreement is
held to be unenforceable, then the invalidity of such specific provision herein
shall not be held to invalidate any other provision herein which shall remain in
full force and effect.

13. AMENDMENT. This Agreement constitutes and contains the entire
agreement of the parties and supersedes any and all prior negotiations,
correspondence, understandings and agreements between the parties respecting the
subject matter hereof. This Agreement may be modified only by an agreement in
writing executed by all the parties hereto.

14. HEADINGS. The section and subsection headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

COMPANY:

LANDRETH ENGINEERING COMPANY

BY: S/ROBERT E. CONE
Robert E. Cone,
Chief Executive Officer

EXECUTIVE:

S/THOMAS C. LANDRETH
Thomas C. Landreth

7
<PAGE>

EXHIBIT 11

INDUSTRIAL HOLDINGS, INC.
EARNINGS (LOSS) PER SHARE
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
SIX MONTHS SIX MONTHS PRO FORMA
ENDED ENDED YEAR ENDED HISTORICAL YEAR ENDED
JUNE 30 JUNE 30 DECEMBER 31 DECEMBER 31
----- --------------- -------- ---------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
----- ----- ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average
common shares
outstanding ....................... 3,952 3,320 3,012 3,669 3,037 2,941 2,624 2,102 716

Common stock equivalents(1) .............. 446 548 68 159 113 89 205
----- ----- ------ ------ ------ ------ ------ ------ -----

Total common shares and
common equivalent
shares deemed to have a
dilutive effect ....................... 4,398 3,868 3,080 3,828 3,150 3,030 2,829 2,102 716
====== ====== ====== ====== ====== ====== ====== ====== =====

Net earnings (loss)
available for common
shareholders .......................... $ 776 $ 556 $ 354 $1,267 $ 545 $ 32 $ 763 $ 382 $(998)
====== ====== ====== ====== ====== ====== ====== ====== =====

Earnings (loss) per share ................ $ .18 $ .14 $ .12 $ .33 $ .17 $ .01 $ .27 $ .17 $(1.39)
====== ====== ====== ====== ====== ====== ====== ====== =====
</TABLE>
- ---------------------

(1) Net effect of dilutive stock options and warrants, calculated using the
treasury stock method using average market price. Fully diluted earnings per
share is not presented since it is the same as primary earnings per share.
The effect of convertible debt is anti-dilutive for all years presented.

EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

Industrial Municipal Supply Company (IMSCO)
Landreth Engineering Company
The Rex Group, Inc.
Rex Supply Corporation
Regal Machine Tool, Inc.
Rex Machinery Sales, Inc.
Rex International Corporation
U.S. Crating, Inc.
First Texas Credit Corporation
XTEL Corporation
Rex Macinery Movers, Inc.
Losco, Inc.

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 29, 1996, except
as to the last paragraph of Note 11 which is as of March 19, 1996, relating to
the financial statements of Industrial Holdings, Inc., which appears in such
Prospectus.

PRICE WATERHOUSE LLP

Houston, Texas
October 2, 1996

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated March 23, 1994 (and to all references to our Firm) included in or made a
part of this Form S-1 Registration Statement.

ARTHUR ANDERSEN LLP

Houston, Texas
October 2, 1996

EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the use of our report dated December 27, 1995 on the
statements of assets sold and liabilities assumed and direct revenues and direct
expenses of MRMC, Inc. Fastener Division as of and for the three years ended
June 30, 1995 included herein in the Industrial Holdings, Inc. Registration
Statement on Form S-1.

GOLDBERG & ZUFFELATO, P.C.

West Haven, Connecticut
October 2, 1996

EXHIBIT 23.4

CONSENT OF KPMG PEAT MARWICK LLP
INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
American Rivet Company, Inc.

We consent to the use of our report dated October 13, 1995, on the financial
statements of American Rivet Company, Inc. as of August 31, 1995 and 1994 and
for each of the years in the three-year period ended August 31, 1995 included
herein in the Industrial Holdings, Inc. Registration Statement on Form S-1.

KPMG Peat Marwick LLP

Chicago, Illinois
October 1, 1996