Does having improved grab allow a character to deal unarmed strike + natural attack damage?

Question

The SRD for improved grab states (emphasis mine):

If a creature with this special attack hits with a melee weapon (usually a claw or bite attack), it deals normal damage and attempts to start a grapple as a free action without provoking an attack of opportunity. No initial touch attack is required.

Unless otherwise noted, improved grab works only against opponents at least one size category smaller than the creature. The creature has the option to conduct the grapple normally, or simply use the part of its body it used in the improved grab to hold the opponent. If it chooses to do the latter, it takes a –20 penalty on grapple checks, but is not considered grappled itself; the creature does not lose its Dexterity bonus to AC, still threatens an area, and can use its remaining attacks against other opponents.

A successful hold does not deal any extra damage unless the creature also has the constrict special attack. If the creature does not constrict, each successful grapple check it makes during successive rounds automatically deals the damage indicated for the attack that established the hold. Otherwise, it deals constriction damage as well (the amount is given in the creature’s descriptive text).

When a creature gets a hold after an improved grab attack, it pulls the opponent into its space. This act does not provoke attacks of opportunity. It can even move (possibly carrying away the opponent), provided it can drag the opponent’s weight.

The regular rules for grappling, state (emphasis mine):

Damage Your Opponent: While grappling, you can deal damage to your opponent equivalent to an unarmed strike. Make an opposed grapple check in place of an attack. If you win, you deal nonlethal damage as normal for your unarmed strike (1d3 points for Medium attackers or 1d2 points for Small attackers, plus Strength modifiers). If you want to deal lethal damage, you take a –4 penalty on your grapple check. Exception: Monks deal more damage on an unarmed strike than other characters, and the damage is lethal. However, they can choose to deal their damage as nonlethal damage when grappling without taking the usual –4 penalty for changing lethal damage to nonlethal damage (see Dealing Nonlethal Damage, page 146).

I can see two possible readings for a character that has Improved Grab, an optimistic and a more 'realistic' one.

Reading 1 (Optimistic):

1. Character goes for the option damage your opponent, he makes a grapple check and succeeds.
2. The character deals unarmed strike damage per regular grapple rules.
3. The character also does natural attack damage (and possibly constrict damage) because a successful grapple check was made.

Reading 2 (Realistic)

1. Character goes for the option damage your opponent, he makes a grapple check and succeeds.
2. The character does natural attack damage (and possibly constrict) because improved grab replaces regular grapple rules (in regards to damaging your opponent).

The question therefore is, which of these readings is correct per RAW?

Answer 1

It's the optimistic version

Let's name our Improved Grab character Alice of the Crab People and her target Bob.

Alice uses Improved Grab and selects the option of taking -20 to Grapple checks and succeeds. This answer establishes that Alice is now grappling but not affected by penalties associated with grappling, and retains normal movement, Dex bonus to AC and threatens applicable area. She pays for that with a hefty -20 penalty on any grappling checks. Therefore she can choose to select Damage Your Opponent action. That action requires her to roll a Grapple check, again with -20 penalty, but if she succeeds, she deals damage from the attack that triggered Improved Grab and normal damage resulting from damaging action.

Note, that she could have elected to do whatever else she would desire (e.g. attack someone else, cast a spell, use an ability, make an Attack of Opportunity, Help Other, etc. etc.) as long as it does not involve the body part which she uses to deal with Bob.

An example:

1. Alice attacks Bob with a Pincer natural weapon attack. Alice rolls attack and it hits. Bob gets damaged by a pincer pinching his body.
2. Pincer attack triggers Improved Grab and Alice can initiate a Grapple special attack. She chooses to do so. She does not provoke an AoO and does not require a touch attack, because she already connected with the pincer.
3. Alice now has to roll Grapple for Hold sub-part of Grapple. She can either do it normally and use her whole body to enter normal grapple or she can take a -20 penalty and deal with Bob using just the pincer. She chooses the latter and succeeds.
4. Bob becomes grappled and is pulled into Alice's space. Alice, on the other hand, uses just the pincer to hold poor Bob and can act freely with no penalties other than -20 to grapple. Since The pincer has already struck Bob, this step causes no damage.
5. It's a new turn. Alice can now choose to attack someone else (using a weapon or a different pincer) or move (as long as she can drag Bob with her). She can also tighten the pincer on Bob's body using Damage Your Opponent grappling action - for which she rolls Grapple at -20 penalty.
6. Bob thrashes about, but Alice succeeds. Bob gets regular nonlethal damage from Alice tight grip, but also gets pincer attack's worth of lethal damage, because he's been struggling against the hold of a weapon.

Answer 2

I think it's Option 2 but not because it supercedes but because the grappler chooses.

From your first quote block: "The creature has the option to conduct the grapple normally, or simply use the part of its body it used in the improved grab to hold the opponent."

Thus:

• Any natural damage is because they chose to hold (+damage/constrict) the opponent.
• Any unarmed damage is because they chose to conduct the grapple normally.

Edit (further attempt to clarify):

In case my position is not clear, perhaps this helps. From Constrict in the SRD:

A creature with this special attack can crush an opponent, dealing bludgeoning damage, after making a successful grapple check. The amount of damage is given in the creature’s entry. If the creature also has the improved grab ability it deals constriction damage in addition to damage dealt by the weapon used to grab.

So my quote from the first quote block says you can choose to grapple normally or use the improved hold. I believe constrict reads similarly, you either deal constrict plus weapon (natural in most cases) damage or you do the damage when you established the hold (just "weapon"). In neither case when consticting do you deal unarmed damage per the questions second quote block grapple rules (unless they're the same in which case your question is "do you deal double damage" which I don't think it is).

But before you get to the constrict (hold) you have to pick: normal grapple (where you can choose unarmed along with the other options) or natural damage (with improved grab/hold).