UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549


___________________




FORM
10-Q/A


_________________________




ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




For the
quarterly period ended March 31, 2007




OR




 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




For the
transition period from
              
to




Commission
File No.: 0-25223




AMERICAN
INTERNATIONAL INDUSTRIES, INC.




(Exact
Name Of Registrant As 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's Telephone Number,
Including Area Code: (281) 334-9479




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes   x  No   ̈




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈ 
Nox




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.




Large
      accelerated filer  ̈
            Accelerated filer ̈
            Non-accelerated
      filer x




At March
31, 2007, the Registrant had 5,467,602 shares of common stock
issued.





EXPLANATORY NOTE




In
response to a letter from the SEC in connection with the review of HMDI’s Form
10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has reexamined
the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complex issue, we
have restated the financial statements for the year ended December 31, 2006 and
for the quarter ended March 31, 2007.








TABLE OF CONTENTS




Item
            Description
            PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
            FINANCIAL
      STATEMENTS
            5ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
            26ITEM
      3.
            QUANTITATIVE AND
      QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
            28ITEM
      4.
            CONTROLS AND
      PROCEDURES
            29PART
      II - OTHER INFORMATIONITEM
      1.
            LEGAL
      PROCEEDINGS
            29ITEM
      1A.
            RISK FACTORS
            30ITEM
      2.
            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            30ITEM
      3.
            DEFAULT UPON
      SENIOR SECURITIES
            30ITEM
      4.
            SUBMISSION OF
      MATERS TO A VOTE OF SECURITY HOLDERS
            30ITEM
      5.
            OTHER
      INFORMATION
            30ITEM
      6.
            EXHIBITS
            30











PART
I - FINANCIAL INFORMATION






ITEM
1.FINANCIAL STATEMENTSBack to Table of Contents




Condensed
      Consolidated Financial StatementsConsolidated
      Balance Sheets - March 31, 2007 (Unaudited) and December 31, 2006
      (Audited)
            6Unaudited
      Consolidated Statements of Operations - Three ended March 31, 2007 and
      2006
            8Unaudited
      Consolidated Statement of Cash Flows - Three months ended March 31, 2007
      and 2006
            9Notes to
      Unaudited Condensed Consolidated Financial Statements
            10












AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESConsolidated
      BalanceSheetsBack to Table
      of ContentsMarch
      31, 2007 and December 31, 2006March
      31, 2007
            
            
            December
      31, 2006(Unaudited)
            
            
            (Audited)(Restated)
            
            
            (Restated)AssetsCurrent
      assets:Cash and cash equivalents
            
            $
            3,651,902
            
            
            $
            3,275,803Certificate of deposit
            
            
            6,025,000
            
            
            
            6,139,000Trading securities
            
            
            858,772
            
            
            
            724,255Accounts receivable, less allowance for doubtful accountsof $232,307 at March 31, 2007 and December 31, 2006
            
            
            4,060,006
            
            
            
            5,221,072Current portion of notes receivable
            
            
            714,166
            
            
            
            1,021,593Accounts and notes receivable from related parties
            
            
            235,000
            
            
            
            235,000Inventories
            
            
            6,071,404
            
            
            
            5,303,418Real estate acquired for resale
            
            
            225,000
            
            
            
            225,000Drilling rigs held for sale
            
            
            187,611
            
            
            
            187,611Prepaid expenses and other current assets
            
            
            532,589
            
            
            
            320,498Total current assets
            
            
            22,561,450
            
            
            
            22,653,250Long-term
      notes receivable, less current portion
            
            
            4,068,322
            
            
            
            4,043,322Investment
      in Whittingdon Oil & Gas
            
            
            6,000
            
            
            
            6,000Property
      and equipment, net of accumulated depreciation and
      amortization
            
            
            3,298,393
            
            
            
            3,141,867Goodwill,
      less accumulated amortization of$205,295 at March 31, 2007 and December 31, 2006
            
            
            674,539
            
            
            
            674,539Patents
      and trademarks, net of amortization
            
            
            5,877,105
            
            
            
            6,038,870Other
      assets
            
            
            221,633
            
            
            
            39,083Total assets
            
            $
            36,707,442
            
            
            $
            36,596,931Liabilities and Stockholders'
      EquityCurrent
      liabilities:Accounts payable and accrued expenses
            
            $
            3,568,058
            
            
            $
            3,667,108Margin loans from financial institutions
            
            
            356,558
            
            
            
            341,058Short-term notes payable
            
            
            1,141,767
            
            
            
            917,301Current installments of long-term debt
            
            
            102,994
            
            
            
            102,580Total current liabilities
            
            
            5,169,377
            
            
            
            5,028,047Long-term
      debt, less current installments
            
            
            7,324,135
            
            
            
            6,945,282Deferred
      tax liability
            
            
            503,200
            
            
            
            503,200Minority
      interest
            
            
            1,606,431
            
            
            
            1,558,395Total liabilities
            
            
            14,603,143
            
            
            
            14,034,924Stockholders'
      equity:Preferred stock, $0.001par value, 1,000,000 authorized: none
      issuedCommon stock, $0.001 par value. Authorized 10,000,000
      shares:5,467,602 shares issued and 5,449,402 shares outstanding at March 31,
      2007;5,340,852 shares issued and 5,335,452 shares outstanding at December 31,
      2006
            
            
            5,468
            
            
            
            5,341Additional paid-in capital
            
            
            38,771,266
            
            
            
            37,324,641Accumulated deficit
            
            
            (16,566,964
            )
            
            
            (15,229,064
            )Common stock issuance obligation
            
            
            -
            
            
            
            508,62022,209,770
            
            
            
            22,609,538Less treasury stock, at cost (18,200 shares at March 31,
    2007and 5,400 shares at December 31, 2006)
            
            
            (105,471
            )
            
            
            (47,531
            )Total stockholders' equity
            
            
            22,104,299
            
            
            
            22,562,007Total liabilities and stockholders' equity
            
            
            36,707,442
            
            
            $
            36,596,931The
      accompanying notes are an integral part of these consolidated financial
      statements












AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESConsolidatedStatements of OperationsBack to Table
      of ContentsThree
      months ended March 31, 2007 and 2006 (Unaudited)Three
      Months Ended
            
            
            Three
      Months EndedMarch
      31, 2007
            
            
            March
      31, 2006Revenues
            
            $
            6,612,570
            
            
            $
            6,859,882Costs
      and expenses:Cost of sales
            
            
            4,603,524
            
            
            
            4,316,213Selling, general and administrative
            
            
            3,453,868
            
            
            
            2,861,872Total operating expenses
            
            
            8,057,392
            
            
            
            7,178,085Operating
      loss
            
            
            (1,444,822
            )
            
            
            (318,203
            )Other
      income (expenses):Interest and dividend income
            
            
            160,689
            
            
            
            60,238Realized losses on investments
            
            
            (598,705
            )
            
            
            -Unrealized gain (losses) on trading securities
            
            
            642,919
            
            
            
            (9,549
            )Interest expense
            
            
            (219,812
            )
            
            
            (170,274
            )Other income (expense)
            
            
            214,867
            
            
            
            (6,445
            )Total other income (expenses)
            
            
            199,958
            
            
            
            (126,030
            )Net loss from operations before income taxes and minority
      interest
            
            
            (1,244,864
            )
            
            
            (444,233
            )Minority
      interest
            
            
            (48,036
            )
            
            
            (239,430
            )Net loss
            
            $
            (1,292,900
            )
            
            $
            (683,663
            )Preferred dividends
            
            
            (45,000
            )
            
            
            -Net loss applicable to common shareholders
            
            
            (1,337,900
            )
            
            
            (683,663
            )Net
      loss applicable to common shareholders:Basic
            
            $
            (0.24
            )
            
            $
            (0.16
            )Weighted
      average common shares:Basic
            
            
            5,460,951
            
            
            
            4,346,933The
      accompanying notes are an integral part of these consolidated financial
      statements












AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESConsolidated
      Statements of Cash FlowsBack to Table
      of ContentsThree
      months ended March 31, 2007 and 2006 (Unaudited)Three
      Months Ended
            
            
            Three
      Months EndedMarch
      31, 2007
            
            
            March
      31, 2006Cash
      flows from operating activities:Net loss
            
            $
            (1,292,900
            )
            
            $
            (683,663
            )Adjustments to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization
            
            
            277,549
            
            
            
            229,664Common shares issued for services
            
            
            172,775
            
            
            
            210,739Compensation - stock warrants
            
            
            70,685
            
            
            
            -Realized (gains) losses on the sale of trading securities
            
            
            598,705
            
            
            
            -Unrealized (gain) losses on the sale of trading securities
            
            
            (642,919
            )
            
            
            9,549Stock returned in lawsuit settlement
            
            
            (39,600
            )
            
            
            -Minority interest
            
            
            48,036
            
            
            
            239,430(Increase)
      decrease of operating assets, net of acquisitions and
      dispositions:Accounts receivable
            
            
            1,161,066
            
            
            
            632,007Trading securities
            
            
            (90,303
            )
            
            
            120,902Inventories
            
            
            (767,986
            )
            
            
            (551,180
            )Prepaid
      expenses and other current assets
            
            
            (212,092
            )
            
            
            (234,547
            )Other
      assets
            
            
            (182,549
            )
            
            
            33,249Increase (decrease) in operating liabilitiesAccounts payable and accrued expenses
            
            
            (144,050
            )
            
            
            (26,601
            )Net cash used in
      operating activities
            
            
            (1,043,583
            )
            
            
            (20,451
            )Cash
      flows from investing activities:Purchase of property and equipment
            
            
            (267,470
            )
            
            
            (330,339
            )Patents and trademarks
            
            
            (4,840
            )
            
            
            -Issuance of note receivable
            
            
            (25,000
            )
            
