**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


___________________




**FORM
      10-Q**


_________________________




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




For
      the
      quarterly period ended September 30, 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.: 1-33640




**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, 2007, the Registrant had 6,843,242 shares of common stock
      issued.





**TABLE
      OF CONTENTS**




**Item**
            **Description**
            **Page****PART
                I - FINANCIAL INFORMATION**ITEM
                1.
            FINANCIAL
                STATEMENTS.
            3ITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND
                ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATION.
            31ITEM
                3.
            QUANTITATIVE
                AND
                QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
            35ITEM
                4.
            CONTROLS
                AND
                PROCEDURES.
            35**PART
                II - OTHER INFORMATION**ITEM
                1.
            LEGAL
                PROCEEDINGS.
            36ITEM
                1A.
            RISK
                FACTORS
            36ITEM
                2.
            UNREGISTERED
                SALES OF
                EQUITY SECURITIES AND USE OF PROCEEDS
            36ITEM
                3.
            DEFAULT
                UPON SENIOR
                SECURITIES.
            36ITEM
                4.
            SUBMISSION
                OF MATERS TO A
                VOTE OF SECURITY HOLDERS.
            36ITEM
                5.
            OTHER
                INFORMATION.
            36ITEM
                6.
            EXHIBITS
            37











**PART
      I - FINANCIAL INFORMATION**






ITEM
      1. FINANCIAL
      STATEMENTS




Condensed
                Consolidated Financial StatementsConsolidated
                Balance Sheets -
                September 30, 2007 (Unaudited) and December 31, 2006
                (Audited)
            4Unaudited
                Consolidated Statements of Operations - Three and nine month ended
                September 30, 2007 and 2006
            6Unaudited Consolidated
                Statement of Cash Flows - Nine months ended September 30, 2007 and
                2006
            8Notes
                to Unaudited
                Condensed Consolidated Financial Statements
            10









**AMERICAN
                INTERNATIONAL INDUSTRIES, INC. AND
                SUBSIDIARIES**Consolidated
                Balance
                SheetsSeptember
                30, 2007 and December 31, 2006





**September
                30, 2007**
            
            
            **December
                31, 2006**(Unaudited)
            
            
            (Restated)(Audited)AssetsCurrent
                assets:Cash and cash equivalents
            
            $
            3,993,361
            
            
            $
            3,275,803Certificate of deposit
            
            
            4,825,000
            
            
            
            6,139,000Trading securities
            
            
            3,245,987
            
            
            
            724,255Accounts receivable, less allowance for doubtful accountsof $239,133 at September 30, 2007 and $232,307 at December 31,
                2006
            
            
            5,777,417
            
            
            
            5,221,072Current portion of notes receivable
            
            
            3,661,529
            
            
            
            1,021,593Accounts and notes receivable from related parties
            
            
            -
            
            
            
            235,000Inventories
            
            
            8,490,273
            
            
            
            5,303,418Real estate acquired for resale
            
            
            1,909,066
            
            
            
            225,000Drilling rigs held for sale
            
            
            187,611
            
            
            
            187,611Prepaid expenses and other current assets
            
            
            696,309
            
            
            
            320,498Total current assets
            
            
            32,786,553
            
            
            
            22,653,250Long-term
                notes receivable, less current portion
            
            
            1,007,501
            
            
            
            4,043,322Investment
                in Whittingdon Oil & Gas
            
            
            6,000
            
            
            
            6,000Property
                and equipment, net of accumulated depreciation and
                amortization
            
            
            4,260,530
            
            
            
            3,141,867Goodwill,
                less accumulated amortization of$205,295 at September 30, 2007 and December 31, 2006
            
            
            674,539
            
            
            
            674,539Patents
                and trademarks, net of amortization
            
            
            5,584,219
            
            
            
            6,038,870Other
                assets
            
            
            83,687
            
            
            
            39,083Total assets
            
            $
            44,403,029
            
            
            $
            36,596,931Liabilities
                and Stockholders' EquityCurrent
                liabilities:Accounts payable and accrued expenses
            
            $
            5,690,340
            
            
            $
            3,667,108Margin loans from financial institutions
            
            
            427,439
            
            
            
            341,058Short-term notes payable
            
            
            320,336
            
            
            
            917,301Current installments of long-term debt
            
            
            49,692
            
            
            
            102,580Total current liabilities
            
            
            6,487,807
            
            
            
            5,028,047Long-term
                debt, less current installments
            
            
            11,343,258
            
            
            
            6,945,282Deferred
                tax liability
            
            
            503,200
            
            
            
            503,200Minority
                interest
            
            
            1,770,704
            
            
            
            1,558,395Total liabilities
            
            
            20,104,969
            
            
            
            14,034,924Stockholders'
                equity:Preferred stock, $0.001par value, 1,000,000 authorized: none
                issuedCommon stock, $0.001 par value, 10,000,000
                authorized:6,843,242
                shares issued and 6,808,380 shares outstanding at September 30,
                2007;5,340,852 shares issued and 5,335,452 shares outstanding at December
                31,
                2006
            
            
            6,843
            
            
            
            5,341Additional paid-in capital
            
            
            45,012,347
            
            
            
            37,324,641Accumulated deficit
            
            
            (20,538,609
            )
            
            
            (15,229,064
            )Common stock issuance obligation
            
            
            -
            
            
            
            508,62024,480,581
            
            
            
            22,609,538Less treasury stock, at cost (34,862 shares at September 30,
                2007and 5,400 shares at December 31, 2006)
            
            
            (182,521
            )
            
            
            (47,531
            )Total stockholders' equity
            
            
            24,298,060
            
            
            
            22,562,007Total liabilities and stockholders' equity
            
            $
            44,403,029
            
            
            $
            36,596,931The
                accompanying notes are an integral part of these consolidated financial
                statements


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          to Table of Contents


**AMERICAN
                INTERNATIONAL INDUSTRIES, INC. AND
                SUBSIDIARIES**Consolidated
                Statements of
                OperationsThree
                and nine months ended September 30, 2007 and 2006
                (Unaudited)





**Three
                Months Ended**
            
            
            **Three
                Months Ended**
            
            
            **Nine
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2007**
            
            
            **September
                30, 2006**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**(restated)
            
            
            
            
            
            (restated)Revenues
            
            $
            8,276,370
            
            
            $
            9,936,232
            
            
            $
            21,916,235
            
            
            $
            24,347,673Costs
                and expenses:Cost of sales
            
            
            5,098,197
            
            
            
