UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549


___________________




FORM
10-QSB/A


_________________________




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




For the
quarterly period ended September 30, 2006


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
September 30, 2006, the Registrant had 5,304,502 shares of common stock
issued.





EXPLANATORY NOTE









TABLEOF CONTENTS




Item
            Description
            
            PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
            FINANCIAL
      STATEMENTS
            
            
            3ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATION.
            
            
            3ITEM
      3.
            CONTROLS AND
      PROCEDURES
            
            
            5PART
      II - OTHER INFORMATIONITEM
      1.
            LEGAL
      PROCEEDINGS.
            
            
            6ITEM
      2.
            CHANGES IN SECURITIES.
            
            
            6ITEM
      3.
            DEFAULT UPON
      SENIOR SECURITIES.
            
            
            6ITEM
      4.
            SUBMISSION OF
      MATERS TO A VOTE OF SECURITY HOLDERS.
            
            
            6ITEM
      5.
            OTHER
      INFORMATION.
            
            
            6ITEM
      6.
            EXHIBITS AND
      REPORTS ON FORM 8-K.
            
            
            7









PART
I - FINANCIAL INFORMATION






ITEM1. FINANCIAL STATEMENTSBack to Table of Contents






The
Registrant's financial statements for the three and six-month periods ended
September 30, 2006 and 2005 are attached to this quarterly report.






Financial
Statements






ITEM2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONBack 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






We are a
holding company and have two reportable segments and corporate overhead: (1)
industrial/commercial and (2) oil and gas. The industrial/commercial segment
includes: (a) Northeastern Plastics, Inc. ("NPI"), a wholly-owned subsidiary,
which is a supplier of automotive after-market and consumer electrical products;
and (b) through our 44.9% subsidiary, International American Technologies, Inc.
(OTCBB: "IMTG), 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 oil and gas segment
includes: (a) Delta Seaboard Well Service, Inc. a 51% owned subsidiary which is
engaged in the oil and gas drilling equipment and service business; and (b) an
oil, gas and mineral royalty interest in Washington County, Texas, carried on
the Company's books at $0.






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. The Company’s ownership percentage of IMTG was 81.0% until Carl
Hammonds, president and a director of IMTG, converted his 49% minority interest
in Hammonds into 16,000,000 shares of IMTG common stock, at a conversion rate of
$0.25 per share. The additional cost has been allocated to patents and is being
amortized in a manner equivalent to the amortization used on the intangible
assets acquired in IMTG's acquisition of 51% of Hammonds, effective April 28,
2005, in connection with IMTG's August 2006 private financing transaction with
Vision Opportunity Fund Limited ("VOMF"), as discussed below. As a result of Mr.
Hammonds conversion of his 49% minority interest into IMTG shares, Hammonds has
become a wholly-owned subsidiary of IMTG. The Company's equity interest in IMTG
was 81.0% until Mr. Carl Hammonds converted his 49% minority ownership in
Hammonds into 16,000,000 shares of IMTG common stock.






On August
8, 2006, IMTG entered into a stock purchase agreement with VOMF pursuant to
which IMTG agreed to sell up to 833,333 shares of newly designated IMTG Series A
Convertible Preferred Stock, having an 8% dividend, for consideration of
$1,500,000. On August 8, 2006, IMTG sold VOMF 555,555 shares of Series A
Preferred Stock for consideration of $1,000,000 and on August 23, 2006, IMTG
sold an additional 277,778 shares of Series A Preferred Stock for consideration
of $500,000. In connection with the August 8 and August 23, 2006 private
financing transactions, IMTG issued VOMF  a Series A Warrant exercisable to
purchase 8,333,333 shares of IMTG common stock at $.18 per share, expiring in
five years, and a Series B Warrant exercisable to purchase an additional
8,333,333 shares of IMTG common stock at $.18 per share, expiring in August
2007.






On
September 30, 2006, IMTG entered into a second stock purchase agreement with
VOMF pursuant to which it sold VOMF 833,333 shares of Series B Preferred Stock,
having identical terms as the Series A stock purchase agreement except for the
dividend rate of 4%, for consideration of $1,500,000 and issued VOMF Series C
Warrants exercisable to purchase 8,333,333 additional shares of common stock at
a price of $.50 per share, expiring in five years. In connection with the Series
B stock purchase agreement, IMTG agreed to extend the expiration dates of the
Series B Warrants issued in the August 2006 private financing transactions from
one year to two years.






Each
share of IMTG Series A and Series B Preferred Stock is convertible into ten
shares of IMTG common stock. The Company’s ownership percentage in IMTG will
decrease when VOMF converts its Series A and Series B Preferred Stock and/or
exercises warrants issued in the August and September 2006 private financing
transactions into shares of IMTG common stock. The Company's IMTG subsidiary
received net proceeds of approximately $2,710,121 from the sale of Series A and
Series B Preferred Stock and will receive gross proceeds of $7,166,666 if all of
the warrants are exercised by VOMF.