            
            -Investment in certificate of deposit
            
            
            (3,100,000
            )
            
            
            -Redemption of certificate of deposit
            
            
            3,214,000
            
            
            
            1,000,000Note receivable
            
            
            307,427
            
            
            
            184,974Net cash provided by
      investing activities
            
            
            124,117
            
            
            
            854,635Cash
      flows from financing activities:Addition to (repayment of) short-term borrowings from related
      parties
            
            
            -
            
            
            
            (46,663
            )Net borrowings under line-of-credit agreements
            
            
            324,218
            
            
            
            -Net repayment under line-of-credit agreements
            
            
            -
            
            
            
            (199,999
            )Proceeds from short-term debt
            
            
            300,000
            
            
            
            -Proceeds from long-term debt
            
            
            264,946
            
            
            
            23,319Margin loans
            
            
            15,501
            
            
            
            -Proceeds from issuance of common stock of subsidiary
            
            
            694,672
            
            
            
            -Principal payments on short-term debt
            
            
            (257,664
            )
            
            
            -Principal payments on long-term debt
            
            
            (27,768
            )
            
            
            (193,802
            )Acquisition on treasury stock
            
            
            (18,340
            )
            
            
            -Net cash provided by
      (used in)  financing activities
            
            
            1,295,565
            
            
            
            (417,145
            )Net increase (decrease) in cash and cash equivalents
            
            
            376,099
            
            
            
            417,039Cash
      and cash equivalents at beginning of year
            
            
            3,275,803
            
            
            
            2,709,105Cash
      and cash equivalents at end of year
            
            $
            3,651,902
            
            
            $
            3,126,144Supplemental
      schedule of cash flow information:Interest paid
            
            $
            219,812
            
            
            $
            91,249The
      accompanying notes are an integral part of these consolidated financial
      statements









American International Industries,
Inc.Back to Table of Contents


Notesto Unaudited Condensed Consolidated Financial Statements






(1)
Summary of Significant Accounting Policies






Organization,
Ownership and Business






American
International Industries, Inc. (the "Company"), a Nevada corporation, operates
as a diversified holding company with a number of wholly-owned subsidiaries and
two majority-owned subsidiaries. The Company is a diversified corporation with
interests in industrial/commercial companies and an oil and gas service
business. The Company's business strategy is to acquire controlling equity
interests in businesses that it considers undervalued. The Company's management
takes an active role in providing its subsidiaries with access to capital,
leveraging synergies and providing management expertise in order to improve its
subsidiaries' growth.






Principles
of Consolidation






The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries: Northeastern Plastics, Inc., and Brenham Oil &
Gas, Inc., and its majority owned subsidiaries, Delta Seaboard Well Services,
Inc. and International American Technologies, Inc. In accordance with FIN46(r),
the Company consolidates IMTG although its ownership is less than 51%, because
the Company controls the IMTG Board of Directors by having designated two of the
three members of IMTG's Board of Directors. Since Hammonds is incurring losses
and there is no minority interest, the Company recognizes 100% of Hammond’s
losses. All significant intercompany transactions and balances have been
eliminated in consolidation.






Cash
and Cash-Equivalents






The
Company considers cash and cash-equivalents to include cash on hand and
certificates of deposits with banks with an original maturity of three months or
less, that the Company intends to convert.






Accounts
Receivable






Accounts
receivable consist primarily of trade receivables, net of a valuation allowance
for doubtful accounts.






Allowance
for Doubtful Accounts






The
Company extends credit to customers and other parties in the normal course of
business. The Company regularly reviews outstanding receivables and provides for
estimated losses through an allowance for doubtful accounts. In evaluating the
level of established reserves, the Company makes judgments regarding its
customers' ability to make required payments, economic events and other factors.
As the financial condition of these parties change, circumstances develop or
additional information becomes available, adjustments to the allowance for
doubtful accounts may be required. When the Company determines that a customer
may not be able to make required payments, the Company increases the allowance
through a charge to income in the period in which that determination is
made.






Inventories






Inventories
are valued at the lower-of-cost or market on a first-in, first-out basis. The
Company assesses the realizability of its inventories based upon specific usage
and future utility. A charge to results of operations is taken when factors that
would result in a need for a reduction in the valuation, such as excess or
obsolete inventory, are noted.






Freight
and Shipment Policy






The
Company's policy is to expense all freight and shipment expenses on a monthly
basis. The Company prepays any shipments greater than $1,250 and to reduce our
freight and shipping costs the Company receives at least three
quotations.






Investment
Securities






The
Company accounts for its investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Management determines the appropriate classification of its
investments in marketable securities at the time of purchase and reevaluates
such determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities. Debt securities for which the Company does not have the
intent or ability to hold to maturity and equity securities not classified as
trading securities are classified as available-for-sale. The cost of investments
sold is determined on the specific identification or the first-in, first-out
method. Trading securities are reported at fair value with unrealized gains and
losses recognized in earnings, and available-for-sale securities are also
reported at fair value but unrealized gains and losses are shown in the caption
"unrealized gains (losses) on shares available-for-sale" included in
stockholders' equity. Management determines fair value of its investments based
on quoted market prices at each balance sheet date.






Property,
Plant, Equipment, Depreciation, Amortization and Long-Lived Assets






Long-lived
assets include:






Property,
Plant and equipment – Assets acquired in the normal course of business are
recorded at original cost and may be adjusted for any additional significant
improvements after purchase. We depreciate the cost evenly over the assets’
estimated useful lives. Upon retirement or sale, the cost of the assets disposed
of and the related accumulated depreciation are removed from the accounts, with
any resultant gain or loss being recognized as a component of other income or
expense. As required by SFAS No. 141, IMTG has recorded the acquisition of
Hammonds using the purchase method of accounting with the purchase price
allocated to the acquired assets and liabilities based on their respective
estimated fair values at the acquisition date. For more information on the
acquisition of Hammonds, see note 2.






Identifiable
intangible assets – These assets are recorded at acquisition cost. Intangible
assets with finite lives are amortized evenly over their estimated useful
lives.






At least
annually, we review all long-lived assets for impairment. When necessary, we
record changes for impairments of long-lived assets for the amount by which the
present value of future cash flows, or some other fair value measure, is less
than the carrying value of these assets.






During
April, 2005 the Company's subsidiary acquired Hammonds Technical Services, Inc.
for a purchase price of approximately $2,455,700. Long-lived assets totaling
$2,958,900 were recognized as a result of the acquisition. The operations of
Hammonds Technical Services are included in the consolidated statements of
operations from date of acquisition.






The
following table contains a summary of the tangible and of the intangible assets
acquired:




Acquired
      Assets
            
            Amount
            
            LifeMachinery
      & Equipment
            
            $
            408,162
            
            2-10
      yearsPatents
            
            
            1,621,500
            
            5-17
      livesTrade
      Marks
            
            
            465,199
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            7
      years$
            2,958,900




SFAS No.
142 eliminated the amortization of goodwill, and requires annual impairment
testing of goodwill and introduces the concept of indefinite life intangible
assets. The Company adopted SFAS No. 142 effective January 1, 2002.






On August
1, 2006, IMTG acquired the 49% minority interest of Hammonds Technical Services,
Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc.
by issuing 16,000,000 restricted shares or 44.4% of IMTG common stock at a
conversion rate of $0.25 a share. The additional cost of $4,000,000 has been
allocated to patents, trademarks, and sole source contract and is being
amortized in a manner equivalent to the amortization used on the intangible
assets acquired in the initial purchase of 51% of the company.






March 31,
2007 and December 31, 2006 balances for long-lived assets are detailed in later
footnotes: Property and Equipment (note 7) and Intangible Assets (note
8).






Revenue
Recognition






Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured. The Company has no
significant sales returns or allowances.






Income
Taxes






The
Company is a taxable entity and recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.






Earnings
Per Share






The basic
net earnings per common share is computed by dividing the net earnings by the
weighted average number of shares outstanding during a period. Diluted net
earnings per common share is computed by dividing the net earnings, adjusted on
an as if converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities. For the years ended December 31,
2006 and 2005, potential dilutive securities that had an anti-dilutive effect
were not included in the calculation of diluted net earnings (loss) per common
share. These securities include options to purchase shares of common
stock.






Advertising
Costs






The cost
of advertising is expensed as incurred.






Management's
Estimates and Assumptions






The
preparation of 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, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.






Stock-Based
Compensation






The
Company grants shares of stock to non-employees for goods and services and in
conjunction with certain agreements. These grants are accounted for under FASB
Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant
date fair values.






Fair
Value of Financial Instruments






The
Company estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the Company estimates of fair value are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumption and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The interest rates payable by the Company on its notes payable
approximate market rates. The Company believes that the fair value of its
financial instruments comprising accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.






New
Standards Implemented






In May
2005, the Financial Accounting Standards Board ( "FASB") issued Statement of
Financial Accounting Standard ( "SFAS") No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion
No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Internal Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154
requires retrospective application of changes in accounting principle to prior
periods’ financial statements, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS No. 154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1,
2006. Any impact on the Company’s consolidated results of operations and
earnings per share will be dependent on the amount of any accounting changes or
corrections of errors whenever recognized.






In 2006,
the Financial Accounting Standards Board issued the following:






- SFAS
No. 155: Accounting for
Certain Hybrid Financial Instruments


-
SFAS No. 156: Accounting for Servicing of Financial Assets


-
SFAS No. 157: Fair Value Measurements


-
SFAS No. 158: Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans


-
SFAS No. 159: The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115


-
FIN No. 48: Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109






Management
has reviewed these new standards and believes that they have no impact on the
financial statements of the Company at this time; however, they may apply in the
future.






(2)
Acquisition of Hammonds Technical Services, Inc.