            7,328,268
            
            
            
            14,054,552
            
            
            
            16,393,018Selling, general and administrative
            
            
            4,204,701
            
            
            
            4,144,495
            
            
            
            11,113,201
            
            
            
            9,775,004****Total
                operating expenses
            
            
            9,302,898
            
            
            
            11,472,763
            
            
            
            25,167,753
            
            
            
            26,168,022Operating
                income (loss)
            
            
            (1,026,528
            )
            
            
            (1,536,531
            )
            
            
            (3,251,518
            )
            
            
            (1,820,349
            )Other
                income (expenses):Settlement proceeds from sale of Nixon Refinery
            
            
            -
            
            
            
            2,000,000
            
            
            
            -
            
            
            
            2,000,000Interest and dividend income
            
            
            245,725
            
            
            
            235,984
            
            
            
            678,889
            
            
            
            335,535Finance expense for issuance of preferred stock of
              subsidiary
            
            
            (386,334
            )
            
            
            -
            
            
            
            (386,334
            )
            
            
            -Realized gains (losses) on investments
            
            
            63,112
            
            
            
            3,045
            
            
            
            (565,897
            )
            
            
            3,045Unrealized gains (losses) on trading securities
            
            
            155,956
            
            
            
            (42,886
            )
            
            
            798,330
            
            
            
            (53,600
            )Interest expense
            
            
            (262,995
            )
            
            
            (272,738
            )
            
            
            (723,592
            )
            
            
            (577,804
            )Texas Emissions Reduction Plan Grant
            
            
            84,435
            
            
            
            -
            
            
            
            431,595
            
            
            
            -Gain (loss) on sale of assets
            
            
            -
            
            
            
            (10,466
            )
            
            
            3,944
            
            
            
            (10,466
            )Other income (expense)
            
            
            (220,398
            )
            
            
            160,835
            
            
            
            (68,559
            )
            
            
            181,534Total other income (expenses)
            
            
            (320,499
            )
            
            
            2,073,774
            
            
            
            168,376
            
            
            
            1,878,244Net income (loss) before income tax
            
            
            (1,347,027
            )
            
            
            537,243
            
            
            
            (3,083,142
            )
            
            
            57,895Provision
                for income taxes
            
            
            (48,358
            )
            
            
            -
            
            
            
            (48,358
            )
            
            
            -Net income (loss) from operations before minority interest
            
            
            (1,395,385
            )
            
            
            537,243
            
            
            
            (3,131,500
            )
            
            
            57,895Minority
                interest
            
            
            31,843
            
            
            
            158,519
            
            
            
            (212,308
            )
            
            
            (214,109
            )Net income (loss)
            
            $
            (1,363,542
            )
            
            $
            695,762
            
            
            $
            (3,343,808
            )
            
            $
            (156,214
            )Preferred
              dividends of subsidiaryRegular dividends
            
            
            (45,000
            )
            
            
            (20,000
            )
            
            
            15,425
            
            
            
            (20,000
            )Deemed dividend
            
            
            (1,981,162
            )
            
            
            (1,290,898
            )
            
            
            (1,981,162
            )
            
            
            (1,290,898
            )Net loss applicable to common shareholders
            
            
            (3,389,704
            )
            
            
            (615,136
            )
            
            
            (5,309,545
            )
            
            
            (1,467,112
            )Net
                loss applicable to common shareholders:Basic and diluted
            
            $
            (0.60
            )
            
            $
            (0.13
            )
            
            $
            (0.96
            )
            
            $
            (0.33
            )Weighted
                average common shares:Basic and diluted
            
            
            5,692,509
            
            
            
            4,562,728
            
            
            
            5,547,230
            
            
            
            4,423,908The
                accompanying notes are an integral part of these consolidated financial
                statements.


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          to Table of Contents


**AMERICAN
                INTERNATIONAL INDUSTRIES, INC. AND
                SUBSIDIARIES**Consolidated
                Statements of Cash
                FlowsNine
                months ended September 30, 2007 and 2006
                (Unaudited)





**Nine
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2007**
            
            
            **September
                30, 2006**(restated)******Cash
                flows from operating activities:**Net loss
            
            $
            (3,343,808
            )
            
            $
            (156,214
            )Adjustments to reconcile net loss to net cash used in operating
                activities:Depreciation and amortization
            
            
            884,607
            
            
            
            587,713Finance expense for issuance of preferred stock of subsidiary
            
            
            386,334
            
            
            
            -Common shares issued for services
            
            
            854,580
            
            
            
            824,265Compensation - stock warrants
            
            
            70,685
            
            
            
            -Realized (gains) losses on the sale of trading securities
            
            
            565,897
            
            
            
            (3,045
            )Unrealized (gain) losses on the sale of trading securities
            
            
            (798,330
            )
            
            
            53,600Note receivable for refinery settlement
            
            
            -
            
            
            
            (1,000,000
            )Stock returned in lawsuit settlement
            
            
            (39,600
            )
            
            
            -Receivable obligation released in lawsuit settlement
            
            
            225,000
            
            
            
            -Texas Emissions Reduction Plan Grant
            
            
            (431,595
            )
            
            
            -(Gain) loss on sale of assets
            
            
            (3,944
            )
            
            
            10,466Minority interest
            
            
            212,308
            
            
            
            214,109Escrow held for sale of property
            
            
            -
            
            
            
            (15,361
            )Miscellaneous write-off
            
            
            -
            
            
            
            (22,684
            )(Increase) decrease of operating assets, net of acquisition of
                subsidiary:Accounts receivable
            
            
            (556,346
            )
            
            
            (2,531,781
            )Trading securities
            
            
            (1,077,298
            )
            
            
            340,505Inventories
            
            
            (3,186,855
            )
            
            
            (1,641,628
            )Prepaid
                expenses and other current assets
            
            
            (375,811
            )
            
            
            (521,364
            )Other
                assets
            
            
            (44,605
            )
            
            
            20,795Increase (decrease) in operating liabilities, net of acquisition
                of
                subsidiary:Accounts payable and accrued expenses
            
            
            2,038,657
            
            
            
            1,949,179**Net cash used in operating activities**
            
            
            (4,620,124
            )
            
            
            (1,891,445
            )**Cash
                flows from investing activities:**Purchase of property and equipment
            
            
            (1,076,361
            )
            
            
            (252,606
            )Costs of securing patents and trademarks
            
            
            (40,718
            )
            
