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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**___________________**FORM 10-QSB**___________________

 

**ý                                QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For thequarterly period ended June 30, 2005

 

**OR**

 

**o                                TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For thetransition period from               to              

 

Commission File No.:0-25223

**AMERICANINTERNATIONAL INDUSTRIES, INC.**(Exact Name Of RegistrantAs Specified In Its Charter)
| Nevada |      |      |      | 88-0326480

(State of Incorporation)
            
(I.R.S. Employer Identification No.)

 
                           
601 Cien Street, Suite 235, Kemah, TX
            
77565-3077

(Address of Principal Executive Offices)
            
(ZIP Code

 Registrant'sTelephone Number, Including Area Code: (281) 334-9479

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.    Yes  [X]   No [  ]Issuers Involved in Bankruptcy Proceeding During The Past Five YearsIndicate by check mark whether the registrant has filed all documents and reports requiredto be filed by Section 12, 13 or 15(b) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. Yes [  ]  No [  ]

At June 30, 2005,the Registrant had 3,083,945 shares of common stock issued.

 
****
**TABLE OF CONTENTS**
Item    Description    Page
**PART I - FINANCIAL INFORMATION**

ITEM 1.
            
FINANCIAL    STATEMENTS.
        3  
ITEM 2.
            
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL    CONDITIONS AND RESULTS OF OPERATION.
        3   
ITEM 3.
            
CONTROLS AND    PROCEDURES.
        5   
**PART II - OTHER INFORMATION**

ITEM 1.
            
LEGAL PROCEEDINGS.
        5  
ITEM 2.
            
CHANGES IN SECURITIES.
        5   
ITEM 3.
            
DEFAULT    UPON SENIOR SECURITIES.
        5   
ITEM 4.
            
SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS.
        5   
ITEM 5.
            
OTHER INFORMATION.
        5   ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.5
 
****
**PART I - FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS****Back toTable of Contents

The Registrant's financialstatements for the three and six-month periods ended June 30, 2005 and 2004 are attachedto this quarterly report.

Financial Statements

ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION****Backto Table of Contents

Forward-Looking Statements; Market Data 

As used in this Quarterly Report, the terms *"we"*, *"us"*,*"our"**"AIII"* and the *"Company"* meansAmerican International Industries, Inc., a Nevada corporation, and its subsidiaries. Tothe extent that we make any forward-looking statements in the *"Management'sDiscussion and Analysis of Financial Condition and Results of Operations"* in thisQuarterly Report, we emphasize that forward-looking statements involve risks anduncertainties and our actual results may differ materially from those expressed or impliedby our forward-looking statements. Our forward-looking statements in this Quarterly Reportreflect our current views about future events and are based on assumptions and are subjectto risks and uncertainties. Generally, forward-looking statements include phrases withwords such as *"expect"*, *"anticipate"*, *"intend"*,*"plan"*, *"believe"*, *"seek"*, *"estimate"*and similar expressions to identify forward-looking statements. 

Overview

We are a holding company and during the six-month period ended June 30,2005, we had the following operating subsidiaries: Northeastern Plastics, Inc. (NPI),Brenham Oil & Gas, Inc. ("Brenham," which is dormant), Delta Seaboard WellService, Inc. (Delta) and International American Technologies, In. ("IMTG), apublicly traded entity (f/k/a Unlimited coatings Corporation). On February 28, 3005 IMTGentered into an agreement to acquire 51% of Hammonds Technical Services, Inc. theAgreement was closed in April, 2005. Hammonds is in the business of water treatment, fuelhandling equipment for the military and industrial customers, a provider of duel injectionservices for the aviation industry and the designer of a new omni directional vehicle fora wide variety of uses. We own 82.7% of the common stock of IMTG.. The historicalfinancial statements of AIII include the acquisitions of acquired companies as of theeffective dates of the purchases and the results of those companies subsequent toacquisition, as these transactions were accounted for under the purchase method ofaccounting. The acquisitions of certain subsidiaries were accounted for using the purchasemethod of accounting, whereby the purchase price of the acquisition was allocated based onthe fair market value of the assets acquired and liabilities assumed. If the purchaseprice exceeded the net fair market value of the assets acquired, any remaining purchaseprice was allocated to goodwill. In addition, certain subsidiaries were accounted forusing the historical cost basis of the predecessor. Reference is made to our AnnualReports on Form 10-KSB for our year ended December 31, 2004 for a full discussion of ourbusiness and subsidiaries under *"Description of Business"* and Note 2, *"Acquisitionsand Divestitures"* of the Notes to Consolidated Financial Statements. 