Effective
April 28, 2005, the Company's subsidiary, International American Technologies,
Inc. ("IMTG"), entered into a Stock Purchase Agreement ("the Agreement") to
acquire a 51% interest in the capital stock of Hammonds Technical Services,
Inc., a privately owned Texas corporation ("Hammonds") in consideration for IMTG
or its parent, American International Industries, Inc., providing: (i) $998,300
in cash to Hammonds for working capital; (ii) a secured revolving long-term line
of credit in the amount of $2,000,000; and (iii) the parent issuing 145,000
restricted shares of common stock to IMTG in consideration for a $1,450,000
promissory note. These shares were exchanged for two minority equity interests
in Hammonds owned by third parties. The total purchase price to acquire the 51%
in Hammonds was $2,455,700 representing cash payments of $825,000, 145,000
shares of AIII’s restricted common stock valued at $1,450,000 and the assumption
of a note payable to one of the former shareholders in the amount of $173,300
and liabilities in excess of assets in the amount of $7,400.






Prior to
the acquisition, Hammonds was two separate legal entities, Hammonds Technical
Services, Inc. and Hammonds Fuel Additives, Inc. (collectively "Hammonds") manufacturers
engineered products and chemicals that serve multiple segments of the fuels
distribution, water treatment and utility vehicle industries. Hammonds products
are marketed by a worldwide network of distributors, manufacturers
representatives and original equipment manufacturers. On February 28, 2005,
Hammond Fuels Additives, Inc. was merged into Hammonds Technical Services,
Inc.






As
required by SFAS No. 141, IMTG has recorded the acquisition using the purchase
method of accounting with the purchase price allocated to the acquired assets
and liabilities based on their respective estimated fair values at the
acquisition date. The purchase price of $2,455,700 had been allocated at
follows:




Current
      assets
            
            $
            1,435,939Property
      and equipment, net
            
            
            826,765Patents
      and trademarks, net of amortization
            
            
            2,724,487Other
      non-current assets
            
            
            70,085Current
      liabilities
            
            
            (2,098,376
            )Deferred
      tax credits
            
            
            (503,200
            )$
            2,455,700




Revenues
and expenses are included in IMTG’s statement of operations from May 1, 2005
through March 31, 2007.






(3)
Trading Securities






Investments
in marketable securities primarily include shares of common stock in various
companies. The investments are considered trading securities, and accordingly
any changes in market value are reflected in the consolidated statement of
operations. At March 31, 2007 and 2006, the Company has unrealized trading gains
of $642,919 and losses of $9,549, respectively, related to securities held on
those dates. These unrealized losses are included in the consolidated statements
of operations for the respective years. The Company recorded realized losses of
$598,705 and realized gains / losses of $-0- on the sales of trading securities
for the quarters ended March 31, 2007 and 2006. The Company sold 180,500 ONH
shares for proceeds of $103,954 in February 2007. Through December 31, 2006, the
Company had an unrealized loss on these shares of $633,227. The realized loss
from the sale of the shares in 2007 was $585,228. The net income effect of the
sale of these shares is a gain of $47,999 in 2007.






(4)
Inventories






Inventories
consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Part
      and materials
            
            $
            1,545,737
            
            
            $
            1,332,446Work
      in process
            
            
            284,630
            
            
            
            232,451Finished
      goods
            
            
            4,501,521
            
            
            
            4,034,699Less
      reserve
            
            
            (260,484
            )
            
            
            (296,178
            )$
            6,071,404
            
            
            $
            5,303,418




(5)
Real Estate Transactions






The
Company continues to own 287 undeveloped acres of waterfront property on
Dickinson Bayou and Galveston Bay in Galveston County, Texas. The book
value for this property is $225,000. The property's appraised value is
substantially more than the book value. In November 2005, the Company signed a
contract for sale of the property for a cash consideration of $16,000,000 with
Lakeland Partners III. In January 2007, Lakeland assigned all of its interest in
the contract to Westfield Forest, L.P. Westfield is a recognized developer
of waterfront properties in the Houston, Texas area. No revenue has been
recognized for this transaction because the development of the property requires
permits from certain governmental agencies, which the developer believes they
can obtain timely. The projected closing of the transaction is scheduled for
sometime in 2007.






(6)
Long-term Notes Receivable






Long-term
notes receivable at March 31, 2007 consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Net
      note receivable from sale of real estate, principal payment due on or
      before July 30, 2008
            
            $
            3,020,044
            
            
            $
            3,020,044Sale
      of machinery and equipment, principal payment due on or before December 1,
      2008
            
            
            164,200
            
            
            
            439,200Sale
      of former subsidiary, Marald, Inc., principal and interest due monthly
      through June 5, 2012
            
            
            183,147
            
            
            
            190,310Sale
      of former subsidiary, Marald, Inc., principal due October 5,
      2007
            
            
            200,000
            
            
            
            200,000Sale
      of refinery to settle lawsuit, principal and interest due on June 1 and
      December 1, through June 1, 2010
            
            
            875,000
            
            
            
            875,000Sale
      of drilling rig, principal and interest due monthly through December 31,
      2009
            
            
            299,736
            
            
            
            325,000Other
            
            
            40,361
            
            
            
            15,361Notes
      receivable
            
            
            4,782,488
            
            
            
            5,064,915Less
      current portion
            
            
            714,166
            
            
            
            1,021,593Notes
      receivable, less current portion
            
            $
            4,068,322
            
            
            $
            4,043,322




(7)
Property and Equipment






Major
classes of property and equipment together with their estimated useful lives,
consisted of the following:




Years
            
            
            March
      31, 2007
            
            
            December
      31, 2006Land
            
            
            
            
            $
            892,945
            
            
            $
            817,595Building
      and improvements
            
            
            20
            
            
            
            1,049,862
            
            
            
            1,009,001Machinery
      and equipment
            
            
            7-15
            
            
            
            2,965,086
            
            
            
            2,910,871Office
      equipment and furniture
            
            
            7
            
            
            
            712,149
            
            
            
            701,682Automobiles
            
            
            5
            
            
            
            811,404
            
            
            
            724,8276,431,446
            
            
            
            6,163,976Less
      accumulated depreciation and amortization
            
            
            
            
            
            
            (3,133,053
            )
            
            
            (3,022,109
            )Net
      property and equipment
            
            
            
            
            
            $
            3,298,393
            
            
            $
            3,141,867




(8)
Intangible Assets






Intangible
assets at March 31, 2007 consisted of the following:




As
      of March 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Average
      Weighted LivesGoodwill
            
            $
            879,834
            
            
            $
            205,295
            
            
            
            N/APatents
            
            $
            4,473,620
            
            
            $
            563,170
            
            
            12
      yearsTrademarks
            
            
            1,149,199
            
            
            
            134,763
            
            
            10
      yearsSole
      Source Contract
            
            
            1,144,039
            
            
            
            191,820
            
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contract
            
            $
            6,766,858
            
            
            $
            889,753
            
            
            11
      years




Intangible
assets at December 31, 2006 consisted of the following:




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Average
      Weighted LivesGoodwill
            
            $
            879,834
            
            
            $
            205,295
            
            
            
            N/APatents
            
            $
            4,468,780
            
            
            $
            466,154
            
            
            12
      yearsTrademarks
            
            
            1,149,199
            
            
            
            106,033
            
            
            10
      yearsSole
      Source Contract
            
            
            1,144,039
            
            
            
            150,961
            
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contract
            
            $
            6,762,018
            
            
            $
            723,148
            
            
            11
      years








Aggregate
      Amortization ExpenseFor
      year ending December 31, 2007
            
            $
            654,906For
      year ending December 31, 2008
            
            $
            638,979For
      year ending December 31, 2009
            
            $
            638,979For
      year ending December 31, 2010
            
            $
            638,979For
      year ending December 31, 2011
            
            $
            638,979




The
Company’s patents, trademarks, and sole source contract resulted from the April
28, 2005 acquisition of 51% of Hammonds Technical Services and from the August
1, 2006 acquisition of the 49% minority interest of the Hammonds
Companies.






The
following table contains a summary of the intangible assets acquired from the
acquisition of Hammonds Technical Services on April 28, 2005:




As
      of March  31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            414,187
            
            12
      yearsTrademarks
            
            
            465,199
            
            
            
            89,163
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            
            
            127,058
            
            7
      yearsPatents,
      Trademarks and Sole Source Contracts
            
            $
            2,735,625
            
            
            $
            630,408
            
            11
      years




On August
1, 2006 The Company acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. by issuing 16,000,000 restricted shares or 44.4% of IMTG common
stock at a price of $0.25 a share. The additional cost of $4,000,000 has been
allocated to patents, trademarks, and sole source contract for the additive
injection system and is being amortized in a manner equivalent to the
amortization used on the intangible assets acquired in the initial purchase of
51% of the company. Additionally, the Company acquired patents totaling $26,393
in 2006 and $4,840 during the quarter ended March 31, 2007. The following table
contains a summary of the intangible assets acquired in 2006 and during the
quarter ended March 31, 2007:




As
      of March 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            2,667,233
            
            
            $
            148,983
            
            12
      yearsTrademarks
            
            
            684,000
            
            
            
            45,600
            
            10
      yearsSole
      Source Contract
            
            
            680,000
            
            
            
            64,762
            
            7
      yearsPatents,
      Trademarks and Sole Source Contracts
            
            $
            4,031,233
            
            
            $
            259,345
            
            11
      years




(9)
Short-term Notes Payable To Banks




March
      31, 2007
            
            
            December
      31, 2006Note
      payable to a bank, which allows the Company to borrow up to $5,000,000,
      interest due monthly at the prime rate, principal payment April 30, 2008,
      secured by assets of the Company's subsidiaries
            
            $
            714,000
            
            
            $
            531,871Note
      payable to a bank with interest at 7.25%, interest payments due monthly,
      with a principal balance due on September 15, 2007
            
            
            300,000
            
            
            
            -Note
      payable with interest at 10.75%, interest payments due quarterly, with a
      principal balance due on December 10, 2007
            
            
            90,459
            
            
            
            90,459Insurance
      note payable with interest at 7.36%, principal and interest due in monthly
      payments of $27,255.05 through April 1, 2007
            
            
            27,255
            
            
            
            109,020Note
      payable to former owner of equity interest in Hammonds payable on July 20,
      2005 with accrued interest at prime plus 4%
            
            
            -
            
            
            
            173,300Other
      notes with various terms
            
            
            10,053
            
            
            
            12,651$
            1,141,767
            
            
            $
            917,301




Each of
the Company’s subsidiaries that have outstanding notes payable has secured such
notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from the Company.