            
            (25,193
            )Proceeds from the sale of property
            
            
            4,000
            
            
            
            -Issuance of note receivable
            
            
            (27,000
            )
            
            
            -Investment in certificate of deposit
            
            
            (6,100,000
            )
            
            
            (850,000
            )Redemption of certificate of deposit
            
            
            7,414,000
            
            
            
            400,000Notes receivable
            
            
            422,885
            
            
            
            423,689Loans to/from related parties
            
            
            10,000
            
            
            
            (180,000
            )**Net cash provided by (used in) investing
                activities**
            
            
            606,806
            
            
            
            (484,110
            )**Cash
                flows from financing activities:**Net borrowings under line-of-credit agreements
            
            
            1,570,218
            
            
            
            513,110Proceeds from short-term debt
            
            
            1,657,420
            
            
            
            391,121Proceeds from long-term debt
            
            
            662,184
            
            
            
            2,020,952Margin loans
            
            
            86,380
            
            
            
            (132,584
            )Proceeds from issuance of common stock of subsidiary
            
            
            694,672
            
            
            
            -Proceeds from issuance of preferred stock of subsidiary
            
            
            1,981,162
            
            
            
            2,727,746Customer deposits
            
            
            -
            
            
            
            266Principal payments on short-term debt
            
            
            (1,722,514
            )
            
            
            (1,221,931
            )Principal payments on long-term debt
            
            
            (103,250
            )
            
            
            (109,449
            )Acquisition on treasury stock
            
            
            (95,396
            )
            
            
            -**Net cash provided by financing activities**
            
            
            4,730,876
            
            
            
            4,189,231Net increase (decrease) in cash and cash equivalents
            
            
            717,558
            
            
            
            1,813,676Cash
                and cash equivalents at beginning of year
            
            
            3,275,803
            
            
            
            2,709,105**Cash
                and cash equivalents at end of year**
            
            $
            3,993,361
            
            
            $
            4,522,781Supplemental
                schedule of cash flow information:Interest paid
            
            $
            723,592
            
            
            $
            577,804Non-cash
                transactions:Issuance of note payable for real estate acquired for sale
            
            $
            1,684,066
            
            
            $
            -Issuance of common stock for the purchase of OI Corporation common
              stock
            
            $
            1,212,000
            
            
            $
            -Transfer of note payable for land and building
            
            $
            -
            
            
            $
            (410,393
            )Issuance of note payable for office equipment
            
            $
            -
            
            
            $
            20,524The
                accompanying notes are an integral part of these consolidated financial
                statements


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**American
      International Industries, Inc.**


Notes
      to 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 subsidiary , Delta Seaboard Well Services,
        Inc. and its 39.5% owned subsidiary, Hammonds Industries, Inc. (OTCBB: "HMDI"),
        formerly International American Technologies, Inc. (“Hammonds”).  In
        accordance with FIN46(r), the Company consolidates Hammonds although its
        ownership is less than 51%, because the Company exercises the right to elect
        three of the four members of Hammonds' board of directors and because
        the Company controls the Hammonds’ financing. 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.


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**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, the acquisition of Hammonds has been
      recorded 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 International American Technologies,
        Inc.,
        n/k/a Hammonds Industries, Inc., 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**
            
            **Life**Machinery
                & 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


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            to Table of Contents


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, Hammonds acquired the 49% minority interest of Hammonds Technical
      Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
      Systems, Inc., by issuing Carl Hammonds 16,000,000 restricted shares or 44.4%
      of
      HMDI 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
      Hammonds.




September
      30, 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 three and nine months
      ended September 30, 2006 and September 30, 2007, 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.


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          to Table of Contents


**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.**




On
        February 28, 2005,  the Company's subsidiary, International American
        Technologies, Inc. n/k/a Hammonds Industries, Inc. (“Hammonds”), entered into a
        Stock Purchase Agreement  to acquire a 51% interest in the capital
        stock of Hammonds Technical Services, Inc., a privately owned Texas corporation
        in consideration for Hammonds 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) issuing 145,000 restricted shares of the Company’s  common stock
        to Hammonds  in consideration for a $1,450,000 promissory note. These
        restricted shares were exchanged for two minority equity interests in Hammonds
        owned by third parties, which minority interests were canceled. The total
        purchase price to acquire the 51% in Hammonds was $2,455,700 representing
        cash
        payments of $825,000, 145,000 shares of AMIN’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. Pursuant to the Stock Purchase Agreement, which was
        effective on April 28, 2005, Hammonds became a 51% owned subsidiary of the
        Company.
  In
        2006,
        Hammonds Technical Services was separated into three separate entities, Hammonds
        Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water
        Treatment Systems, Inc.


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          to Table of Contents


As
      required by SFAS No. 141, the Company's subsidiary 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 HMDI’s statement of operations from May 1, 2005
      through September 30, 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 September 30, 2007 and 2006, the Company has unrealized trading
      gains of $798,330 and losses of $53,600, respectively, related to securities
      held on those dates. These unrealized gains / losses are included in the
      consolidated statements of operations for the respective years. The Company
      recorded realized losses of $565,897 for the nine months ended September 30,
      2007 and realized gains of $3,045 on the sales of trading securities and for
      the
      nine months ended September 30, 2006.  For the quarter ended September 30,
      2007, the Company recorded realized gains of $63,112 compared to realized gains
      of $3,045 during the same quarter of 2006.  The Company sold 180,500 Orion
      Healthcorp Inc. (AMEX: "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.




On September
      12, 2007, the
      Company acquired 170,345 shares or approximately 7% of OI Corporation's common
      stockfor
      a $1,000,000 cash payment and the issuance of 240,000 restricted shares of
      AMIN stock for a total purchase price of $2,212,000. The OICO shares were
      purchased from OI Corporation's former President and CEO, William W.
      Botts.




**(4)
      Inventories**




Inventories
      consisted of the following:




**September
                30, 2007**
            
            **December
                31, 2006**Parts
                and materials
            $
            1,322,140
            
            $
            1,332,446Work
                in process
            
            631,903
            
            
            232,451Finished
                goods
            
            6,787,523
            
            
            4,034,699Less
                reserve for obsolescence
            
            (251,293
            )
            
            (296,178
            )$
            8,490,273
            
            $
            5,303,418




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          to Table of Contents


**(5)
      Real Estate Transactions**




During
      the second quarter of 2007, the Company purchased for investment a 174 acre
      tract of land in Waller County, Texas for $1,684,066. This property is listed
      for sale with a real estate broker.  This property is not going to be
      developed or being held as inventory by the Company.  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 within the terms
      of the contract.  As a result, the transaction has not had all the elements
      necessary for it to be considered a completed revenue recognition
      event.