On
October 24, 2006, the Company received $750,000 as a partial settlement in its
litigation against SurgiCare, Inc. and UHY Mann Frankfort Stein Lipp CPA's, LLP.
The Company released SurgiCare and its affiliates from any further liabilities
to the Company. However, the Company is vigorously pursuing its claims against
UHY Mann Frankfort Stein Lipp CPA's, LLP.






The
Company takes an active role in its subsidiaries, in order to foster growth and
profitability by providing its financial resources and management expertise. The
Company’s industrial/commercial and oil and gas assets and operations are
located in the greater Houston, Texas area. Each of our portfolio companies is
expected to grow in its particular market or industry. By operating as a holding
company, we provide both financial assistance and professional business
expertise and management services to our subsidiaries. Our role is to improve
each subsidiaries access to capital, achieve economies of scale through the
consolidation of administrative functions, and provide management expertise from
each Company's corporate personnel.






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 and Nine Months Ended
September 30, 2006 Compared to Three and Nine Months Ended September 30,
2005.






Net
revenues for the three and nine-month periods ended September 30, 2006 were
$9,936,232 and $24,347,673 respectively, compared to $9,046,634 and $18,032,255
, respectively, for the three and nine-month periods ended September 30, 2005,
representing an increase of over 9% and 35%, respectively. The increase in
revenues is due primarily to the increase in drilling pipe sales at Delta, which
reported revenues of $10,541,530 for the nine months ended September 30, 2006
compared to $8,429,982 for the same period of 2005, the increase in nine months
revenues during 2006 at NPI to $9,117,451 from $7,897,351 during the nine month
2005 period, principally due to NPI’s license to sell the MOTORTRENDTM and Good
Housekeeping Seal of ApprovalTM products, and increased revenues generated from
the acquisition by the Company’s IMTG subsidiary of Hammonds Technical Services,
Inc., effective April 28, 2005, which reported revenues of $4,688,692 for the
nine months ended September 30, 2006 compared to $1,704,922 for the same period
of 2005.






Our
consolidated net income (loss) for the three and nine-month periods ended
September 30, 2006 was $695,762 and $(156,214), respectively, compared to
consolidated net income (loss) of $193,849 and $(1,821,042), respectively during
the same three and nine-month periods in the prior year. The primary reason for
the improvement was due to the receipt of $2,000,000 from the sale of the Nixon
Refinery to settle an outstanding lawsuit. During the three and nine-month
periods ended September 30, 2006, Delta had net income (loss) of $(323,509) and
$436,956, respectively, compared to $493,664 and $1,009,076 for the same periods
of 2005. The decrease was due primarily to a decline in pipe sales and decreased
margins on pipe sales resulting from higher material costs. Delta expects a
strong business environment during the forth quarter of the 2006 fiscal year as
a result of the strong energy section. NPI had net income of $534,855 and
$435,347, respectively, during the three and nine-month periods ended September
30, 2006 compared to net income of $443,237 and $302,648 for the same periods of
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. We
expect a strong performance of NPI in the forth quarter of this fiscal year due
to the fact that NPI currently has a backorder of over $4,500,000. IMTG, our
44.9% owned subsidiary, which owns 100% of Hammonds, reported net losses of
$925,489 and $1,558,354, respectively, for the three and nine-month periods
ended September 30, 2006, compared to net losses of $536,928 and $741,294 during
the same periods of 2005. We are implementing manufacturing and cost saving
procedures for Hammonds in order to generate increased revenues with greater
cost efficiencies.






Liquidity
and Capital Resources






Total
assets at September 30, 2006 were $40,771,191 compared to $30,163,349 at
December 31, 2005. Total liabilities at September 30, 2006 were $20,496,456,
compared to $17,264,410 at December 31, 2005. At September 30, 2006,
consolidated working capital was $13,010,390 compared to working capital of
$7,929,567 at December 31, 2005. Our consolidated cash position at September 30,
2006 was $4,522,781 compared to $2,709,105 at December 31, 2005.






For the
nine months ended September 30, 2006, we had negative cash flow from operations
of $2,231,950, which represents a significant decrease from our negative cash
flow from operations of $3,090,301 during the same period of the prior year.
This improvement was a result of a significant decrease in our net loss from
$1,821,042 for nine months ended September 30, 2005 to $156,214 for the nine
months ended September 30, 2006. Our inventories decreased by $1,641,628 for the
nine months ended September 30, 2006 as compared to a decrease of $3,794,365
during the nine months ended September 30, 2005. We reduced accounts receivable
during the nine months ended September 30, 2006 by $2,531,781 compared to
$2,818,871 during the same nine-month period of the prior year. Our net loss of
$156,214 was offset by non-cash compensation of $824,265, depreciation and
amortization expenses of $587,713 and a minority interest in the amount of
$214,109. Additionally, we received cash of $1,000,000 and a note of $1,000,000
from the sale of the Nixon Refinery to settle an outstanding
lawsuit.