(10)
Long-term Debt






Long-term
debt consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Note
      payable to a bank, interest due monthly at prime plus 1%, principal
      payment due August 26, 2008, secured by a Deed of Trust on the Company’s
      property
            
            $
            1,000,000
            
            
            $
            1,000,000Note
      payable to bank, which allows the Company to borrow up to $2,000,000,
      interest due monthly at prime plus 1%, principal payment due August 26,
      2008, secured by assets of the Company's subsidiary
            
            
            1,992,189
            
            
            
            1,992,189Note
      payable to a bank, which allows the Company to borrow up to $2,000,000,
      due in monthly payments of interest only, with interest at prime floating
      rate, with the principal balance due in June 2009, secured by subsidiary's
      property
            
            
            1,611,631
            
            
            
            1,469,542Note
      payable to bank due in monthly installments of principal and interest
      through July 2025 with interest at prime floating rate secured by
      property
            
            
            426,018
            
            
            
            426,508Note
      payable to a bank, due in monthly installments of $6,170, including
      interest at 6.6% through May 2018, secured by property
            
            
            579,248
            
            
            
            588,106Note
      payable to a bank, due in monthly installments of interest only at prime
      plus 1%, with a principal balance due on August 26, 2008
            
            
            400,000
            
            
            
            400,000Note
      payable to a bank, due in quarterly installments of interest only at 7.5%,
      with a principal balance due on January 19, 2008
            
            
            1,000,000
            
            
            
            1,000,000Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
            
            
            85,272
            
            
            
            89,354Note
      payable to a bank, with interest at 9.25%, due in monthly installments of
      principal and interest of $4,050 through February 26, 2012, secured by
      assets of the Company’s subsidiary
            
            
            241,193
            
            
            
            -Other
      notes with various terms
            
            
            91,578
            
            
            
            82,1637,427,129
            
            
            
            7,047,862Less
      current portion
            
            
            (102,994
            )
            
            
            (102,580
            )$
            7,324,135
            
            
            $
            6,945,282




Each of
the Company’s subsidiaries that have outstanding notes payable has secured such
notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from the Company.






Principal
repayment provisions of long-term debt are as follows at March 31,
2007:




2007
            
            $
            102,9942008
            
            
            4,514,9022009
            
            
            1,721,9592010
            
            
            527,7422011
            
            
            94,180Thereafter
            
            
            465,352Total
            
            $
            7,427,129




(11)
Related Party Notes Payable and Accounts Receivable






Transactions
related to accounts receivable from related parties arise from compensation
arrangements, expense allowances and other similar items conducted in the
ordinary course of business.






(12)
Capital Stock and Stock Options






The
Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.001
par value per share of which no shares are presently outstanding. The Preferred
Stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion, redemption rights and sinking fund provisions.






The
Company is authorized to issue up to 10,000,000 shares of Common Stock, of which
720,000 are reserved for issuance pursuant to the exercise of warrants pursuant
to an employment agreement with the Company’s Chairman, CEO. On March 30, 2007,
the Company issued 144,000 stock warrants to the Company’s Chairman, CEO, with
an exercise price of $7.00 per share, expiring in 2 years, at a cost of $70,685
to the Company.






The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2007 as follows:




March
      31, 2007Dividend
      yield
            
            
            0.00
            %Expected
      volatility
            
            
            38.68Risk
      free interest
            
            
            6.25
            %Expected
      lives
            
            2
      years




A summary
of the status of the Company's stock options to employees as of March 31, 2007,
and changes during the periods ending on those dates is presented
below:




Shares
            
            
            Weighted
      Average Exercise Price March 31, 2007Outstanding
      at beginning of period
            
            
            -
            
            
            $
            N/AGranted
            
            
            144,000
            
            
            
            7.00Exercised
            
            
            -
            
            
            
            N/ACanceled
            
            
            -
            
            
            
            N/AOutstanding
      and exercisable at end of period
            
            
            144,000
            
            
            $
            7.00Weighted
      average fair value of optionsgranted
      during the period
            
            
            144,000
            
            
            
            0.49




The
following table summarizes information about fixed stock options to employees
outstanding at March 31, 2007:




Exercise
      Price
            
            Number
      Outstanding and Exercisable at March 31, 2007$
            7.00
            
            144,000




(13)
Preferred Stock of Subsidiary (Restated)






The
Company’s subsidiary, IMTG, entered into preferred stock agreements with VOMF,
described below, with the strategic objectives to raise working capital funds,
bring in outside investors, and provide liquidity for the Company’s common
shares.






In August
and September 2006, the Company sold to VOMF 833,333 shares of Series A
Preferred Stock and 833,333 shares of Series B Preferred Stock, respectively. In
connection with the sale of the Series A convertible preferred stock, the
Company issued VOMF: (i) Series A Warrants to purchase an additional 8,333,333
shares at $0.18 per share, expiring in August 2011; and (ii) Series B Warrants
to purchase an additional 8,333,333 shares at $0.18 per share, expiring in
August 2007.  In connection with the sale of the Series B convertible
preferred stock, the Company issued VOMF: (i) Series C Warrants to purchase an
additional 8,333,333 shares at $0.50 per share, expiring on September 29, 2011;
and (ii) we agreed to extend the expiration dates on the Series B Warrants
issued in the August 2006 Private Financing Transactions from August 2007 to
August 2008.






Each
share of Series A and Series B Preferred Stock is convertible into ten shares of
the Company's common stock. The Company received net proceeds of approximately
$2,710,120 from the sale of Series A and Series B Preferred Stock and will
receive gross proceeds of $5,180,466 if all of the Series A and B Warrants and
the remaining 4,362,922 Series C Warrants are exercised by VOMF.






American
International Industries’ ownership interest in the Company will decrease if and
when VOMF converts its Series A and Series B Preferred Stock and/or
exercises warrants issued in the VOMF August and September 2006 private
financing transactions into shares of common stock.






The
Company reviewed the following accounting standards to determine the appropriate
accounting for these issuances:






-
            SFAS
      No. 133: Accounting for
      Derivative Instruments and Hedging
  Activities


-
            SFAS
      No. 150: Accounting for
      Certain Financial Instruments with Characteristics of Both Liabilities and
      Equity


-
            EITF
      00-19:  Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s
      Own Stock


-
            EITF
      98-5: Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios


-
            EITF
      00-27: Application of
      Issue No. 98-5 to Certain Convertible
  Instruments


-
            EITF
      Topic D-98: Classification and Measurement
      of Redeemable Securities


-
            ASR
      No. 268: Redeemable
      Preferred Stocks




We
concluded that all components of these issuances should be classified as equity,
because the only way for the value of the conversion feature and the fair value
of the warrants to be realized is through the issuance of shares.  The
Company has sufficient authorized and unissued shares available to settle the
contracts after considering all other commitments that may require the issuance
of stock.





The
proceeds for these issuances are required to be allocated based on the relative
fair values of the securities issued.  We valued the warrants using
the Black-Scholes model, using the following assumptions:





Stock
      Price on Date of Issuance
            
            
            Volatility
            
            
            Risk-Free
      Interest RateWarrants
      A – Aug. 8, 2006
            
            $
            0.25
            
            
            
            102.4
            %
            
            
            6.25
            %Warrants
      B – Aug. 8, 2006
            
            $
            0.25
            
            
            
            102.4
            %
            
            
            6.25
            %Warrants
      A – Aug. 23, 2006
            
            $
            0.44
            
            
            
            106.4
            %
            
            
            6.25
            %Warrants
      B – Aug. 23, 2006
            
            $
            0.44
            
            
            
            106.4
            %
            
            
            6.25
            %Warrants
      B – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %Warrants
      B – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %Warrants
      C – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %





Volatility
was determined using 28 observations of the closing stock price over the prior
year.





The
Black-Scholes model assumes an active trading market for the underlying
security.  It does not price in the impact of potential large trades
for a thinly traded stock.  Since the Company’s common stock is thinly
traded, realization of the resulting fair value of the warrants that this model
yields is unlikely, due to the large number of shares involved.  Other
financial models would yield different values, but are less accessible and
costly to produce.





The
proceeds from the preferred share issuances have been allocated based on the
relative fair values of the securities issued as follows:





Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      A – Aug. 8, 2006
            10
      to 1
            
            $
            1,388,888.75
            
            
            $
            387,499.34Warrants
      A – Aug. 8, 2006
            $0.18
      / 5 years
            
            $
            1,139,517.82
            
            
            $
            317,924.97Warrants
      B – Aug. 8, 2006
            $0.18
      / 1 year
            
            $
            709,497.05
            
            
            $
            197,949.36Totals
            
            
            $
            3,237,903.62
            
            
            $
            903,373.67








Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      A – Aug. 23, 2006
            10
      to 1
            
            $
            1,222,222.32
            
            
            $
            176,643.37Warrants
      A – Aug. 23, 2006
            $0.18
      / 5 years
            
            $
            1,076,403.58
            
            
            $
            155,568.71Warrants
      B – Aug. 23, 2006
            $0.18
      / 1 year
            
            $
            826,663.96
            
            
            $
            119,474.75Totals
            
            
            $
            3,125,289.86
            
            
            $
            451,686.83








Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      B – Sept. 30, 2006
            10
      to 1
            
            $
            3,333,333.20
            
            
            $
            726,755.40Warrants
      B – Sept. 30, 2006
            $0.18
      / 1 year
            
            $
            (2,118,000.19
            )
            
            $
            (461,780.44
            )Warrants
      B – Sept. 30, 2006
            $0.18
      / 2 years
            
            $
            2,442,305.00
            
            
            $
            532,487.52Warrants
      C – Sept. 30, 2006
            $0.50
      / 5 years
            
            $
            2,557,476.70
            
            
            $
            557,598.02Totals
            
            
            $
            6,215,114.71
            
            
            $
            1,355,060.50





As part
of the Preferred B issuance, the Warrants B with an expiration term of 1 year,
which were issued with the Preferred A stock, were cancelled and Warrants B with
an expiration term of 2 years were issued.  The Company accounted for
the change in expiration terms as part of the Preferred B issuance because we
regard the consideration given for this issuance to include the change in
expiration terms.