We have three reportable segments and corporate overhead:industrial/commercial, real estate and oil and gas related activities. Due to the sale ofthe real estate division we no longer have the real estate as a reportable segment. Theindustrial/commercial segment includes: (1) a supplier of automotive after-market andconsumer electrical products, and (2) an oil and gas segment, which owns an oil, gas andmineral royalty interest in Washington County, Texas and Delta Seaboard Well Services, anoil and gas service company. 

Corporate overhead includes our investment activities includingfinancing current operations and expansion of our current holdings, as well as evaluatingthe feasibility of entering into additional businesses. Our discussion under *"Resultsof Operations"* and *"Liquidity and Capital Resources"* below is ona consolidated basis. For reference to *"Industry Segments"*. See Note 4 tothe Notes to Consolidated Financial Statements under Item 1, Financial Statements above.Results of Operations - American International Industries, Inc. - Consolidated.

The following defined terms are used in this Quarterly Report:Northeastern Plastics, Inc. (NPI), Brenham Oil & Gas, Inc. (Brenham) (which isdormant), Delta Seaboard Well Service, Inc. (Delta) and International AmericanTechnologies, Inc. (IMTG).
**Three and Six months Ended June 30, 2005 Compared to Three and Sixmonths Ended June 30, 2004 

Our consolidated net losses for the three and six-month periods endedJune 30, 2005 were $253,948 and $2,014,891, respectively, compared to consolidated netlosses of $491,401 and $773,194, respectively during the same periods in the prior year.During the three and six-month periods ended June 30, 2005, Delta posted net earnings of$210,191 and $515,412. Delta expects the strong business environment to prevail during thesecond half of the year. NPI posted net losses of $62,962 and $140,589, respectively.NPI's business is seasonal and therefore most of its profits will be in the third quarter.We expect a strong performance of NPI in the second half of this fiscal year due to thefact that NPI currently has a backorder of over $5,000,000. IMTG, with its operatingsubsidiary Hammonds Technical Services, reported net earnings of $125,806 for thetwo-month period starting April 28. The holding company incurred a net loss of $2,256,838mainly due to an unrealized loss in value of its trading securities.

Net revenues for the three and six months ended June 30, 2005 were$4,869,929 and $8,985,621 respectively, compared to $3,527,298 and $6,388,382respectively, for the three and six-months period ended June 30, 2004. The increase is dueto acquisition of Hammonds Technical Services and the strong performances of Delta and NPIduring the period. The Selling, general and administrative expenses during the three andsix-month periods ended June 30, 2005, were $2,913,405 and $4,279,971, respectively, whichcompares to $373,341 and $2,351,188 for the three and six months ended June 30, 2004.Delta continues to service the same number of wells annually due to the limitation of thenumber of usable well service rigs. In FY 2005 Delta plans to add at least one additionalwell service rig which could increase revenue by $100,000.00 per month, with anapproximate gross margin of 35% which would add an additional $15,000.00 per month to netincome. Delta as part of its business sells salvaged and new pipe to the oil fields. Dueto the demand of "pipe sales" it has increased 20% and its associated marginshave increased to 40%, which has had and will continue to have an effect of profitability.With NPI’s current backlog at over $5,000,000 we expect NPI’s year-end revenueto exceed $8,000,000 a significant increase over last years revenue. IMTG’s newlyacquired subsidiary Hammonds Technical Services is estimating that its revenue for thenext six months could exceed $4,000,000.
**Liquidity and Capital Resources - AIII 

Total assets for the six-month period ended June 30, 2005 were$28,615,513 compared to $22,745,845 at December 31, 2004. Total liabilities at June 30,2005 were $13,267,322 compared to $6,904,448 at December 31, 2004. At June 30, 2005, ourconsolidated working capital was $12,046,518 compared to working capital of $12,065,215 atDecember 31, 2004.