Our
investing activities used $143,605 during the nine-month period ended September
30, 2006, as a result of a redemption of a certificate of deposit in the amount
of $400,000 and notes receivable of $423,689 offset by and investment in new
certificates of deposit of $850,000, loans to related parties of $180,000 and
purchases of property and equipment and patents and trademarks of $252,606 and
$25,193, respectively. This is compared to cash used by investing activities
during the same period in the prior year in the amount of $508,847, primarily as
a result of net cash used in the acquisition of a subsidiary of $770,194,
partially offset by the redemption of a certificate of deposit in the amount of
$300,000. We used cash in the amount of $89,249 during the three months ended
September 30, 2006 to purchase property and equipment.






During
the nine months ended September 30, 2006, our financing activities provided
$4,189,231 compared to $3,049,285 during the same period of 2005. During the
2006 period we received proceeds from the issuance of preferred stock in the
amount of $2,727,746, from short-term borrowings in the amount of $391,121, from
long-term debt of $2,020,952, and from line-of-credit agreements of $513,110. We
made payments of $1,221,931 on short-term notes and principal payments on
long-term debt of $109,449 during the nine-month period ended September 30,
2006. The Company had $4,522,781 in cash at September 30, 2006.






We record
on our consolidated balance sheets real estate acquired for sale at its
historical cost basis of $225,000 pursuant to GAAP accounting rules applicable
to assets acquired from a related party. The Company believes that the current
value of its real estate acquired for sale to be significantly higher than the
historic cost basis of this property. The Company is under contract to sell its
real estate to a third party for approximately $16,000,000 subject to the
completion of due diligence by the purchaser. The Company believes that if the
due diligence is satisfactorily completed, the sale is expected to close before
the end of the fourth quarter.






ITEM3. CONTROLS AND PROCEDURES






Evaluation of disclosure controls
and procedures. As of September 30, 2006, 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 quarter ended September 30,
2006.




The
Company’s Chief Executive Officer and Chief Financial Officer have reassessed
our disclosure controls and procedures for the quarter ended September 30. Based
on the reassessment, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were therefore
not, as of September 30, 2006, effective to provide reasonable assurance that
the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and
that information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to our management, including our principal executive and financial
officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.




Changes in internal controls.During the quarterly period covered by this report, the Company made
changes in its internal control over financial reporting in order to improve
such internal controls over financial reporting. Specifically, the Company has
hired a qualified financial consultant with accounting and auditing experience
to perform an internal audit function and the Company has hired a full-time CFO
to oversee financial and accounting transactions and the Company’s financial
reporting and disclosure.






PART
II - OTHER INFORMATION






ITEM1. LEGAL
PROCEEDINGSBack to Table of Contents






None.






ITEM2.
CHANGES IN SECURITIESBack to Table of Contents






On
September 18, 2006, the Company issued 10,000 shares of restricted stock to the
Company’s directors for serving on our board of directors. The shares were
issued pursuant to Section 4(2) of the Act.






ITEM3. DEFAULTS UPON SENIOR SECURITIESBack to Table of Contents






None.






ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSBack to Table of Contents






On
September 28, 2006, the Company's annual meeting of shareholders was held. At
the meeting the shareholders voted for the election of Daniel Dror, Charles R.
Zeller, Robert W. Derrick, Jr., and Thomas J. Craft, Jr. to serve on our board
until the next annual meeting of shareholders or until their successors are
elected and qualified and voted to ratify our selection of John A. Braden &
Company, P.C. as independent auditors for 2006. At the date of the annual
meeting, the Company had a total of 4,417,010 shares of common stock outstanding
and a total of 4,137,266 were present and voted. The following tables sets forth
the vote of shareholders with respect to the two proposals:






Proposal
1. Election of Directors




Nominees
            For
            WithheldDaniel
      Dror
            4,007,296
            129,970Charles
      R. Zeller
            4,008,716
            128,550Robert
      W. Derrick, Jr.
            4,007,441
            129,825Thomas
      J. Craft, Jr.
            4,017,134
            120,132




Proposal
2. Ratification of John A. Braden & Company, P.C. as Independent Auditors
for 2006




For
            Against
            Abstain
            BNV4,129,065
            3,321
            4,880
            -




ITEM5. OTHER INFORMATIONBack to Table of Contents






None.






ITEM
6.EXHIBITS AND REPORTS ON FORM 8-KBack to Table of Contents






(a) The
following documents are filed as exhibits to this report on Form 10-QSB 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




(b)
Reports on Form 8-K During the Period Covered by this Report: The Registrant has
filed a Form 8-K/A on July 5, 2006 with Item 4.01 "Changes in Registrant's
Certifying Accountant" disclosure.



