The
Company has determined that a beneficial conversion feature
exists.  Based on our review of  the “Emerging Issues Task
Force” EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, and EITF
00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the
amount of proceeds allocated to the Series A and Series B Convertible Preferred
Stock should be assigned  to the embedded conversion feature with a
corresponding amount recorded as a “deemed dividend” to the preferred
shareholders.  This is based on paragraph 6 of EITF 98-5, which states
that “the discount assigned to the beneficial conversion feature is limited to
the amount of the proceeds allocated to the convertible
instrument.”





We
allocated the following amounts to the embedded conversion feature and recorded
a deemed dividend to the preferred shareholders:





Preferred
      A – August 8, 2006
            
            $
            387,499.34Preferred
      A – August 23, 2006
            
            $
            176,643.37Preferred
      B – September 30, 2006
            
            $
            726,755.40Total
      deemed dividend
            
            $
            1,290,898.11





In
connection with the agreement of VOMF to exercise up to 4,000,000 Series C
Warrants in March 2007, the Company reduced the exercise price from $0.50 per
share to $0.18 per share through December 31, 2007, following which the exercise
price reverts to $0.50 per share. On March 27, 2007, VOMF exercised 3,970,400
Series C Warrants at a price of $0.18 per share with gross proceeds of $714,672
to the Company.  This modification to the initial agreement requires a
comparison of the fair values of the warrants immediately before and after the
modification.  As a result of this comparison, we have calculated a
fair value reduction of $193,559.56 for this modification.  Since no
additional value was given to the holders of these warrants, no expense has been
recognized for the change in exercise price.





We valued
the warrants using the Black-Scholes model, using the following
assumptions:





Stock
      Price on Date of Reduction
            
            
            Volatility
            
            
            Risk-Free
      Interest RateWarrants
      C – March 19, 2007
            
            $
            0.35
            
            
            
            105.33
            %
            
            
            6.25
            %





The
Black-Scholes model yielded the following valuations for the
warrants





Exercise
      Price / Term
            
            Fair
      ValueWarrants
      C – March 19, 2007
            $0.50
      / 4.53 years
            
            $
            1,018,320.96Warrants
      C – March 19, 2007
            $0.18
      / .79 year
            
            $
            ( 824,761.40
            )Fair
      value reduction
            
            
            $
            193,559.56




The
material terms of these issuances are disclosed in the following
paragraphs.






Series A Convertible Preferred Stock. The principal terms of the Series A Preferred Stock are as
follows:






Voting:
Except with respect to specified transactions that may affect the rights,
preferences, privileges or voting power of the Series A Preferred Stock and
except as otherwise required by Nevada law, the Series A Preferred Stock has no
voting rights. We shall not affect certain specified transactions, which include
authorizing or increasing the authorized or issued amount of any stock ranking
pari passu or senior to the Series A Preferred Stock with respect to the
distribution of assets on liquidation or the dissolution or winding up, without
the affirmative vote or consent of the holders, voting as a class, of at least
75% of the shares of the Series A Preferred Stock outstanding at the time.
Dividends: The holders of Series A Preferred Stock are entitled to receive out
of legally available assets dividends at the rate of 8% per annum, payable
semi-annually on June 30 and December 31. Dividends on the Series A Preferred
Stock are cumulative and are prior and in preference to payment of any dividend
or distribution on any junior stock. So long as any shares of Series A Preferred
Stock are outstanding, we will not declare, pay or set apart for payment any
dividend or make any distribution on any junior stock (other than dividends or
distributions payable in additional shares of junior stock), unless at the time
of such dividend or distribution we shall have paid all accrued and unpaid
dividends on Series A Preferred Stock. Conversion: The holder of Series A
Preferred Stock may, at their option, elect to convert all or any portion of the
shares of the Series A Preferred Stock into a number of shares of common stock
equal to the quotient of (i) the liquidation preference amount ($1.80) of the
shares of Series A Preferred Stock being converted plus any accrued but unpaid
dividends divided by (ii) the conversion price, which initially is $0.18 per
share, subject to certain adjustments. If, within 3 business days of our receipt
of a conversion notice, our transfer agent shall fail to issue to the holder the
proper number of shares of common stock subject to the conversion notice, or
fail to issue a new preferred stock certificate representing the number of
shares of Series A Preferred Stock to which such holder is entitled, we shall be
required to pay additional damages on each business day after such 3rd business
day that such conversion is not timely effected equal to 0.5% of the product of:
(i) the number of shares of common stock not timely issued and, in the event we
failed to timely deliver a preferred stock certificate, the number of shares of
common stock issuable upon conversion of the shares of Series A Preferred Stock
represented by such certificate; and (ii) the closing bid price of our common
stock on the last possible date which we could have timely issued such common
stock and/or such preferred stock certificate. If we fail to pay those
additional damages within 5 business days of the date incurred, then such
payment shall bear interest at the rate of 2.0% per month (pro rated for partial
months) until such payments are made. The conversion price of the Series A
Preferred Stock may be adjusted in the event of (i) common stock split or
reclassification; (ii) capital reorganization; (iii) distribution of dividends;
or (iv) the issuance or sale of additional shares of common stock or
equivalents.






Liquidation.
In the event of the liquidation, dissolution or winding up of our affairs, the
holders of outstanding shares of Series A Preferred Stock shall be entitled
to receive, out of our assets available for distribution to shareholders, an
amount equal to $1.80 per share or the liquidation preference amount of the
Series A Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the common
stock or any other junior stock. If our assets are not sufficient to pay in full
the liquidation preference amount plus any accrued and unpaid dividends payable
to the holders of outstanding shares of the Series A Preferred Stock and any
series of preferred stock or any other class of stock ranking pari passu, as to
rights on liquidation, dissolution or winding up, with the Series A Preferred
Stock, then all of said assets will be distributed among the holders of the
Series A Preferred Stock and the other classes of stock ranking pari passu with
the Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. All distribution payments, shall be in cash, property valued at
its fair market value as determined by an independent appraiser or a combination
thereof.






Series B Convertible Preferred Stock. The principal terms of the Series B Preferred Stock are identical to
those of the Series A Preferred Stock except that the dividends on the Series B
Preferred Stock shall be at the rate of 4% per annum.






(14)
Concentration of Credit Risk






The
Company maintains its cash in commercial accounts at major financial
institutions. Although the financial institutions are considered creditworthy,
at March 31, 2007, the Company's cash balances exceeded the limits ($100,000)
covered by the Federal Deposit Insurance Corporation. The terms of these
deposits are on demand to minimize risk. The Company has not incurred losses
related to these deposits.






Trade
accounts receivable subject the Company to the potential for credit risk with
customers in the retail and distribution sectors. To reduce credit risk, the
Company performs ongoing evaluations of its customer’s financial condition but
generally does not require collateral. The Company had two customers on a
consolidated basis that accounted for more than ten (10%) percent of the
Company's revenues on a consolidated basis. (Customer A - 15% and Customer B -
11%).






(15)
Income Taxes






The
following table sets forth a reconciliation of the statutory federal income tax
for March 31, 2007 and March 31, 2006.




March
      31, 2007
            
            
            March
      31, 2006Income
      (loss) before taxes
            
            $
            (1,292,900
            )
            
            $
            (683,663
            )Income
      tax benefit expense at statutory rate
            
            $
            (439,586
            )
            
            $
            (232,445
            )Unrealized
      loss on securities
            
            
            (218,592
            )
            
            
            3,247Permanent
      differences
            
            
            84,600
            
            
            
            84,600Minority
      expense
            
            
            16,332
            
            
            
            81,406Inventory
      reserve
            
            
            (101,487
            )
            
            
            78,788Other
            
            
            (22,925
            )
            
            
            74,314Increase
      (decrease) in valuation allowance
            
            
            681,658
            
            
            
            (89,910
            )Tax
      benefit
            
            $
            -
            
            
            $
            -




The tax
effects of the temporary differences between financial statement income and
taxable income are recognized as deferred tax asset and liabilities as of March
31, 2007 is set forth below.




March
      31, 2007Deferred
      tax assets:Net operating loss
            
            $
            1,150,681Total deferred tax asset
            
            
            1,150,681Valuation allowance
            
            
            (1,150,681
            )Net
      deferred asset
            
            $
            -








March
      31, 2007Deferred
      tax liability:Fixed
      asset temporary difference
            
            $
            138,775Intangible
      asset temporary difference
            
            
            364,425Deferred
      tax liability
            
            $
            503,200




The
Company has an estimated net operating loss carryforward in excess of
$10,900,000, which expires from 2024 to 2025. The loss may be limited under
Internal Revenue Code Section 382.






The
Company has an estimated capital loss carryforward of $109,000.






(16)
Earnings Per Share






Basic
earnings per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share, in addition to the
weighted average determined for basic loss per share, include common stock
equivalents, which would arise from the conversion of the preferred stock to
common shares.