**(6)
      Long-term Notes Receivable**




Long-term
      notes receivable at September 30, 2007 consisted of the following:




**September
                30, 2007**
            
            
            **December
                31, 2006**Net
                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
            
            
            164,000
            
            
            
            439,200Sale
                of former subsidiary, Marald, Inc., principal and interest due monthly
                through June 5, 2012
            
            
            168,440
            
            
            
            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
                1and
                December 1, through June 1, 2010
            
            
            875,000
            
            
            
            875,000Sale
                of drilling rig, principal and interest due monthly through December
                31,
                2009
            
            
            239,546
            
            
            
            325,000Other
            
            
            2,000
            
            
            
            15,361Notes
                receivable
            
            
            4,669,030
            
            
            
            5,064,915Less
                current portion
            
            
            3,661,529
            
            
            
            1,021,593Notes
                receivable, less current portion
            
            $
            1,007,501
            
            
            $
            4,043,322




**(7)
      Property and Equipment**




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




**Years**
            
            **September
                30, 2007**
            
            
            **December
                31, 2006**Land
            
            
            
            $
            892,945
            
            
            $
            817,595Building
                and improvements
            
            
            20
            
            
            1,089,231
            
            
            
            1,009,001Machinery
                and equipment
            
            
            7-15
            
            
            3,985,886
            
            
            
            2,910,871Office
                equipment and furniture
            
            
            7
            
            
            813,432
            
            
            
            701,682Automobiles
            
            
            5
            
            
            890,189
            
            
            
            724,8277,671,683
            
            
            
            6,163,976Less
                accumulated depreciation and amortization
            
            
            
            
            
            (3,411,153
            )
            
            
            (3,022,109
            )Net
                property and equipment
            
            
            
            
            $
            4,260,530
            
            
            $
            3,141,867




Depreciation
      expense for the three and nine months ended September 30, 2007 was $146,141
      and
      $389,238, respectively.


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            to Table of Contents


**(8)
      Intangible Assets**




Intangible
      assets at September 30, 2007 consisted of the following:




**As
                of September 30, 2007****Gross
                Carrying Amount**
            
            
            **Accumulated
                Amortization**
            
            **Average
                Weighted Lives**Goodwill
            
            $
            879,834
            
            
            $
            205,295
            
            N/APatents
            
            $
            4,509,498
            
            
            $
            752,757
            
            12
                yearsTrademarks
            
            
            1,149,199
            
            
            
            192,223
            
            10
                yearsSole
                Source Contract
            
            
            1,144,039
            
            
            
            273,537
            
            7
                yearsPatents,
                Trademarks, and Sole Source Contract
            
            $
            6,802,736
            
            
            $
            1,218,517
            
            11
                years


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




**As
                of December 31, 2006****Gross
                Carrying Amount**
            
            
            **Accumulated
                Amortization**
            
            **Average
                Weighted Lives**Goodwill
            
            $
            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 Expense**For
                year ending December 31, 2007
            
            $
            656,983For
                year ending December 31, 2008
            
            $
            642,567For
                year ending December 31, 2009
            
            $
            642,567For
                year ending December 31, 2010
            
            $
            642,567For
                year ending December 31, 2011
            
            $
            642,567




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 interests of the three Hammonds
      subsidiaries.




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




**As
                of September 30, 2007****Gross
                Carrying Amount**
            
            
            **Accumulated
                Amortization**
            
            **Average
                Weighted Lives**Patents
            
            $
            1,806,387
            
            
            $
            492,170
            
            12
                yearsTrademarks
            
            
            465,199
            
            
            
            112,423
            
            10
                yearsSole
                Source Contract
            
            
            464,039
            
            
            
            160,204
            
            7
                yearsPatents,
                Trademarks and Sole Source Contracts
            
            $
            2,735,625
            
            
            $
            764,797
            
            11
                years






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            to Table of Contents
 
 
 On
          August
          1, 2006, Hammonds acquired the 49% minority interest of Hammonds Technical
          Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
          Systems, Inc. by issuing Carl Hammonds 16,000,000 restricted shares or
          44.4% of
          Hammonds' 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 Hammonds. Additionally, the Company incurred costs
          related to the securing of additional patents totaling $26,393 in 2006 and
          $40,718 during the nine months ended September 30, 2007. The following
          table
          contains a summary of the intangible assets acquired in 2006 and during
          the
          quarter ended September 30, 2007:





**As
                of September 30, 2007****Gross
                Carrying Amount**
            
            
            **Accumulated
                Amortization**
            
            **Average
                Weighted Lives**Patents
            
            $
            2,703,111
            
            
            $
            260,587
            
            12
                yearsTrademarks
            
            
            684,000
            
            
            
            79,800
            
            10
                yearsSole
                Source Contract
            
            
            680,000
            
            
            
            113,333
            
            7
                yearsPatents,
                Trademarks and Sole Source Contracts
            
            $
            4,067,111
            
            
            $
            453,720
            
            11
                years




Amortization
      expense for the three and nine months ended September 30, 2007 was $162,119
      and
      $495,369, respectively.




**(9)
      Short-term Notes Payable To Banks**




**September
                30, 2007**
            
            
            **December
                31, 2006**Note
                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
            
            $
            -
            
            
            $
            531,871Note
                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 7.86%, principal and interest due in
                monthly
                payments of $32,492.73 through May 1, 2008
            
            
            227,449
            
            
            
            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
            
            
            2,428
            
            
            
            12,651$
            320,336
            
            
            $
            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.


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              to Table of Contents


**(10)
      Long-term Debt**




Long-term
      debt consisted of the following:




**September
                30, 2007**
            
            
            **December
                31, 2006**Note
                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
            
            
            1,821,631
            
            
            
            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
            
            
            425,098
            
            
            
            426,508Note
                payable to a bank, due in monthly installments of $6,170, including
                interest at 6.6% through May 2018, secured by property
            
            
            561,408
            
            
            
            588,106Note
                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,
                2009,
                secured by assets of the Company's subsidiaries
            
            
            1,750,000
            
            
            
            -Note
                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
            
            
            76,881
            
            
            
            89,354Note
                payable to a bank, with interest at 9.25%, due in monthly installments
                of
                principal and interest of $4,054.12 through February 26, 2012, secured
                by
                assets of the Company’s subsidiary
            
            
            227,630
            
            
            
            -Note
                payable to a bank, due in quarterly payments of interest only, with
                interest at 8.0%, with a principal balance due on June 1, 2009, secured
                by
                real property
            
            
            1,740,000
            
            
            
            -Note
              payable to a bank, due in monthly payments of $6,120.38, including
              interest at 8.25%, through August 9, 2012, secured by
              property
            
            
            295,710
            
            
            
            -Other
                notes with various terms
            
            
            102,403
            
            
            
            82,16311,392,950
            
            
            
            7,047,862Less
                current portion
            
            
            (49,692
            )
            
            
            (102,580
            )$
            11,343,258
            
            
            $
            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.