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

























FinancialStatementsBack to Table of Contents




Condensed
      Consolidated Financial StatementsConsolidated
      Balance Sheets - September 30, 2006 (Unaudited) and December 31, 2005
      (Audited)
            10Unaudited
      Consolidated Statements of Operations - Three and nine months ended
      September 30, 2006 and 2005
            12Unaudited
      Consolidated Statement of Cash Flows -Nine months ended September 30, 2006
      and 2005
            13Notes to
      Unaudited Condensed Consolidated Financial Statements
            15


















AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESCondensedConsolidated Balance SheetsBack to
      Table of ContentsSeptember
      30, 2006 and December 31, 2005September
      30, 2006
            
            
            December
      30, 2005(Unaudited)
            
            
            (Audited)(Restated)AssetsCurrent
      assets:Cash and cash equivalents
            
            $
            4,522,781
            
            
            $
            2,709,105Certificates of deposit
            
            
            2,450,000
            
            
            
            2,000,000Trading securities
            
            
            670,198
            
            
            
            1,061,259Accounts
      receivable, less allowance for doubtful accounts of$320,611 at September 30, 2006 and $322,365 at December 31,
      2005
            
            
            7,675,680
            
            
            
            5,143,899Current portion notes receivable
            
            
            503,408
            
            
            
            249,096Accounts and notes receivables from related parties
            
            
            275,000
            
            
            
            95,001Inventories
            
            
            6,331,028
            
            
            
            4,689,399Real estate acquired for resale
            
            
            225,000
            
            
            
            225,000Drilling rigs held for sale
            
            
            187,611
            
            
            
            325,753Prepaid expenses and other current assets
            
            
            716,654
            
            
            
            195,290Total current assets
            
            
            23,557,360
            
            
            
            16,693,802Long-term
      notes receivable
            
            
            4,856,046
            
            
            
            3,868,686Property
      and equipment, net of accumulated depreciation and
      amortization
            
            
            5,353,669
            
            
            
            6,293,674Goodwill,
      less accumulated amortization of $205,295 at September 30,
      2006and December 31, 2005
            
            
            674,539
            
            
            
            674,539Patents
      and trademarks, net of amortization
            
            
            6,253,987
            
            
            
            2,536,263Other
      assets
            
            
            75,590
            
            
            
            96,385Total assets
            
            $
            40,771,191
            
            
            $
            30,163,349Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts payable and accrued expenses
            
            $
            5,710,355
            
            
            $
            3,793,462Margin loans from financial institutions
            
            
            274,365
            
            
            
            406,949Short-term notes payable
            
            
            4,125,259
            
            
            
            4,257,469Current installments of long-term debt
            
            
            436,991
            
            
            
            306,355Total current liabilities
            
            
            10,546,970
            
            
            
            8,764,235Long-term
      debt, less current installments
            
            
            7,628,408
            
            
            
            6,393,206Deferred
      tax liability
            
            
            503,200
            
            
            
            503,200Minority
      interest
            
            
            1,817,878
            
            
            
            1,603,769Total liabilities
            
            
            20,496,456
            
            
            
            17,264,410Stockholders'
      equity:Preferred
      stock, $.001 par value. authorized 1,000,000 shares: none
      issued.
            
            
            -
            
            
            
            -Common stock, $.001 par value. authorized 10,000,000
    shares:5,304,502 shares issued and 5,299,102 shares outstandingat September 30, 2006; and 4,318,660 shares issued and4,313,260 shares outstanding at December 31, 2005
            
            
            5,304
            
            
            
            4,319Additional paid-in capital
            
            
            37,131,515
            
            
            
            28,389,591Accumulated deficit
            
            
            (16,914,553
            )
            
            
            (15,447,440
            )Common stock issuance obligation
            
            
            100,000
            
            
            
            -20,322,266
            
            
            
            12,946,470Less treasury stock, at cost (5,400 shares)
            
            
            (47,531
            )
            
            
            (47,531
            )Total stockholders' equity
            
            
            20,274,735
            
            
            
            12,898,939Total liabilities and stockholders' equity
            
            $
            40,771,191
            
            
            $
            30,163,349See
      accompanying notes to unaudited consolidated financial
      statements.












AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESCondensedConsolidated Statements of OperationsBack to
      Table of ContentsThree
      and nine months ended September, 30 2006 and 2005Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2006
            
            
            2005
            
            
            2006
            
            
            2005(Restated)
            
            
            (Restated)
            
            
            (Restated)
            
            
            (Restated)Revenues
            
            $
            9,936,232
            
            
            $
            9,046,634
            
            
            $
            24,347,673
            
            
            $
            18,032,255Costs
      and expenses:Cost of sales
            
            
            7,328,268
            
            
            
            6,129,144
            
            
            
            16,393,018
            
            
            
            10,926,031Selling, general and administrative
            
            
            4,144,495
            
            
            
            2,479,305
            
            
            
            9,775,004
            
            
            
            6,759,276Total operating expenses
            
            
            11,472,763
            
            
            
            8,608,449
            
            
            
            26,168,022
            
            
            
            17,685,307Operating
      income (loss)
            
            
            (1,536,531
            )
            
            
            438,185
            
            
            
            (1,820,349
            )
            
            
            346,948Other
      income (expenses):Settlement proceeds from sale of Nixon Refinery
            
            
            2,000,000
            
            
            
            -
            
            
            
            2,000,000
            
            
            
            -Interest and dividend income
            
            
            235,984
            
            
            
            213,877
            
            
            
            335,535
            
            
            
            334,950Realized gains (losses) on investments
            
            
            3,045
            
            
            
            (26,955
            )
            
            
            3,045
            
            
            
            (438,955
            )Unrealized gain and (losses) on trading securities
            
            
            (42,886
            )
            
            
            (330,333
            )
            
            
            (53,600
            )
            
            
            (2,021,250
            )Gain (loss) on sale of assets
            
            
            (10,466
            )
            
            
            -
            
            
            
            (10,466
            )
            
            
            -Oil and gas royalty income
            
            
            587
            
            
            
            3,671
            
            
            
            3,786
            
            
            
            3,671Interest expense
            
            
            (272,738
            )
            
            
            (128,744
            )
            
            
            (577,804
            )
            
            
            (194,841
            )Other income (expense)
            
            
            160,248
            
            
            
            67,280
            
            
            
            177,748
            
            
            
            588,738Total other income (expenses)
            
            
            2,073,774
            
            
            
            (201,204
            )
            
            
            1,878,244
            
            
            
            (1,727,687
            )Net
      income (loss) before income tax
            
            
            537,243
            
            
            
            236,981
            
            
            
            57,895
            
            
            
            (1,380,739
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net income (loss) from operations before minority
      interest
            
            
            537,243
            
            
            
            236,981
            
            
            
            57,895
            
            
            
            (1,380,739
            )Minority interest
            
            
            158,519
            
            
            
            (43,132
            )
            
            
            (214,109
            )
            
            
            (440,303
            )Net income (loss)
            
            $
            695,762
            
            
            $
            193,849
            
            
            $
            (156,214
            )
            
            $
            (1,821,042
            )Preferred dividend
            
            
            (1,310,898
            )
            
            
            -
            
            
            
            (1,310,898
            )
            
            
            -Net
      earnings (loss) applicable to common shareholders
            
            
            (615,136
            )
            
            
            193,849
            
            
            
            (1,467,112
            )
            
            
            (1,821,042
            )Net
      earnings (loss) applicable to common shareholder:Basic
            
            $
            (0.13
            )
            
            $
            0.05
            
            
            $
            (0.33
            )
            
            $
            (0.57
            )Weighted
      average common shares:Basic
            
            
            4,562,728
            
            
            
            3,620,352
            
            
            
            4,423,908
            
            
            
            3,204,678See
      accompanying notes to consolidated financial statements.












AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIESCondensedConsolidated Statements of Cash FlowsBack to
      Table of ContentsNine
      months ended September 30, 2006 and 2005(Unaudited)Nine
      month ended
            
            
            Nine
      month endedSeptember
      30, 2006
            
            
            September
      30, 2005(Restated)Cash
      flows from operating activities:Net loss
            
            $
            (156,214
            )
            
            $
            (1,821,042
            )Adjustments
      to reconcile net earnings (loss) to net cash used in operating
      activities:Depreciation and amortization
            
            
            587,713
            
            
            
            180,211Common stock issued for services
            
            
            824,265
            
            
            
            347,800Realized (gains) losses on the sale of trading securities
            
            
            (3,045
            )
            
            
            930,593Unrealized loss on trading securities
            
            
            53,600
            
            
            
            2,021,250(Gain) loss on sale of assets
            
            
            10,466
            
            
            
            -Note receivable for refinery settlement
            
            
            (1,000,000
            )
            
            
            -Gain on restructuring of debt
            
            
            -
            
            
            
            (466,350
            )Minority interest
            
            
            214,109
            
            
            
            440,303Escrow held for sale of property
            
            
            (15,361
            )
            
            
            -Miscellaneous write-off
            
            
            (22,684
            )
            
            
            -(Increase) decrease in operating assets, net of acquisition of
      subsidiary:Accounts receivable
            
            
            (2,531,781
            )
            
            
            (2,818,871
            )Trading securities
            
            
            -
            
            
            
            420,832Inventories
            
            
            (1,641,628
            )
            
            
            (3,794,365
            )Prepaid expenses and other current assets
            
            
            (521,364
            )
            
            
            (951,666
            )Other assets
            
            
            20,795
            
            
            