Quarter
      Ended
            
            
            Quarter
      EndedMarch
      31, 2007
            
            
            March
      31, 2006Basic
      income (loss) per share:Net
      income (loss)
            
            $
            (1,292,900
            )
            
            $
            (683,663
            )Weighted
      average common shares outstanding
            
            
            5,460,951
            
            
            
            4,346,933Weighted
      average common shares outstanding for diluted net income (loss) per
      share
            
            
            5,460,961
            
            
            
            4,346,933Net
      income (loss) per share - basic
            
            $
            (0.24
            )
            
            $
            (0.16
            )Net
      income (loss) per share - diluted
            
            $
            (0.24
            )
            
            $
            (0.16
            )




(17)
Commitments and Contingencies






Various
key officials of the Company have entered into employment agreements with the
Company. The CEO of the Company entered into a five-year employment agreement
which provides for a monthly salary of $10,000 plus a bonus as determined by the
Board of Directors. Also, the agreement provides for the grant of 144,000
warrants per annum with an exercise price of $7.00, beginning March 15, 2007.
The president of NPI previously entered into an at-will employment agreement
that provides an annual salary of $158,000 plus a bonus based upon operating
results of this subsidiary. The employment agreement also grants the president
of NPI an option to purchase NPI common stock equal to 5% of NPI's equity at an
exercise price of 5% of the total stockholder's equity, if NPI conducts an
initial public offering of its common stock during the time of his employment.
Delta’s president and vice president entered into an employment agreement that
provides for an annual base salary of $150,000 each. The employment agreement
for IMTG’s president provides for an annual base salary of $90,000.






As of
March 31, 2007, Delta Seaboard Well Service, Inc. is involved in two lawsuits.
In the first lawsuit, Fort Apache Energy, Inc. ("Apache") v. Delta Seaboard Well
Service, Inc., Apache alleges that Delta breached its contract with Apache and
violated the Texas Deceptive Trade and Practices Act. Apache drilled a well
which they subsequently decided to plug. Apache contracted with Delta to plug
the well. Apache alleges that Delta bid the job with a specified lump sum
plugging operation and that Delta went over the bid amount. Apache claims that
it never authorized the costs of the extra labor, operation or additional
equipment to plug the well. Also, Apache claims that the well is still
commercially viable as Delta encountered pressure at the well site during its
plugging operations. Apache claims that Delta acted negligently in failing to
contact Apache regarding the pressure at the well so as to allow Apache to
determine the feasibility of production at the well. Apache claims that it was
damaged as a result of the omissions of Delta, and Delta’s actions in
force-plugging the well and that its damages are the costs of drilling a new
well. Discovery is still ongoing and factual matters are still being
investigated and developed in connection with the claims of Apache and the
defenses of Delta. Management is vigorously defending this matter. An evaluation
of the outcome of this case cannot be made at this time. In the unlikely event
that a favorable verdict is received by Apache against Delta, Apache seeks
damages which would allow a new well to be drilled at the site. Delta’s expert
witness estimates that the cost of unplugging and drilling a new well in the
same or similar style of the previous well to be approximately $3.7 million.
Apache has estimated the cost to be in excess of $5.6 million. The Company has
not recorded any liabilities in connection with this matter because management
has determined that this lawsuit is not likely to result in a loss to the
Company.






In the
second, related lawsuit, Gemini Insurance Company v. Delta Seaboard Well
Services, Inc., Delta had a CGL insurance policy with Gemini Insurance Company
("Gemini") for 2003, naming Delta as an insured, which policy was in effect at
such time as Delta began the plugging operation referenced in the first lawsuit.
Delta made a claim under the policy for a defense in the Apache case; however,
Gemini has filed suit against Delta seeking a declaratory judgment that it owes
no defense under the policy. In connection with such declaration, Delta has
filed a counterclaim seeking to have the policy declared applicable as to the
claims of Apache against Delta and claims for breach of contract, violations of
the Texas Deceptive Trade and Practices Act, violations of the Insurance Code
and bad faith on the part of Gemini in refusing coverage. Discovery is still
ongoing and factual matters are still being investigated and developed in
connection with the claims of Gemini and the defenses of Delta. Management is
vigorously defending this matter and asserting its affirmative claims. An
evaluation cannot be made at this time in connection with the outcome of the
Gemini Litigation.






The
Hammonds Companies lease office space under an operating lease which expires in
October 2016. Future minimum lease payments under the operating lease are as
follows:




Year
      December 31,
            
            Amount2007
            
            $
            420,0002008
            
            
            420,0002009
            
            
            420,0002010
            
            
            420,0002011
            
            
            420,000Thereafter
            
            
            2,100,000$
            4,200,000




Delta
leases space under a commercial lease which expires in June 2009. Future minimum
lease payments are as follows:




Year
      December 31,
            
            Amount2007
            
            $
            36,0612008
            
            
            36,0612009
            
            
            18,030$
            90,152




(18)
Related Party Transactions






The stock
grants to related parties mentioned below were accounted for under FASB
Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant
date fair values.






During
the first quarter of 2007, the Company issued 108,350 shares of common stock to
officers for services representing $530,505 of cost to the Company, of which
$500,780 was expensed in 2006.






In the
first quarter of 2007, the Company issued 12,600 shares of common stock to
Daniel Dror II for services representing $60,900 of cost to the Company. Daniel
Dror II is the son of the CEO of the Company.






On March
30, 2007, the Company issued 144,000 stock warrants to the Company’s Chairman,
CEO, with an exercise price of $7.00 per share, expiring in 2 years, at a cost
of $70,685 to the Company. See note 12 for additional valuation
information.






The
Company has a $10,000 note receivable at December 31, 2006 and March 31, 2007,
from Daniel Dror II, the son of the CEO of the Company. In 2005, the Company
sold an investment of $50,000 to Daniel Dror II, who agreed to reimburse the
Company for this investment through a promissory note. The Company believes this
transaction was based on the value that would have been received by an
independent third party. No gain or loss was realized by the Company on this
transaction. A principal payment of $40,000 plus $7,917 in interest was received
by the Company in 2006, leaving a balance of $10,000. The promissory note bears
interest at 10% and is due in December 2007.






The
Company has a revolving credit note receivable at December 31, 2006 and March
31, 2007, in the amount of $225,000 due from International Diversified
Corporation, Ltd. (IDCL), a corporation owned by Elkana Faiwuszewicz, the CEO’s
brother. This note bears interest at the prime rate.






(19)
Segment Information






We have
six reporting segments:






-
Hammonds Technical Services - a business engaged in fuel handling equipment for
the military and industrial customers, a provider of fuel injection services for
the aviation industry, and the designer of a new omni directional vehicle for a
wide variety of uses






-
Hammonds Fuel Additives – produces and markets motor and aviation fuel
additives


-
Hammonds Water Treatment – manufactures calcium hypochlorite tablet and granular
systems which provide water disinfection for a wide range of potable and waste
water applications


-
Northeastern Plastics - a supplier of products to retailers and wholesalers in
the automotive after-market and in the consumer durable electrical products
markets


- Delta
Seaboard - an onshore rig-based well servicing contracting company providing
service to the oil and gas industry


- Brenham
Oil & Gas - owns an oil, gas and mineral royalty interest in Washington
County, Texas, which is carried on the Company's books at $0


-
Corporate overhead - the Company's investment holdings including financing
current operations and expansion of its current holdings as well as evaluating
the feasibility of entering into additional businesses






The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performances
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses and foreign exchange gains and
losses.






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






The
Company's areas of operations are principally in the United States. No single
foreign country or geographic area is significant to the consolidated financial
statements.






Consolidated
revenues from external customers, operating income/(losses), and identifiable
assets were as follows:




March
      31, 2007
            
            
            March
      31, 2006Revenues:Hammonds
      Technical Services
            
            $
            650,483
            
            
            $
            696,795Hammonds
      Fuel Additives
            
            
            309,008
            
            
            
            336,337Hammonds
      Water Treatment
            
            
            659,908
            
            
            
            292,037Northeastern
      Plastics
            
            
            2,332,925
            
            
            
            1,692,280Delta
      Seaboard
            
            
            2,660,246
            
            
            
            3,842,433$
            6,612,570
            
            
            $
            6,859,882Income
      (loss) from operations:Hammonds
      Technical Services
            
            $
            (761,401
            )
            
            $
            (409,176
            )Hammonds
      Fuel Additives
            
            
            40,162
            
            
            
            (5,951
            )Hammonds
      Water Treatment
            
            
            20,298
            
            
            
            51,629Northeastern
      Plastics
            
            
            (51,295
            )
            
            
            (52,782
            )Delta
      Seaboard and Brenham Oil & Gas
            
            
            81,097
            
            
            
            490,471Corporate
            
            
            (773,683
            )
            
            
            (392,394
            )Income
      (loss) from operations
            
            
            (1,444,822
            )
            
            
            (318,203
            )Other
      income (expenses)
            
            
            199,958
            
            
            
            (126,030
            )Net
      income (loss) before income tax
            
            $
            (1,244,864
            )
            
            $
            (444,233
            )Identifiable
      assets:Hammonds
      Technical Services
            
            $
            8,591,060
            
            
            $
            5,207,539Hammonds
      Fuel Additives
            
            
            335,746
            
            
            
            389,679Hammonds
      Water Treatment
            
            
            476,191
            
            
            
            135,470Northeastern
      Plastics
            
            
            5,504,317
            
            
            
            5,807,121Delta
      Seaboard and Brenham Oil & Gas
            
            
            6,174,608
            
            
            
            7,705,619Corporate
            
            
            15,625,520
            
            
            
            10,287,343$
            36,707,442
            
            
            $
            29,532,771




(20)
Subsequent Events






On April
20, 2007, the Registrant's board of directors elected John W. Stump, III to the
board of directors. John W. Stump, III will serve as chairperson of the
Registrant's Audit Committee and a member of its newly established Nominating
Committee and Compensation Committee.