The Company’s consolidated cash position at June 30, 2005 was$4,425,477 compared to $5,079,873 at December 31, 2004. Accounts receivable net ofreserves at June 30, 2005 were $3,339,824 compared to $3,012,398 at December 31, 2004.Inventories totaled $4,769,961 at June 30, 2005, compared to $1,235,743 at December 31,2004.

For the six months ended June 30, 2005, AIII used $2,621,882 in itsoperating activities compared to net cash used in operating activities of $1,121,760during the same period of the prior year. We had net cash provided by investing activitiesof $1,189,914 during the six month period ending June 30, 2005, compared to net cash usedin investing activities of $191,163 during the same period of the prior year. Financingactivities provided $721,066 compared to $742,673 for the same period in prior year.

In regards to additional liquidity AMIN has recently renegotiated itscurrent $1,000,000 line of credit and is payable in 18 months. Our subsidiary NPI hasrecently negotiated a new $5,000,000 line of credit, Delta has recently negotiated a newline of credit for $1,500,000 and IMTG’s newly acquired subsidiary Hammond hasnegotiated a new revolving line of credit for $2,000,000. All of the new lines of creditare due in eighteen months.
**SRG Agreements 

In June 2002, the Company’s real estate subsidiary sold realestate consisting of approximately 63% of its real estate portfolio to SurgiCare, Inc.(AMEX: SRG). The purchase price of $6 million evidenced by 1,200,000 shares of SRG SeriesAA Convertible Preferred Stock, redeemable by SRG at $5.00 per share, for the real estatewas determined following receipt by SRG of independent appraisals of the real estate. InDecember 2002 the Company agreed to convert 300,000 Series AA shares into 3,658,537 sharesof SRG common stock, which were sold by the Company during 2003. SRG had the right toredeem the remaining 900,000 Series AA shares for $4,500,000 in cash or SRG commonstock in increments of 300,000 Series AA shares on June 2004, 2005 and 2006. 

During the quarter ended June 30, 2004, SRG issued 8,750,000 shares ofSRG's common stock to the Company having a market value of $3,150,000, in exchange for theconversion of the remaining 900,000 Series AA SRG shares owned by the Company, with a bookvalue of $4,500,000. In addition to the $3,150,000 in common stock, SRG transferred to theCompany the real estate owned by SRG to cover the difference between the book value of thepreferred stock of $4,500,000 and the $3,150,000 market value of the common stock at thedate of the transaction. The real estate received was subject to a first lien in theamount of $1,100,000. The Company also agreed to pay SRG $250,000 related to costs of thetransaction at the time of the closing. No gain or loss was recognized on thistransaction. The land was placed on the books at approximately $2,939,000.

On June 30, 2004, the Company sold the real estate to an unaffiliatedthird party for a cash payment equal to the first lien and the $250,000 owed to SRG and anote receivable in the amount of $5,000,000, secured by a lien on the real estate. Thebuyer financed the cash payment by borrowing against the property. The note is payable in20 years, with a 5-year balloon payment in the amount of $4,012,084, and bears interest of3% per annum. The Company recorded a gain in the amount of $1,813,070 on the sale of thisreal estate based on discounting the $5,000,000 note at an 8% interest rate (approximatingthe market rate for real estate transactions).

On July 12,2005 Amin announced that it filed a lawsuit against OrionHealth Corp. Inc. formerly Surgicare and Brantley Venture partners alleging common lawfraud, stock fraud, misrepresentation, civil conspiracy and violations of the rules of theAmerican Stock Exchange. Amin is seeking actual damages of $3,800,000, punitive damages of$3,800,000 and rescission of the agreement to convert the preferred stock into common. 