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Principal
      repayment provisions of long-term debt are as follows at September 30,
      2007:




2007
            
            $
            49,6922008
            
            
            4,573,0302009
            
            
            5,486,4442010
            
            
            597,6532011
            
            
            170,682Thereafter
            
            
            515,449Total
            
            $
            11,392,950




**(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.  In connection with the Company's20%
      stock dividend to all shareholders on September 19, 2007, the terms
      of these warrants were adjusted to reflect the dividend,
      resulting in the warrant being exercisable to buy 172,800 shares for $5.83
      per
      share.




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:




**September
                30, 2007**Dividend
                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 September 30,
      2007, and changes during the periods ending on those dates is presented
      below:


**Shares**
              
              **Weighted
                  Average Exercise**
                **September
                  30, 2007**Outstanding
                  at beginning of period
              -
              $
              N/AGranted
              172,800
              
              5.83Exercised
              -
              
              N/ACanceled
              -
              
              N/AOutstanding
                  and exercisable at end of period
              172,800
              $
              5.83Weighted
                  average fair value of optionsgranted
                  during the period
              172,800
              
              5.83
 Back
            to Table of Contents
 The
      following table summarizes information about fixed stock options to employees
      outstanding at September 30, 2007:




**Exercise
                Price**
            
            **Number
                Outstanding and Exercisable at September 30,
                2007**$
            5.83
            
            172,800





**(13)
      Preferred Stock of Subsidiary**




In
          August
          and September 2006, Hammonds entered into stock purchase agreement with
          Vision Opportunity Master Fund Limited (“VOMF”) pursuant to the
          Hammonds  sold to VOMF 833,333 shares of Series A Preferred Stock and
          833,333 shares of Series B Preferred Stock, respectively. (the “August and
          September 2006 Private Financing Transactions” respectively) and issued VOMF:
          (i) Series A Warrants to purchase 8,333,333 shares of common stock at $0.18
          per
          share, expiring in August 2011; and (ii) Series B Warrants to purchase
          an
          additional 8,333,333 shares of common stock at $0.18 per share, expiring
          in
          August 2007. In connection with the sale of the Series B Convertible Preferred
          Stock, Hammonds issued VOMF: (i) Series C Warrants to purchase an
          additional 8,333,333 shares of common stock at $0.50 per share, expiring
          in
          September 2011; and (ii) Hammonds agreed to extend the expiration dates on
          the Series B Warrants issued in the August 2006 Private Financing Transaction
          from August 2007 to August 2008. Hammonds received net proceeds of approximately
          $2,710,120 from the sale of Series A and Series B Preferred Stock.
  On
          September 20, 2007, Hammonds  and VOMF agreed to  amend the
          Series A, B and C Warrants to: (i) adjust the exercise price of all of the
          Warrants to $0.10; and (ii) provide for the issuance of a total of 2,102,960
          shares of Hammond's newly designated Series C Convertible Preferred Stock
          in
          lieu of 21,029,599 shares of common stock. On September 21, 2007, VOMF
          delivered
          a notice of exercise of all 21,029,599 Series A, B and C Warrants at an
          exercise
          price of $0.10 per Warrant from which Hammonds received net proceeds of
          $981,162
          and VOMF cancelled a short-term promissory note in the amount of $1,000,000,
          representing a loan made by VOMF to Hammonds on August 17,
          2007.
 
 The
          Company’s ownership
          interest in Hammonds was 51% prior to the Private Financing Transactions
          with VOMF, which interest decreased  to 39.5% after VOMF’s exercise of
          all of the Series A, B and C Warrants,  The ownership interest will
          decrease further if and when VOMF converts its Series A,  B and C
          Convertible Preferred 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. Hammonds
      has sufficient authorized and unissued shares available to settle the contracts
      after considering all other commitments that may require the issuance of
      stock.


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            to Table of Contents


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 Rate**Warrants
                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 26 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, more costly to produce, and, in
        the
        opinion of the Company, are not inherently more meaningful than the method
        utilized.


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 Proceeds**Preferred
                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 Proceeds**Preferred
                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 Proceeds**Preferred
                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


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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. Hammonds 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.




We
      have 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, Hammonds 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 Hammonds. 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 Rate**Warrants
                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
                Value**Warrants
                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




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            to Table of Contents


On
        July
        25, 2007, Hammonds and VOMF entered into an agreement pursuant to which
        VOMF waived the cash dividends of $150,425 on the Series A and Series B
        Convertible Preferred Stock accrued from August and September 2006,
        respectively, through September 30, 2007. This dividend waiver is recorded
        in the September 30, 2007 financial statements presented in this report.
        Additionally, VOMF agreed that future accrued dividends may be paid, at
        Hammond's option, in cash or in restricted shares of Hammond's common stock.
        The
        number of shares of common stock to be issued as payment of accrued and unpaid
        dividends shall be determined by dividing (i) the total amount of accrued
        and
        unpaid dividends to be converted into common stock by (ii) eighty percent
        (80%)
        of the average of the VWAP for the twenty (20) Trading Days immediately
        preceding the dividend payment date. The term "VWAP" means, for any date,
        (i)
        the daily volume weighted average price of the common stock for such date
        on the
        OTC Bulletin Board as reported by Bloomberg Financial L.P. (based on a trading
        day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (ii) if the common
        stock is not then listed or quoted on the OTC Bulletin Board and if prices
        for
        the common stock are then reported in the "Pink Sheets" published by the
        Pink
        Sheets, LLC (or a similar organization or agency succeeding to its functions
        of
        reporting prices), the most recent bid price per share of the common stock
        so
        reported; or (iii) in all other cases, the fair market value of a share of
        common stock as determined by an independent appraiser selected in good faith
        by
        the Investor and reasonably acceptable to the Company.
 We
          have determined that a beneficial conversion feature exists for the
          issuance of the Convertible Preferred C Stock, because the fair value of
          the
          issuance exceeded the proceeds by $10.6 million, based on a market price
          of
          $0.60 vs. the exercise price of $0.10 per share. Based on our review of
          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
          received for the Series C 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 proceeds of $1,981,162 to the embedded
          conversion feature and recorded a deemed dividend to the preferred
          shareholders.