            (19,455
            )Increase (decrease) in operating liabilities, net of acquisition of
      subsidiary:Accounts payable and accrued expenses
            
            
            1,949,179
            
            
            
            2,440,459Net cash used in operating activities
            
            
            (2,231,950
            )
            
            
            (3,090,301
            )Cash
      flows from investing activities:Purchase of property and equipment
            
            
            (252,606
            )
            
            
            (89,249
            )Patents and trademarks
            
            
            (25,193
            )
            
            
            -Cash paid for acquisition of subsidiary
            
            
            -
            
            
            
            (826,700
            )Cash received on acquisition of subsidiary
            
            
            -
            
            
            
            56,506Net changes in investments
            
            
            340,505
            
            
            
            -Investment in certificate of deposit
            
            
            (850,000
            )
            
            
            -Redemption of certificate of deposit
            
            
            400,000
            
            
            
            300,000Notes receivable
            
            
            423,689
            
            
            
            39,021Loans (to) from related parties
            
            
            (180,000
            )
            
            
            11,575Net cash provided by investing activities
            
            
            (143,605
            )
            
            
            (508,847
            )Cash
      flows from financing activities:Proceeds from exercise of stock options
            
            
            -
            
            
            
            75,000Net borrowings under line-of-credit agreements
            
            
            513,110
            
            
            
            -Net repayment under line-of-credit agreements
            
            
            -
            
            
            
            (1,245,742
            )Proceeds from short-term debt
            
            
            391,121
            
            
            
            -Proceeds from long-term debt
            
            
            2,020,952
            
            
            
            4,992,889Margin loans
            
            
            (132,584
            )
            
            
            -Proceeds from issuance of preferred stock
            
            
            2,727,746
            
            
            
            -Customer deposits
            
            
            266
            
            
            
            -Repayment of borrowing from related parties
            
            
            -
            
            
            
            (684,654
            )Principal payments on short-term debt
            
            
            (1,221,931
            )
            
            
            -Principal payments on long-term debt
            
            
            (109,449
            )
            
            
            (25,801
            )Payment of dividends on preferred stock
            
            
            -
            
            
            
            (48,750
            )Acquisition of treasury stock
            
            
            -
            
            
            
            (13,657
            )Net cash provided by financing activities
            
            
            4,189,231
            
            
            
            3,049,285Net increase (decrease) in cash and cash equivalents
            
            
            1,813,676
            
            
            
            (549,863
            )Cash
      and cash equivalents at beginning of year
            
            
            2,709,105
            
            
            
            5,079,873Cash
      and cash equivalents at end of period
            
            $
            4,522,781
            
            
            $
            4,530,010Supplemental
      schedule of cash flow information:Interest paid
            
            $
            577,804
            
            
            $
            194,841Non-cash transactions:Transfer of note payable for land and building
            
            
            (410,393
            )
            
            
            -Issuance of note payable for office equipment
            
            
            20,524
            
            
            
            -Receipt of note receivable for sale of real estate acquired for
      resale
            
            
            -
            
            
            
            3,401,916See
      accompanying notes to unaudited consolidated financial
      statements.

















American International Industries,
Inc.Back to Table of Contents




Notesto Unaudited Condensed Consolidated Financial Statements






(1)
General






American
International Industries, Inc. (the "Company"), operates as a diversified
holding company with a number of wholly-owned subsidiaries and two
majority-owned subsidiaries.






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 and controlled subsidiaries, Delta Seaboard
Well Services, Inc. and International American Technologies, Inc. All
significant inter-company transactions and balances have been eliminated in
consolidation.






The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U. S. generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months period ended September 30, 2006 are not indicative
of the results that may be expected for the year ending December 31,
2006.






As
contemplated by the Securities and Exchange Commission (SEC) under Rules of
Regulation S-B, the accompanying financial statements and related footnotes have
been condensed and do not contain certain information that will be included in
the Company's annual financial statements and footnotes thereto. For further
information, refer to the Company's audited consolidated financial statements
and related footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 2005.






(2)
Use of Estimates






The
preparation of financial statements in conformity with U. S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those
estimates.






(3)
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.






(4)
Recent Accounting Pronouncements






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.






(5)
Inventory




Delta
            
            
            NPI
            
            
            IMTG
            
            
            AMINFinished
      Goods
            
            $
            1,663,487
            
            
            $
            3,241,327
            
            
            $
            141,564
            
            
            $
            5,046,378Work
      in process
            
            
            47,912
            
            
            
            -
            
            
            
            263,972
            
            
            
            311,884Parts
      and materials
            
            
            -
            
            
            
            -
            
            
            
            1,420,377
            
            
            
            1,420,377Sub
      Total
            
            
            1,711,399
            
            
            
            3,241,327
            
            
            
            1,825,913
            
            
            
            6,778,639Less:
      Obsolesces Reserve
            
            
            -
            
            
            
            (166,169
            )
            
            
            (281,442
            )
            
            
            (447,611
            )Total
            
            $
            1,711,399
            
            
            $
            3,075,158
            
            
            $
            1,544,471
            
            
            $
            6,331,028




(6)
Income Taxes






Income
taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management. The estimated federal income tax expense
for the three and nine month periods ended September 30, 2006 and 2005 is
eliminated by net operating loss carry forwards.