ITEM 3. CONTROLS AND PROCEDURES****Back toTable of Contents

*Evaluation ofdisclosure controls and procedures*. As of June30, 2005, the Company's chief executive officer and chief financial officer conducted anevaluation regarding the effectiveness of the Company's disclosure controls and procedures(as defined in Rules 13a-15(e) or 15d-15(e) under the  Exchange Act. Based upon theevaluation of these controls and procedures, our chief executive officer and chieffinancial officer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this report.*Changes in internal controls*. Duringthe quarterly period covered by this report, no changes occurred in our internal controlover financial reporting that materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

ITEM 1. LEGAL PROCEEDINGS****Back toTable of Contents

The Registrant'sofficers and directors are not aware of any threatened or pending litigation to which theRegistrant is a party or which any of its property is the subject and which would have anymaterial, adverse effect on the Registrant.

ITEM 2. CHANGES IN SECURITIES****Back toTable of Contents

None.

ITEM 3. DEFAULTS UPON SENIORSECURITIES****Back to Table of Contents

None.

ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS****Back toTable of Contents

None.

ITEM 5. OTHER INFORMATION****Back toTable of Contents

None.

ITEM6. EXHIBITS AND REPORTS ON FORM 8-K****Back to Table of Contents

(a) The following documents are filed as exhibits tothis report on Form 10-KSB or incorporated by reference herein. Any document incorporatedby reference is identified by a parenthetical reference to the SEC filing that includedsuch document.
**Exhibit    No.**
**Description**31.1Certification of Chief    Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the    Sarbanes-Oxley Act of 200231.2
Certification    of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 200232.1Certification of Chief    Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the    Sarbanes-Oxley Act of 200232.2Certification of Chief    Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K During the Period Covered by this Report:

The Registrant has not filed a Form 8-K during the Period ended June 30,2005.

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and on the dateindicated.

/s/ DANIEL DROR   CEO, PRESIDENT AND CHAIRMAN   *Dated: August 15, 2005*

/s/ GARY D. WOERZ   CHIEF FINANCIAL OFFICER   *Dated: August 15, 2005*

 

**FinancialStatements**Back to Table of Contents
Consolidated    Financial Statements   Balance Sheets - June 30, 2005 and December 31, 2004    (Audited)8   Statements of Operations - Three and six    months ended June 30, 2005 and 20049   Statement of Cash Flows - Six months ended    June 30, 2005 and 200410Notes to Consolidated Financial Statements11
 