Mr. Stump
will receive a monthly Directors Fee of $1,250 (Twelve Hundred Fifty Dollars),
and was awarded 500 registered S-8 shares upon acceptance of the position. Also,
Mr. Stump will receive 500 S-8 shares quarterly and will be reimbursed for any
travel or other reasonable and ordinary expenses incurred in the conduct of his
responsibilities.






John W.
Stump, III, had previously served as a Director of the Registrant and was
Chairman of the Audit Committee from February 2004 through December 2004. Mr.
Stump also served as Chief Financial Officer of the Company from August 1998
through October 2003. Since October 2005, Mr. Stump has been the controller for
Lifechek, Inc., a large regional pharmacy chain. Mr. Stump is a Certified Public
Accountant and has over twenty-five years of experience in financial and
accounting management, SEC compliance and disclosure services for public
reporting companies.




(21)
Restatement
 
 In
response to a letter from the SEC in connection with the review of Hammonds’
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complicated issue as
explained in note 13 above, we have restated the financial statements as of
December 31, 2006 and March 31, 2007. The differences are summarized
below:
 
 
 Year
      Ended December 31, 2006As
      previously reported
                
                
                Restatement
      adjustments
                
                
                As
      restatedAdditional
      paid-in capital
                
                $
                36,033,743
                
                
                $
                1,290,898
                
                
                $
                37,324,641Accumulated
      deficit
                
                $
                (13,938,166
                )
                
                $
                (1,290,898
                )
                
                $
                (15,229,064
                )
  Quarter Ended
      March 31, 2007As
      previously reported
                
                
                Restatement
      adjustments
                
                
                As
      restatedAdditional
      paid-in capital
                
                $
                37,480,368
                
                
                $
                1,290,898
                
                
                $
                38,771,266Accumulated
      deficit
                
                $
                (15,276,066
                )
                
                $
                (1,290,898
                )
                
                $
                (16,566,964
                )












ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION Back to Table of Contents






Forward-Looking
Statements; Market Data






As used
in this Quarterly Report, the terms "we", "us", "our" and the "Company"means American International Industries, Inc., a Nevada corporation, and
its subsidiaries. To the extent that we make any forward-looking statements in
the "Management's Discussion
and Analysis of Financial Condition and Results of Operations"in this
Quarterly Report, we emphasize that forward-looking statements involve risks and
uncertainties and our actual results may differ materially from those expressed
or implied by our forward-looking statements. Our forward-looking statements in
this Quarterly Report reflect our current views about future events and are
based on assumptions and are subject to risks and uncertainties. Generally,
forward-looking statements include phrases with words such as "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate"and similar expressions to identify
forward-looking statements.






Overview






American
International Industries, Inc., organized under the laws of the State of Nevada
in September 1994, is a diversified corporation with interests in industrial
companies, oil and gas service companies, and interests in undeveloped real
estate in the Galveston Bay, TX area. The Company’s business strategy is to
acquire controlling equity interests in undervalued companies in which it takes
an active role to improve their growth, by providing its subsidiaries with
access to capital, leveraging synergies and its management's expertise. The
Company is sometimes referred to as we, us, our, and other such phrases as
provided in Regulation F-D (Fair Disclosure).






American
International Industries, Inc. is a holding company and has six reporting
segments:






·
            Hammonds
      Technical Services - a business engaged in fuel handling equipment for
      military and industrial customers, a provider of fuel injection services
      for the aviation industry, and the designer of a new omni directional
      vehicle for a wide variety of uses;


·
            Hammonds
      Fuel Additives – produces and markets motor and aviation fuel
      additives


·
            Hammonds
      Water Treatment – manufactures calcium hypochlorite tablet and granular
      systems which provide water disinfection for a wide range of potable and
      waste water applications;


·
            Northeastern
      Plastics (NPI) - a wholly-owned subsidiary, is a supplier of automotive
      after-market products and consumer durable goods products to retailers and
      wholesalers in the automotive after-market and in the consumer durable
      electrical products markets;


·
            Delta
      Seaboard Well Services (Delta) - a 51% owned subsidiary, is an onshore
      rig-based well-servicing contracting company providing services to the oil
      and gas industry;


·
            Brenham
      Oil & Gas - owns an oil, gas and mineral royalty interest in
      Washington County, Texas, which is carried on the Company's books at $0;
      and


·
            Corporate
      overhead - the Company's investment holdings including financing current
      operations and expansion of its current holdings as well as evaluating the
      feasibility of entering into additional
  businesses






Our
40.67% subsidiary, International American Technologies, Inc. (OTCBB: "IMTG), is
a public reporting company, which owns 100% of Hammonds Technical Services,
Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc.
(collectively "Hammonds"). The Company consolidates IMTG although its ownership
is less than 51%, because the Company controls IMTG’s Board of Directors by
having designated two of the three members of IMTG's Board of Directors and
because the Company controls IMTG’s financing. Since Hammonds is incurring
losses and there is no minority interest, the Company recognizes 100% of
Hammond’s losses.






The
historical financial statements of the Company include the acquisitions of
acquired companies as of the effective dates of the purchases, and the results
of those companies subsequent to closing, as these transactions were accounted
for under the purchase method of accounting.






Our
long-term strategy is to expand the operations of each of our subsidiaries in
their respective fields. The Company provides managerial and financial support
to our subsidiaries. As part of our business model, we explore mergers,
acquisitions and dispositions of businesses and assets from time to time, based
upon the reasonable discretion of management and the value added of each
potential transaction.






We
encounter substantial competition in each of our subsidiaries product and
service areas. Such competition is expected to continue. Depending on the
particular market involved, our subsidiaries compete on a variety of factors,
such as price, quality, delivery, customer service, performance, product
innovation and product recognition. Other competitive factors for certain
products include breadth of product line, research and development efforts and
technical and managerial capability.






Corporate
overhead includes our investment activities including financing current
operations and expansion of our current holdings, as well as evaluating the
feasibility of entering into additional businesses.






Results
of Operations






Three months Ended March 31,
2007 Compared to Three months Ended March 31, 2006.






Net revenues. For the three
month period ended March 31, 2007, net revenues were $6,612,570, compared to
$6,859,882 for the three month period ended March 31, 2006, or a decrease of
$247,312. The decrease in net revenues is due primarily to decreased pipe sales
at Delta due to slow industry-wide sales in the first quarter. Delta reported
revenues of $2,660,246 for the three months ended March 31, 2007, compared to
$3,842,433 for the same period in 2006. This decline was partially offset by
increased revenues at NPI during the three months ended March 31, 2007 of
$2,332,925 compared to $1,692,280 for the same period in 2006, or an increase of
$640,645, principally due to NPI’s license to sell MOTORTRENDTM and Good
Housekeeping Seal of ApprovalTM products. In addition, Hammonds revenues
increased to $1,619,399 for the three months ended March 31, 2007, compared to
$1,325,169 for the same period in 2006, or an increase of $294,230. The decrease
in pipe sales of Delta for this quarter is not unusual and demand tends to
fluctuate based on price.






Net loss from operations.Our
consolidated net loss from operations for the three month period ended March 31,
2007 was $1,444,822, compared to a loss of $318,203 during the same three month
period in the prior year. The primary reason for the increase in loss from
operations was due to reduced profits from Delta of $409,374, increased losses
at Hammonds of $341,314, and increased corporate expenses of $381,289. During
the three month period ended March 31, 2007, Delta had net income from
operations of $81,097, compared to $490,471 for the same period in 2006, which
decline was primarily due to decreased pipe sales during the quarter and lower
gross margins on pipe sales. Material prices and pipe rework costs were higher
due to increased fuel costs being passed through by Delta’s vendors. Delta
expects a strong business environment during the second quarter of the 2007 as a
result of the strong energy sector. NPI had a net loss from operations of
$51,295 during the three month period ended March 31, 2007, compared to a net
loss from operations of $52,782 for the same period in the prior year. NPI's
business is seasonal and historically most of NPI’s revenues and income have
been generated in the third and fourth quarters. IMTG, our 40.7% owned
subsidiary, which owns 100% of Hammonds, reported net losses from operations of
$710,561 for the three month period ended March 31, 2007, compared to net losses
of $369,247 during the same period in 2006. Hammonds recently purchased $240,000
in capital equipment, including a CNC controlled plasma steel cutting system, a
state-of-the-art painting facility, multiple material handling cranes throughout
the production area, an automated production saw and a new mill for the machine
shop. In addition to tools, Hammonds installed new compressed air systems and
expanded plant lighting and power distribution to support additional welding and
assembly stations. New production flow testing stands and hydrostatic test
stations will be installed by the end of May 2007. When installed and
operational, these recent additions to production equipment will contribute
significantly to Hammonds production capacity through the implementation of
manufacturing and cost saving procedures which will generate increased revenues
with greater cost efficiencies and improved margins.






Corporate expenses.Corporate
operating expenses increased by $381,289 during the three month period ended
March 31, 2007, compared to the same period in the prior year, due to increased
compensation costs of $117,000, legal and professional fees of $45,000 related
to lawsuit settlements, real estate consulting fees of $54,000, "key" man life
insurance of $25,000, and reduced reimbursements for rent and management fees of
$140,000. In the 1 stquarter
of 2006, corporate operating expenses included offsets for $84,000 in rent
charged to Hammonds and a non-affiliated company for the Rankin Road property,
which was sold to a third party in December 2006. Hammonds now pays rent
directly to the third party owner of the property. The remaining $56,000 in
reduced reimbursements represents lower charges to the subsidiaries for
management and consulting fees, which are reflected in lower expenses at the
subsidiaries.






