Abstract: An improved insulated, heat shrink tool system and method of assembly, which utilizes an insulating sleeve within the internal opening of a heat shrink tool holder wherein the insulating sleeve has a thermal conductivity less than that of the tool holder. In use the tool holder, is heated by means of an induction heating system, or hot air. As the tool holder is heated it expands outwardly thereby enlarging or increasing the internal diameter of the holder. The internal section of the holder is lined with an insulating sleeve prepared from titanium or a titanium alloy having a thermal conductivity less than that of the holder. The insulating sleeve is brazed to the inner wall of the holder so that the expansion of the holder during heating will result in a simultaneous, and equal expansion of the inner diameter of the insulating sleeve. The shank of a cutting tool is than inserted within the insulating sleeve of the holder and the holder is allowed to cool.