(7)
Short-term Notes Payable To Banks




September
      30, 2006
            
            
            December
      31, 2005Note
      payable to former owner of equity interest in Hammonds payable on July 20,
      2005 with accrued interest at prime plus 4%
            
            
            173,300
            
            
            
            173,300Note
      payable with interest at 10.75%, interest payments due quarterly, with a
      principal balance due on December 10, 2006
            
            $
            90,000
            
            
            $
            -Other
      notes with various terms
            
            
            26,258
            
            
            
            -$
            289,558
            
            
            $
            173,300




(8)
Long-term Debt






Long-term
debt consisted of the following:




September
      30, 2006
            
            
            December
      31, 2005Note
      payable to bank, interest due monthly at prime plus 2%, principal payment
      due January 31, 2008, secured by assets of the Company's
      subsidiary
            
            
            1,992,189
            
            
            
            1,993,878Note
      payable to a bank, due in quarterly installments of interest only at 6.5%,
      with a principal balance due on 1/1/2008
            
            
            300,000
            
            
            
            -Note
      payable to a bank, due in quarterly installments of interest only at 7.5%,
      with a principal balance due on 1/18/2008
            
            
            200,000
            
            
            
            -Note
      payable to a bank, due in monthly installments of interest only at 9.75%,
      with a principal balance due on 10/26/2007
            
            
            400,000
            
            
            
            -Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through 4/3/2011
            
            
            82,385Note
      payable with interest at 10.75%, interest payments due quarterly, with a
      principal balance due on December 10, 2006
            
            
            -
            
            
            
            89,890Other
      notes with various terms
            
            
            -
            
            
            
            47,8372,974,574
            
            
            
            2,131,605Less
      current portion
            
            
            (157,402
            )
            
            
            (2,131,605
            )$
            2,817,172
            
            
            $
            -




Principal
repayment provisions of long-term debt are as follows at September 30,
2006:




4th
      quarter of 2006
            
            $
            4,1172007
            
            
            417,5032008
            
            
            2,511,4772009
            
            
            21,2552010
            
            
            20,222Total
            
            $
            2,974,574




(9)
Employee Stock Based Compensation






The
Company grants options 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.






(10)
Preferred Stock (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 IMTG’s common
shares.






On August
8, 2006, IMTG entered into a stock purchase agreement with VOMF pursuant to
which IMTG agreed to sell up to 833,333 shares of newly designated IMTG Series A
Convertible Preferred Stock, having an 8% dividend, for consideration of
$1,500,000. On August 8, 2006, IMTG sold VOMF 555,555 shares of Series A
Preferred Stock for consideration of $1,000,000 and on August 23, 2006, IMTG
sold an additional 277,778 shares of Series A Preferred Stock for consideration
of $500,000. As part of the VOMF purchase of 555,555 shares of Series A
Preferred Stock on August 8, 2006 and 277,778 shares of Series A Preferred Stock
on August 23, 2006 (the "August 2006 Private Financing Transactions"), we issued
VOMF: (i) Series A Warrants to purchase an additional 8,333,333 shares at $.18
per share, or $1,500,000, expiring with respect to 5,555,555 shares on August 8,
2011, and expiring with respect to 2,777,778 shares on August 23, 2011; and (ii)
Series B Warrants to purchase an additional 8,333,333 shares at $.18 per share,
or $1,500,000, which warrants expire with respect to 5,555,555 shares on August
8, 2007 and with respect to 2,777,778 shares on August 23, 2007.






On
September 30, 2006, IMTG entered into a second stock purchase agreement with
VOMF pursuant to which it sold VOMF 833,333 shares of Series B Preferred Stock,
having identical terms as the Series A stock purchase agreement except for the
dividend rate of 4%, for consideration of $1,500,000. As part of this
transaction (the "September 2006 Private Financing Transaction"), we issued
VOMF: (i) Series C Warrants to purchase an additional 8,333,333 shares of our
common stock at $.50 per share, or $4,166,666, 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 B Convertible Preferred Stock is convertible into ten
shares of the Company's common stock. The Company received net proceeds of
approximately $2,710,121 from the sale of Series A and Series B Preferred Stock
and will receive gross proceeds of $7,166,666 if all of the warrants are
exercised by VOMF.  American International Industries’ ownership
interest in IMTG will decrease 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 IMTG 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




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.