Other income.Other income
was $199,958 for the three month period ended March 31, 2007, compared to other
expenses of $126,030 for the same period in the prior year. Interest and
dividend income increased by $100,451, primarily due to a significant increase
in investment in certificates of deposit and interest on notes receivable. Net
realized/unrealized gain on trading securities was $44,214 for the three month
period ended March 31, 2007, compared to a loss of $9,549 for the same three
month period in the prior year. The Company sold 180,500 ONH shares for proceeds
of $103,954 in February 2007. Through December 31, 2006, the Company had an
unrealized loss on these shares of $633,227. The realized loss from the sale of
the shares in 2007 was $585,228. The net income effect of the sale of these
shares is a gain of $47,999 in 2007. Income from lawsuit settlements was
$209,600 for the three-month period ended March 31, 2007. Interest expense was
$49,538 higher in the first quarter of 2007 than it was in the same period in
2006.






Net loss.Net loss was
$1,292,900 in the first quarter of 2007, compared to $683,663 in the same period
in 2006.






Liquidity
and Capital Resources






Total assets/liabilities.Total assets at March 31, 2007 were $36,707,442, compared to $36,596,931
at December 31, 2006. Total liabilities at March 31, 2007 were $14,603,143,
compared to $14,034,924 at December 31, 2006. At March 31, 2007, consolidated
working capital was $17,392,073, compared to working capital of $17,625,203 at
December 31, 2006. Our consolidated cash position at March 31, 2007 was
$3,651,902 compared to $3,275,803 at December 31, 2006.






Cash flow from operations.For the three months ended March 31, 2007, we had negative cash flow from
operations of $1,043,583, compared to negative cash flow from operations of
$20,451 during the same period in the prior year. This decrease was the result
of an increase in our net loss from $683,663 for three months ended March 31,
2006 to $1,292,900 for the three months ended March 31, 2007. Our inventories
increased by $767,986 for the three months ended March 31, 2007, compared to an
increase of $551,180 during the three months ended March 31, 2006. We reduced
accounts receivable during the three months ended March 31, 2007 by $1,161,066
compared to $632,007 during the same three month period in the prior year.
Trading securities decreased by $90,303 during the three months ended March 31,
2007. Prepaid expenses increased by $212,092, other assets increased by
$182,549, and accounts payable decreased by $144,050 for the three months ended
March 31, 2007. Our net loss of $1,292,900 was offset by non-cash compensation
of $243,460, depreciation and amortization expenses of $277,549 and minority
interest in the amount of $48,036.






Cash flow from investing activities.Our investing activities provided $124,117 during the three month period
ended March 31, 2007, as a result of a net reduction in investment in
certificates of deposit of $114,000, receipts of principal payments on notes
receivable of $307,427, offset by purchases of property, equipment, and
intangible assets of $272,310. This is compared to cash provided by investing
activities during the same period in the prior year in the amount of $854,635,
as a result of the redemption of a certificate of deposit for $1,000,000,
receipts of principal payments on long-term notes of $184,974, offset by
purchases of property, equipment and intangible assets of $330,339.






Cash flow from financing activities.During the three months ended March 31, 2007, our financing activities
provided $1,295,565 compared to cash used for financing activities of $417,145
during the same period of 2006. During the 2007 period, we received net proceeds
from the issuance of common stock of our subsidiary in the amount of $694,672,
from short-term borrowings in the amount of $300,000, from long-term debt of
$264,946, and from line-of-credit agreements of $324,218. We made payments of
$257,664 on short-term notes and principal payments on long-term debt of $27,768
during the three month period ended March 31, 2007.






Real estate.The Company
continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou
and Galveston Bay in Galveston County, Texas, which is carried at historic
cost basis of $225,000. The property's appraised value is substantially more
than the book value. In November 2005, the Company signed a contract for sale of
the property for cash consideration of $16,000,000 with Lakeland Partners III.
In January 2007, Lakeland assigned all of its interest in the contract to
Westfield Forest, L.P., a well-recognized developer of waterfront
properties in the Houston, Texas area. The development of the property requires
permits from certain governmental agencies, which permits, the developer
believes, can be obtained in a timely manner.






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS Back to Table of Contents






Interest Rate Risk.The
carrying amounts for cash and cash equivalents, accounts receivable, notes
payable and accounts payable and accrued liabilities shown in the Condensed
Consolidated Balance Sheets approximate fair value at March 31, 2007, due to the
generally short maturities of these items. At March 31, 2007, our investments
were primarily in short-term dollar denominated bank deposits with maturities of
a few days, or in longer-term deposits where funds can be withdrawn on demand
without penalty. We have the ability and expect to hold our investments to
maturity.






The
Company’s outstanding long-term debt as of March 31, 2007, is at fixed interest
rates, prime plus 1%, or prime floating rate. The Company does not believe that
a change of 100 basis points in interest rates would have a material effect on
the Company’s financial condition.






Equity Investments.We are
exposed to equity price risk on our portfolio of trading securities. As of
March 31, 2007, our total equity holdings in publicly traded companies were
valued at $858,772 compared to $724,255 at December 31, 2006. We believe
that it is reasonably possible that the fair values of these securities could
adversely change in the near term. We have a policy in place to review our
equity holdings on a regular basis. Our policy includes, but is not limited to,
reviewing each company’s cash position, earnings/revenue outlook, stock price
performance, liquidity and management/ownership. The Company seeks to manage
exposure to adverse equity returns by maintaining diversified securities
portfolios.






The
following table represents the potential decrease in fair values of our
marketable equity securities that are sensitive to changes in the stock market.
Fair value deteriorations of 50%, 35% and 15% were selected for illustrative
purposes because none is more likely to occur than another.




50
            %
            
            
            35
            %
            
            
            15
            %Marketable
      equity securities
            
            $
            (429,386
            )
            
            $
            (300,570
            )
            
            $
            (128,816
            )




ITEM 4. CONTROLS AND PROCEDURES Back to Table of Contents






Evaluation of disclosure controls
and procedures.As of March 31, 2007, the Company's chief executive
officer and chief financial officer conducted an evaluation 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 the
evaluation of these controls and procedures, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report.




In
response to a letter from the SEC in connection with the review of HMDI’s Form
10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has reexamined
the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complex issue, we
have restated the financial statements for the year ended December 31, 2006 and
for the quarter ended March 31, 2007.




Changes in internal controls.During the quarterly period covered by this report, no changes occurred
in our internal control over financial reporting that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.






PART
II - OTHER INFORMATION






ITEM 1. LEGAL PROCEEDINGS Back to Table of Contents






In the
first quarter of 2007, IMTG settled two suits brought by two former Hammonds’
shareholders, pursuant to which IMTG paid $300,000 as follows: $173,300 balance
on a short-term note payable, plus interest $26,700 and $100,000 for an option
to purchase 104,398 shares of one party’s shares of the Company’s common stock
at $5.00 per share, and the other party returned to the Company 8,800 shares he
received in the Company’s 2006 share dividend. These settlements did not have a
significantly effect on the Company’s financial condition.






Delta
Seaboard Well Service is a defendant in two lawsuits related to the same matter:
(i) Fort Apache Energy, Inc. v. Delta Seaboard Well Service, pending in the
334th Judicial District Court of Harris County, TX, in which Apache alleges that
Delta damaged Apache in connection with Delta’s plugging a minimally producing
Apache well for which Apache contracted with Delta to plug. Apache is seeking
monetary damages equal to the cost of drilling a new well. Delta’s expert
estimates that the cost of unplugging and drilling a new well to be
approximately $3.7 million while Apache is seeking approximately $5.6 million.
Pre-trial discovery is ongoing and the Company believes that it has meritorious
defenses to Apache’s claims but cannot predict the outcome at this time; and
(ii) Gemini Insurance Company v. Delta Seaboard Well Services, pending in the
the 164 thJudicial District Court of Harris County, TX, which action relates to the
Apache matter above. Delta was insured under a Gemini CGL insurance policy
during the relevant period that Delta was providing well-plugging service to
Apache. Delta made a claim with Gemini, its insurance carrier, demanding Gemini
provide for Delta’s defense in the Apache case. Gemini has filed an action
against Delta seeking a declaratory judgment that it is not obligated to provide
a defense and Delta has counterclaimed seeking to have the policy enforced as
well as alleging breach of insurance contract, violations of the Texas Deceptive
Trade and Practices Act, violations of the Insurance Code and bad faith in
refusing coverage. Discovery is pending and management is vigorously defending
this matter and pursuing its counterclaims. The Company cannot predict the
outcome at this time. In the event that Delta is found liable to Apache for
damages in the amount asserted, and Delta does not prevail against Gemini, its
insurance carrier, the Company’s financial condition could be adversely
effected.






ITEM 1A. RISK FACTORS Back to Table of Contents






There
have been no material changes from Risk Factors as previously disclosed in the
Registrant’s annual report for the year ended December 31, 2006.






ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS Back to Table of Contents






On
January 2, 2007, the Company issued 103,800 shares of restricted stock to the
Company’s officers and corporate employees for 2006 bonuses. The shares were
issued pursuant to Section 4(2) of the Act.






ITEM 3. DEFAULTS UPON SENIOR SECURITIES Back to Table of Contents






None.






ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Back to Table of Contents






None.






ITEM 5. OTHER INFORMATION Back to Table of Contents






None.






ITEM 6. EXHIBITS Back to Table of Contents






(a) The
following documents are filed as exhibits to this report on Form 10-Q or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing that included such
document.




Exhibit
      No.
            Description31.1
            Certification
      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 Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
      of 200232.1
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to the Sarbanes-Oxley Act of 200232.2
            Certification
      of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
      of 2002























SIGNATURES






Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.






/s/ DANIEL
DROR


CEO, PRESIDENT AND CHAIRMAN


Dated:March 18, 2008






/s/ SHERRY L.
COUTURIER


CHIEF FINANCIAL OFFICER


Dated:March 18,
2008