**AMERICAN    INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**Consolidated Balance Sheets****Back to    Table of ContentsJune 30, 2005    (Unaudited) and December 31, 2004  **  ****June 30, 2005**
**December    31, 2004**
AssetsCurrent assets:
      Cash and cash equivalents
$4,425,477
$
5,079,873   Certificate of    deposit-300,000   Trading securities788,6973,874,500   Accounts    receivable, less allowance for doubtful accounts of          $125,627 at June 30, 2005 and $81,162 at December 31, 20043,339,8243,012,398   Accounts and notes    receivable from related parties236,13411,575   Inventories4,769,9611,235,743   Real estate    held-for sale225,000225,000   Drilling rigs held    for sale1,230,6471,230,647   Prepaid expenses    and other current assets1,191,671358,853        **Total current assets**16,207,41115,328,589   Long-term notes receivable4,301,3144,324,447Property and equipment, net of    accumulated   depreciation and    amortization3,130,6272,406,780Excess of cost over net assets    of businesses acquired, less accumulated   amortization of    $205,295 at June 30, 2005 and December 31, 20044,808,588674,539Patents and trademarks, net of    amortization138,415-Other assets29,15811,490          **Total assets**$28,615,513$22,745,845  
Liabilities    and Stockholders' Equity  Current liabilities:   Accounts payable    and accrued expenses$3,586,173$1,889,070   Short-term notes    payable477,460609,300   Loans to related    parties-684,654   Current    installments of long-term debt97,26080,350        Total current liabilities4,160,8933,263,374Long-term debt, less current    installments4,682,6361,698,504Minority interest4,423,7931,942,570        **Total liabilities**13,267,3226,904,448  Stockholders' equity:   Preferred stock,    $.001par value.         Authorized 1,000,000 shares: Series A, 5% cumulative, redeemable and         convertible, 390,000 shares issued and outstanding at June 30, 2005 and     at    December 31, 2004.390390   Common stock,    $.001 par value. Authorized 10,000,000 shares:         3,083,945 shares issued and 3,081,425 shares outstanding at June 30, 2005,     and    2,907,845 shares issued and 2,905,325 shares outstanding at December 31, 20043,0812,905   Additional paid-in    capital27,827,02926,208,020   Accumulated    deficit(12,448,281)(10,335,890)  15,382,21915,875,425   Less treasury    stock, at cost (2,520 shares)(34,028)(34,028)     Total    stockholders' equity15,348,19115,841,397        **Total liabilities and stockholders' equity**
$28,615,513$22,745,845  See accompanying    notes to consolidated financial statements**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND    SUBSIDIARIES**Consolidated    Statements of Operations****Back to Table of ContentsThree and six months ended June, 30 2005 and 2004(Unaudited)  
**Three months ended June 30,**
**Six months ended June 30,****  ****2005****2004**
**2005**
**2004**  Revenues $4,869,929$3,527,298
$
8,985,621
$
6,388,382Costs    and expenses:       Cost of sales 2,369,0523,390,280
4,796,887
4,466,055      Selling, general and administrative 2,913,405373,341
4,279,971
2,351,188        Total operating expenses 5,282,4573,763,621
9,076,858
6,817,243      Operating loss(412,528)(236,323)
(91,237)
(428,861)      Other    income (expenses):       Interest income 49,0663,754
121,073
26,186      Realized gains (losses) on investments--
(412,000)
37,500      Unrealized gain and (losses) on trading securities(108,185)-
(1,690,917)
-      Interest expense(3,276)(44,601)
(66,097)
(125,460)      Other income (expense)521,458(48,749)
521,458
(48,749)        Total other income (expenses)459,063(89,596)
(1,526,483)
(110,523)          Net    income (loss) before income tax46,536(325,919)
(1,617,720)
(539,384)Provision    for income taxes--
-
-        Net income (loss) from operations before minority interest46,536(325,919)
(1,617,720)
(539,384)Minority    interest(300,483)(165,482)
(397,171)
(233,810)    Net loss$(253,948)$(491,401)
$
(2,014,891)
$
(773,194)      Net    earnings (loss) applicable to common shareholder       Basic$(0.08)$(0.18)
$
(0.67)
$
(0.29)       Diluted$(0.08)$(0.18)$(0.67)$(0.29)  Weighted    average common sharesBasic3,050,3212,733,122
2,986,183
2,695,632Diluted3,440,3213,133,1223,376,1833,095,632See accompanying notes to consolidated financial statements
 
**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND    SUBSIDIARIES**Consolidated    Statements of Cash Flows****Back to Table of ContentsSix months ended June 30, 2005 and 2004(Unaudited)  **  **
**2005**
**2004**Cash    flows from operating activities:       Net earnings (loss)
$
(2,014,891)
$
(773,194)      Adjustments to reconcile net earnings (loss)        to net cash used in operating activities:           Depreciation and amortization 
84,438
70,422          Common stock issued for services 
179,575
817,210          Realized losses on the sale of trading securities412,000-          Unrealized loss on trading securities1,627,500-          Minority interest
397,171
233,810          (Increase) decrease of operating assets:              Accounts receivable 
(369,566)
(293,940)             Inventories 
(2,725,380)
(408,514)             Prepaid expenses and other current assets
(803,157)
239,334             Other assets 
1,017
(59,362)          Increase (decrease) in operating liabilities,          net of acquisition of subsidiary:             Accounts payable and accrued expenses589,411(947,526)             Net cash    used in operating activities 
(2,621,882)
(1,121,760)  Cash    flows from investing activities:       Purchase of property and equipment
(11,469)
(104,515)      Proceeds from sale of equity investments1,046,303-      Cash received on acquisition of subsidiary56,506-      Redemption of certificate of deposit300,000-      Notes receivable23,13330,197      Loans from related parties
(224,559)
(116,845)            Net cash    provided by (used in) investing activities 
1,189,914
(191,163)      Cash    flows from financing activities:       Proceeds from short-term borrowing
886,380
124,565      Proceeds from long-term debt2,114,66288,316      Proceeds from borrowing from related parties-644,246      Repayment of borrowing from related parties(684,654)-      Repayment of short-term notes payable(1,497,822)-      Principal payments on long-term debt-(14,454)      Payment of dividends on preferred stock
(97,500)
(100,000)            Net cash    provided by financing activities 
721,066
742,673                 Net decrease in cash and cash equivalents
(710,902)
(570,250)  Cash and    cash equivalents beginning of year 
5,136,379
944,233Cash and cash equivalents end of period
$
4,425,477
$
373,983      Supplemental    schedule of cash flow information:       Interest paid 
$
66,097
$
125,460  See accompanying notes to consolidated financial statements
 