The
      modification of the exercise price to $0.10 per share for the Warrants 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
      increase of $386,334 for this modification. Since additional value was given
      to
      the holders of these warrants, $386,334 has been recognized and recorded as
      finance expense in accordance with SFAS No. 123R, Share-Based
      Payment.




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




**Stock
                Price on Date of Reduction**
            
            
            **Volatility**
            
            
            **Risk-Free
                Interest Rate**Warrants
                A, B, & C – September 20, 2007
            
            $
            0.60
            
            
            
            106.18
            %
            
            
            6.25
            %




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




**Exercise
                Price / Term**
            
            **Fair
                Value**Warrants
                A, B, & C – September 20, 2007
            $0.10
                / 0.03 years
            
            $
            10,518,678Warrants
                A, B, & C – September 20, 2007
            Original
                Terms
            
            
            10,132,344Fair
                value reduction
            
            
            $
            386,334




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**(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 September 30, 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. During the nine months ended September
      30, 2007, the Company had one customer on a consolidated basis that accounted
      for thirteen (13%) percent of the Company's revenues.





**(15)
      Texas Emissions Reduction Plan Grant**




Delta
      Seaboard Well Services, Inc. is the recipient of a Texas Emissions Reduction
      Plan (TERP) grant from the Texas Commission on Environmental Quality in the
      amount of $1,157,273. TERP is a comprehensive set of incentive programs aimed
      at
      improving air quality in Texas. Through this grant, Delta’s rig engines are
      being replaced with engines certified to emit 25% less nitrogen oxide (NOx)
      than
      required under the current federal standard for the horsepower of the engines.
      The old engines must be destroyed or rendered permanently
      inoperable.




International
      Accounting Standard No. 20 (IAS 20): *Accounting for Government Grants and
      Disclosure of Government Assistance* provides guidance on recognizing,
      measuring and disclosing government grants, which requires that grants related
      to assets be presented in the balance sheet either by setting up the grant
      as
      deferred income or by deducting the grant in arriving at the carrying amount
      of
      the asset. However, IAS 20 is under review because it is inconsistent with
      the
      "Framework" for International Accounting Standards. The "Framework" states
      that
      "Income is increases in economic benefits during the accounting period in the
      form of inflows or enhancements of assets . . ., other than those relating
      to
      contributions from equity participants." The International Accounting Standards
      Board (IASB) noted that recognizing an amount in the balance sheet as a deferred
      credit is inconsistent with the "Framework" in that the entity has no liability.
      The IASB has decided to replace the guidance in IAS 20 for accounting for
      government grants with the guidance in IAS 41: *Agriculture*. Also, the
      IASB noted that SFAS No. 116: *Accounting for Contributions Received and
      Contributions Made*, while exempting government grants to business entities
      from its scope, provides an accounting model that can be applied to government
      grants and that is consistent with the "Framework." In both IAS 41 and SFAS
      No.
      116, the guidance calls for establishing an asset and recording the grant
      (contribution) as income. The Company applied this guidance and during the
      nine
      months ended September 30, 2007, Delta increased machinery and equipment and
      recognized other income for this grant in the amount of $431,595.




TERP
      grant recipients are required to monitor and track the total NOx emission
      reductions and cost-effectiveness. The grant contract includes provisions for
      the return of a prorated share of the grant if the NOx emission reductions
      originally projected are not achieved. The Company has not recorded any
      liabilities in connection with this matter because management has determined
      that return of any grant receipts is not likely.  Based
      on
      the advice of the State of Texas authorities who administer the grant, the
      taxability of this grant has not been determined and the advice of the Internal
      Revenue Service has been inconsistent.  The Company is still
      determining the effect this will have, but believes it will not materially
      affect the Company because of the tax loss carryforwards explained in note
      (16)
      below.


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**(16)
      Income Taxes**




The
      following table sets forth a reconciliation of the statutory federal income
      tax
      for September 30, 2007 and September 30, 2006.




**September
                30, 2007**
            
            
            **September
                30, 2006**Income
                (loss) before taxes
            
            $
            (3,295,450
            )
            
            $
            (156,214
            )Income
                tax benefit expense at statutory rate
            
            $
            (1,120,453
            )
            
            $
            (53,113
            )Unrealized
                (gain) loss on securities
            
            
            (271,432
            )
            
            
            18,224Permanent
                differences
            
            
            84,600
            
            
            
            84,600Minority
                expense
            
            
            72,185
            
            
            
            72,797Inventory
                reserve
            
            
            (15,261
            )
            
            
            (94,361
            )Other
            
            
            2,321
            
            
            
            (596
            )Increase
                (decrease) in valuation allowance
            
            
            1,248,040
            
            
            
            (27,551
            )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
      September 30, 2007 is set forth below.




**September
                30, 2007**Deferred
                tax assets:Net operating loss
            
            $
            2,932,951Total deferred tax asset
            
            
            2,932,951Valuation allowance
            
            
            (2,932,951
            )Net
                deferred asset
            
            $
            -






**September
                30, 2007**Deferred
                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
      $9,300,000, 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 $990,000.


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**(17)
      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.


**Three
                  Months Ended**
              
              
              **Three
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006**Basic
                  income (loss) per share:Net
                  income (loss)
              
              $
              (1,395,385
              )
              
              $
              537,243Weighted
                  average common shares outstanding
              
              
              5,692,509
              
              
              
              4,562,728Weighted
                  average common shares outstanding for diluted net income (loss)
                  per
                  share
              
              
              5,692,509
              
              
              
              4,562,728Net
                  income (loss) per share - basic
              
              $
              (0.25
              )
              
              $
              0.12Net
                  income (loss) per share - diluted
              
              $
              (0.25
              )
              
              $
              0.12
  **Nine
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30, 2007**
                
                
                **September
                    30, 2006**Basic
                    income (loss) per share:Net
                    income (loss)
                
                $
                (3,131,500
                )
                
                $
                57,895Weighted
                    average common shares outstanding
                
                
                5,547,230
                
                
                
                4,423,908Weighted
                    average common shares outstanding for diluted net income (loss)
                    per
                    share
                
                
                5,547,230
                
                
                
                4,423,908Net
                    income (loss) per share - basic
                
                $
                (0.56
                )
                
                $
                0.01Net
                    income (loss) per share - diluted
                
                $
                (0.56
                )
                
                $
                0.01


**(18)
      Commitments and Contingencies**




Various
      key officials of the Company have entered into employment agreements with the
      Company. In March 2007, 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 CFO of the Company entered into a three-year employment
      agreement beginning June 1, 2007, which provides for an annual salary of $75,000
      plus a bonus as determined by the Board of Directors. 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 HMDI’s president provides
      for an annual base salary of $90,000.