Series A, B and C Warrants.
Each Series A and B Warrant allows holders to purchase one share of common stock
for $0.18, subject to adjustment. Series A Warrants expire five (5) years from
the August 8 and August 23, 2006 dates of issuance and the Series B Warrants
expire two years from the August 2006 dates of issuance. Each Series C Warrant
allows its holder to purchase one share of common stock for $0.50, subject to
adjustment. The Series C Warrants expire five (5) years from the September 30,
2006 date of issuance. In the event that our registration statement is not
effective, as required by the registration rights agreement between the Company
and VOMF, holders would also be permitted to exercise the warrants through a
cashless exercise. using the formula considering the number of shares of Common
Stock to be issued to the holder, the number of shares of Common Stock
purchasable upon exercise of the Warrant, the exercise price of the Warrant and
the closing bid price of our Common Stock. The exercise price of the Warrants
and the number of shares of Common Stock purchasable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events
including recapitalization of our Common Stock, dividends payable in our Common
Stock, and the issuance of rights to purchase additional shares of our Common
Stock or other securities convertible into additional shares of Common Stock.
The Warrants provide that the Company shall not effect the exercise of any
Series A, B or C Warrants, and Warrant holder shall have the right to exercise
Warrants, if, after giving effect to such exercise, such Warrant holder would
beneficially own more than 9.99% of the then outstanding shares of our Common
Stock. Notwithstanding the foregoing, the Warrant holder may, by a sixty-0ne day
notice, request that we waive this 9.9% limitation with regard to any or all
shares of Common Stock issuable upon conversion of the Series A and/or Series B
Preferred Stock, in which event the 9.9% restriction shall be waived with
respect to those shares of Common Stock subject to the waiver
notice.






(11)
Industry Segments






The
Company has two reportable segments and corporate overhead:
industrial/commercial and oil and gas. The industrial/commercial segment
includes (1) a supplier of automotive after-market products and (2) a business
engaged in water treatment, 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. The oil and gas segment owns an oil, gas and mineral royalty interest
in Washington County, Texas, which is carried on the Company's books at $0, and
an onshore rig-based well servicing contracting company providing service to the
oil and gas industry. The corporate overhead includes 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
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.






Consolidated
revenues from external customers, net operating income (loss) for the nine
months ended September 30, 2006 and 2005, and identifiable assets as of
September 30, 2006 and 2005, were as follows:




2006
            
            
            2005Revenues:
            
            $
            
            
            
            $Industrial/Commercial
            
            
            13,806,143
            
            
            
            9,602,273Oil and gas
            
            
            10,541,530
            
            
            
            8,429,982$
            24,347,673
            
            
            $
            18,032,255Operating
      income (loss):Industrial/Commercial
            
            $
            (234,178
            )
            
            $
            (176,439
            )Oil and gas
            
            
            577,549
            
            
            
            1,573,034Corporate
            
            
            (2,163,720
            )
            
            
            (1,049,647
            )$
            (1,820,349
            )
            
            $
            346,948Identifiable
      assets:Industrial/commercial
            
            $
            19,320,027
            
            
            $
            15,297,718Oil and gas
            
            
            6,168,142
            
            
            
            7,340,394Corporate
            
            
            15,283,022
            
            
            
            12,268,668$
            40,771,191
            
            
            $
            34,906,780




The
Company's areas of operations are in the United States.




(12) 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 10 above, we have restated the financial statements as of September 30,
2006. The differences are summarized below:
  Three
      Months Ended September 30, 2006As
      previously reported
              
              
              Restatement
      adjustments
              
              
              As
      restatedNet
      income (loss) applicable to common shareholders
              
              $
              675,762
              
              
              $
              (1,290,898
              )
              
              $
              (615,136
              )Deemed
      dividend
              
              $
              -
              
              
              $
              (1,290,898
              )
              
              $
              (1,290,898
              )Net
      income (loss) per share applicable to common shareholders – Basic and
      diluted
              
              $
              0.15
              
              
              $
              (0.28
              )
              
              $
              (0.13
              )
  
  Nine
      Months Ended September 30, 2006As
      previously reported
              
              
              Restatement
      adjustments
              
              
              As
      restatedNet
      loss applicable to common shareholders
              
              $
              (176,214
              )
              
              $
              (1,290,898
              )
              
              $
              (1,467,112
              )Deemed
      dividend
              
              $
              -
              
              
              $
              (1,290,898
              )
              
              $
              (1,290,898
              )Net
      loss per share applicable to common shareholders – Basic and
      diluted
              
              $
              (0.04
              )
              
              $
              (0.29
              )
              
              $
              (0.33
              )
  
  September
      30, 2006As
      previously reported
              
              
              Restatement
      adjustments
              
              
              As
      restatedAdditional
      paid-in capital
              
              $
              35,840,617
              
              
              $
              1,290,898
              
              
              $
              37,131,515Accumulated
      deficit
              
              $
              (15,623,655
              )
              
              $
              (1,290,898
              )
              
              $
              (16,914,553
              )