**AmericanInternational Industries, Inc.**Back to Table of Contents****Notes to Consolidated Financial Statements
**(1) General

American International Industries, Inc. (the "Company" or"AIII"), operates as a diversified holding company with a number of wholly-ownedsubsidiaries and one majority-owned subsidiary.

The accompanying unaudited financial statements have been prepared inaccordance with U. S. generally accepted accounting principles ("GAAP") forinterim financial information and with the instructions to Form 10-QSB. Accordingly, theydo not include all of the information and footnotes required by GAAP for completefinancial statements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have been included.Operating results for the Six months period ended June 30, 2005 are not indicative of theresults that may be expected for the year ending December 31, 2005.

As contemplated by the Securities and Exchange Commission (SEC) underRules of Regulation S-B, the accompanying financial statements and related footnotes havebeen condensed and do not contain certain information that will be included in theCompany's annual financial statements and footnotes thereto. For further information,refer to the Company's audited consolidated financial statements and related footnotesthereto included in the Company's annual report on Form 10-KSB for the year ended December31, 2004.
**(2) Use of Estimates

The preparation of financial statements in conformity with U. S. GAAPrequires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses during thereporting period. Actual results could vary from those estimates.
**(3) Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 153. This statement addresses themeasurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, *"Accountingfor Nonmonetary Transactions,"* is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assets exchanged.

The guidance in that opinion; however, included certain exceptions tothat principle. This statement amends Opinion 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with a generalexception for exchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. This statement is effectivefor financial statements for fiscal years beginning after June 15, 2005. Earlierapplication is permitted for nonmonetary asset exchanges incurred during fiscal yearsbeginning after the date of this statement is issued. Management believes the adoption ofthis statement will have no impact on the financial statements of the Company.

In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 152, which amends FASB statement No. 66, *"Accountingfor Sales of Real Estate,"* to reference the financial accounting and reportingguidance for real estate time-sharing transactions that is provided in AICPA Statement ofPosition (SOP) 04-2, *"Accounting for Real Estate Time-Sharing Transactions."*This statement also amends FASB Statement No. 67, *"Accounting for Costs andInitial Rental Operations of Real Estate Projects,"* to state that the guidancefor (a) incidental operations and (b) costs incurred to sell real estate projects does notapply to real estate time-sharing transactions. The accounting for those operations andcosts is subject to the guidance in SOP 04-2. This statement is effective for financialstatements for fiscal years beginning after June 15, 2005. Management believes theadoption of this statement will have no impact on the financial statements of the Company.

November 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 151, *"Inventory Costs— anamendment of ARB No. 43, Chapter 4."* This statement amends the guidance in ARBNo. 43, Chapter 4, *"Inventory Pricing,"* to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wasted material(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that *"under somecircumstances, items such as idle facility expense, excessive spoilage, double freight,and rehandling costs may be so abnormal as to require treatment as current periodcharges."* This statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of *"soabnormal."* In addition, this statement requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacity of theproduction facilities. This statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Management does not believe the adoption ofthis statement will have any immediate material impact on the Company.
**(4) Income Taxes

Income taxes for the interim periods were computed using the effectivetax rate estimated to be applicable for the full fiscal year, which is subject to ongoingreview and evaluation by management. The estimated federal income tax expense for thesix-month periods ended June 30, 2005 and 2004 is eliminated by net operating loss carryforwards.
**(5) Employee Stock-Based Compensation

The Company accounts for its employee stock options under theAccounting Principles Board Opinion No. 25, "*Accounting for Stock Issued toEmployees*," and related interpretations. No stock-based employee compensationcost is reflected in net income (loss), as all employee options granted has an exerciseprice equal to the market value of the underlying common stock on the date of grant.