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The
          Registrant's 51% owned subsidiary, Delta Seaboard Well Service, Inc., is
          a
          defendant in two related lawsuits: (i) in Fort Apache Energy, Inc. v. Delta
          Seaboard Well Service, commenced on  July 26, 2005 and pending in
          the 334th Judicial District Court of Harris County, TX,  Apache
          alleged that Delta, which was contracted to provide well-plugging services
          for
          Apache, negligently damaged Apache in plugging a minimally producing Apache
          well
          and exceeded the contract bid amount, Apache was seeking monetary damages
          equal to the cost of drilling a new well, which Apache alleged was approximately
          $5.6 million. Delta’s expert estimated that the cost of unplugging and drilling
          a new well to be approximately $3.7 million Pre-trial discovery has been
          completed in this matter and a bench trial was held from September 10-September
          17, 2007.  During the bench trial, Apache revised its damage estimate to be
          between $2-4 million after deducting the costs of a sidetracking procedure
          and
          also seeks legal fees in excess of $400,000. While Delta believes that
          it should
          prevail in this matter, no decision has been made by the court and Delta
          cannot
          predict the outcome at this time; and (ii) in Gemini Insurance Company
          v. Delta
          Seaboard Well Services, commenced on May 2, 2006 and pending in the
          164th Judicial District Court of Harris County, TX, Gemini filed an action
          against Delta seeking declaratory judgment that Gemini did not have to
          defend
          Delta in the Apache matter. Delta, which was insured under a Gemini CGL
          insurance policy during the relevant period that Delta provided well-plugging
          service to Apache, made a claim with Gemini demanding that Gemini provide
          for
          Delta’s defense in the Apache case. Delta has counterclaimed against Gemini
          seeking to have the CGL policy enforced as well as alleging breach of insurance
          contract, deceptive practices and acting in bad faith Act in refusing coverage.
          Pre-trial discovery is also pending in this matter. Delta is vigorously
          defending this matter, believes that it has meritorious defenses and valid
          counterclaims against Gemini. We cannot predict the outcome of the Gemini
          matter
          at this time. In the event that Delta is found liable to Apache for damages,
          and
          Delta does not prevail against Gemini, its insurance carrier, the Company’s
          financial condition could be adversely affected.  Since Delta expects to
          prevail in these matters, the Company has not recorded any liabilities
          in
          connection with these lawsuits.


Delta
      Seaboard Well Services, Inc. is the recipient of a TERP grant from the Texas
      Commission on Environmental Quality in the amount of $1,157,273, of which
      $431,595 has been recognized through September 30, 2007. TERP grant recipients
      are required to monitor and track the total NOx emission reductions and
      cost-effectiveness. The grant contract includes provisions for the return of
      a
      prorated share of the grant if the NOx emission reductions originally projected
      are not achieved. The Company has not recorded any liabilities in connection
      with this matter because management has determined that return of any grant
      receipts is not likely.




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,**
            
            **Amount**2007
            
            $
            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,**
            
            **Amount**2007
            
            $
            36,0612008
            
            
            36,0612009
            
            
            18,030$
            90,152


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**(19)
      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 nine months ended September 30, 2007, the Company issued 37,800 shares
      of common stock to Daniel Dror II for services representing $188,790 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.


On
        August
        24, 2007, Hammonds issued 500,000 shares of restricted stock to American
        International Industries, Inc. valued at $105,000 as a management
        fee.




The
      Company had a revolving credit note receivable at December 31, 2006, in the
      amount of $225,000 due from International Diversified Corporation, Ltd. (IDCL),
      a corporation owned by Elkana Faiwuszewicz, the CEO’s brother.  IDCL was a
      party to the lawsuit between the Company and Orion
      HealthCorp., Inc. (AMEX: "ONH"), f/k/a SurgiCare, Inc.,which was settled
      by the Company in October 2006.  On August 30, 2007, the Company agreed to
      release IDCL from this obligation  in consideration for settling the
      lawsuit and the $225,000 is included in other expense for three and nine
      months ended September 30, 2007.




**(20)
      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


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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:




**Three
                  months ended September 30,**
              
              
              **Nine
                  months ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues:Hammonds
                  Technical Services
              
              $
              1,962,312
              
              
              $
              591,696
              
              
              $
              3,938,724
              
              
              $
              2,343,592Hammonds
                  Fuel Additives
              
              
              281,292
              
              
              
              316,778
              
              
              
              824,714
              
              
              
              916,141Hammonds
                  Water Treatment
              
              
              839,682
              
              
              
              619,389
              
              
              
              2,357,023
              
              
              
              1,428,959Northeastern
                  Plastics
              
              
              2,309,175
              
              
              
              5,329,843
              
              
              
              6,166,189
              
              
              
              9,117,451Delta
                  Seaboard
              
              
              2,883,909
              
              
              
              3,078,526
              
              
              
              8,629,585
              
              
              
              10,541,530$
              8,276,370
              
              
              $
              9,936,232
              
              
              $
              21,916,235
              
              
              $
              24,347,673Income
                  (loss) from operations:Hammonds
                  Technical Services
              
              $
              8,275
              
              
              $
              (610,953
              )
              
              $
              (1,103,253
              )
              
              $
              (1,250,844
              )Hammonds
                  Fuel Additives
              
              
              43,229
              
              
              
              (61,136
              )
              
              
              107,177
              
              
              
              (47,311
              )Hammonds
                  Water Treatment
              
              
              38,807
              
              
              
              (7,481
              )
              
              
              88,228
              
              
              
              76,780Northeastern
                  Plastics
              
              
              114,422
              
              
              
              614,804
              
              
              
              (34,908
              )
              
              
              669,391Delta
                  Seaboard and Brenham Oil & Gas
              
              
              (128,419
              )
              
              
              (303,792
              )
              
              
              134,540
              
              
              