The Company also grants options to non-employees for goods and servicesand in conjunction with certain agreements. These grants are accounted for under FASBStatement No. 123, "*Accounting for Stock-Based Compensation*" based on thegrant date fair values.

The following table illustrates the effect on net earnings (loss) and earnings (loss)per share if the Company had applied the fair value recognition provisions of FASBStatement No. 123 to stock-based employee compensation.

**Three months ended**
**Six months ended**
**June    30, 2005**
**June 30, 2004**
**June    30, 2005**
**June 30, 2004**  
Net earnings (loss) as    reported
$
(253,948)
$
(491,401)
$
(2,014,891)
$
(773,194)
Deduct: Total stock-based    employee compensation (expense determined under the fair value method for all awards), net    of tax effect
(103,903)
(74,076)
(207,805)
(148,153)
Pro forma net earnings    (loss)
(357,851)
(565,477)
(2,222,696
(921,347)
Earnings (loss) per share:
Basic net earnings (loss)    per share - as reported
(0.08)
(0.18)
(0.67)
(0.29)
Basic net earnings (loss)    per share - pro forma
(0.12)
(0.21)
(0.74)
(0.34)
The above pro forma effects onnet earnings (loss) and net earnings (loss) per share are not like to be representative ofthe effects on reported net earnings (loss) for future years because options vest overseveral years and additional awards could be made each year.

**(6) Industry Segments**

The Company has three reportable segments and corporate overhead:industrial/commercial, oil and gas, and real estate. The industrial/commercial segmentincludes (1) a supplier of automotive after-market products and (2) a holding company forfuture commercial ventures. The real estate segment includes sales of commercial realestate (undeveloped land). The oil and gas segment owns an oil, gas and mineral royaltyinterest in Washington County, Texas and an onshore rig-based well servicing contractingcompany providing service to the oil and gas industry. The corporate overhead includes theCompany's investment holdings including financing current operations and expansion of itscurrent holdings as well as evaluating the feasibility of entering into additionalbusinesses.

The Company's reportable segments are strategic business units thatoffer different technology and marketing strategies. Most of the businesses were acquiredas subsidiaries and the management at the time of the acquisition was retained.

Consolidated revenues, net operating losses for the six months endedJune 30, 2005 and 2005, and identifiable assets as of June 30, 2005 and 2004, were asfollows:
**2005****2004**Revenues:$$   Industrial/Commercial3,499,4352,055,504   Real estate--   Oil and gas5,486,1864,332,878$8,985,621$6,388,382Operating income (loss):   Industrial/Commercial$(300,926)$(20,822)   Real estate-(964)   Oil and gas990,781690,047   Corporate(598,618)(1,097,122)$91,237$(428,861)Identifiable assets:   Industrial/commercial$11,166,444$2,980,720   Real estate225,0005,517,488   Oil and gas6,215,6775,489,528   Corporate11,008,3926,618,224$28,615,513$20,605,960
The Company's areas of operations are in the United States.

**(7) Subsequent Events**

On July 28, 2005, the Company's board of directorsdeclared a cash dividend of $0.05 per share of common stock and a 20% stock dividend forshareholders of record as of August 26, 2005.

On July 12, the Company accepted a cash offer of$14,525,000 form an investor group based in Mesa, Arizona to sell the Company's remaining287 acres of undeveloped real estate. The sale is subject to customary contingencies of areal estate transaction, such as obtaining of permits and other due diligence. The realestate is carried on the Company's balance sheet at $225,000.**************** |
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