              577,549Corporate
              
              
              (1,102,842
              )
              
              
              (1,167,973
              )
              
              
              (2,443,302
              )
              
              
              (1,845,914
              )Income
                  (loss) from operations
              
              
              (1,026,528
              )
              
              
              (1,536,531
              )
              
              
              (3,251,518
              )
              
              
              (1,820,349
              )Other
                  income (expenses)
              
              
              (320,499
              )
              
              
              2,073,774
              
              
              
              168,376
              
              
              
              1,878,244Net
                  income (loss) before income tax
              
              $
              (1,347,027
              )
              
              $
              537,243
              
              
              $
              (3,083,142
              )
              
              $
              57,895Identifiable
                  assets:Hammonds
                  Technical Services
              
              
              
              
              
              
              
              
              
              $
              9,735,099
              
              
              $
              5,044,077Hammonds
                  Fuel Additives
              
              
              
              
              
              
              
              
              
              
              300,464
              
              
              
              422,287Hammonds
                  Water Treatment
              
              
              
              
              
              
              
              
              
              
              560,901
              
              
              
              733,352Northeastern
                  Plastics
              
              
              
              
              
              
              
              
              
              
              8,731,019
              
              
              
              9,283,880Delta
                  Seaboard and Brenham Oil & Gas
              
              
              
              
              
              
              
              
              
              
              6,962,719
              
              
              
              6,811,065Corporate
              
              
              
              
              
              
              
              
              
              
              18,112,827
              
              
              
              18,476,530$
              44,403,029
              
              
              $
              40,771,191
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**(21)
      Subsequent Events**




On October
      15, 2007, Hammonds issued 7,142,857 shares of restricted common stock at
      $0.14 per share to the Company for the conversion of a $1,000,000
      promissory note.  After this transaction, the Company's ownership
      of Hammonds' common stock increased to 56.2% from 39.5% at
      September 30, 2007.




On October 19, 2007, Nestle
      Products Corporation (incorporated on October 18, 2007 in the State of Nevada),
      a wholly-owned subsidiary of the Company, acquired 9.9% of Las Vegas
      Premium Gold Products, Inc., a private Nevada corporation (“LVPG”), in exchange
      for 50,000 restricted shares of the Company's common stock valued at
      $250,000.


**(22)
        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
        September 30, 2006 and December 31, 2006. Because of the complexity of the
        issue, our letter response to the SEC, including the restatement, has been
        submitted to the SEC. Upon receipt from the SEC of its acceptance of the
        restatements, the Company will file an amended 10KSB for the year ended December
        31, 2006. The differences are summarized below:
 
 **Three
                  Months Ended September 30, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Net
                  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, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Net
                  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
              )
 
 **December
                  31, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Additional
                  paid-in capital
              
              $
              36,033,743
              
              
              $
              1,290,898
              
              
              $
              37,324,641Accumulated
                  deficit
              
              $
              (13,938,166
              )
              
              $
              (1,290,898
              )
              
              $
              (15,229,064
              )


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ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATION




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 39.5%
      subsidiary, Hammonds Industries, Inc. (OTCBB: "HMDI"),  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 Hammonds although its
      ownership is less than 51%, because the Company exercises the right to elect
      three of the four members of Hammonds’s board of directors and because
      the Company controls the Hammonds’ financing.Since
      Hammonds is incurring losses and there is no minority interest, the Company
      recognizes 100% of Hammond’s losses.


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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
      and nine months Ended September 30, 2007 Compared to Three and nine months
      Ended
      September 30, 2006.




*Net
      revenues*. For the three months ended September 30, 2007, revenues were
      $8,276,370, compared to $9,936,232 for the three months ended September 30,
      2006. For the nine month period ended September 30, 2007, revenues were
      $21,916,235, compared to $24,347,673 for the same period in 2006.




Hammonds’
      revenues for the three months ended September 30, 2007 were $3,083,286, compared
      to $1,527,863 for the three months ended September 30, 2006, representing an
      increase of $1,555,423, or 102%. Hammonds’ revenues for the nine months
      ended September 30, 2007 were $7,120,461, compared to $4,688,692 for the same
      period in 2006, representing an increase of $2,431,769, or 52%. The
      increase was due to higher demand for Hammonds Water Treatment products and
      sales of Hammonds Technical Services’ transport mounted injection systems.
      Hammonds' backlog of orders was $4.8 million at September 30, 2007, compared
      to
      a backlog of orders of $5.0 million at September 30, 2006.




Delta
      reported revenues of $2,883,909 for the three months ended September 30, 2007,
      compared to $3,078,526 for the same period in 2006. Delta’s revenues for the
      nine months ended September 30, 2007 were $8,629,585, compared to $10,541,530
      for the nine months ended September 30, 2006.  The decrease in revenues at
      Delta is primarily due to decreased pipe sales, which have
      declined industry-wide.




Revenues
      at NPI during the three and nine months ended September 30, 2007 were $2,309,175
      and $6,166,189, respectively, compared to $5,329,843 and $9,117,451,
      respectively, for the same periods in 2006. The decline in revenues is due
      primarily to a shift in shipments to a major customer from the third quarter
      in
      2006 to the forth quarter in 2007.  In addition, customers changed the
      assortment of NPI products that they carry, resulting in a reduction in sales
      through the third quarter of 2007.  The Company believes that the
      future impact of this reduction will be mitigated through replacement
      business with new and existing customers.  NPI
      is in
      final negotiations with a major "big box" store chain to distribute its Good
      Choice night light and wall tap products in the 4th quarter of
      2007.  NPI's business is seasonal and historically, most of NPI’s
      revenues have been generated in the third and fourth quarters. At the end of
      September 2007, NPI had a backlog of $5.4 million, compared to a backlog of
      orders of $4.5 million at September 30, 2006.




*Net
      loss from operations.*Our consolidated net loss from operations for the
      three-month period ended September 30, 2007 was $1,026,528, compared to
      $1,536,531 during the same three-month period in the prior year. Consolidated
      net loss from operations for the nine-month period ended September 30, 2007
      was
      $3,251,518, compared to a net loss of $1,820,349 during the same period in
      2006.


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During
      the three and nine-month periods ended September 30, 2007, Delta had
      a net loss from operations of $128,419 and net income
      of $134,540, respectively, compared to a net loss of $303,792 and net
      income of $577,549, respectively, for the same periods in 2006. The decline
      was primarily due to decreased pipe sales 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.




NPI
        had
        net income from operations of $114,422 during the three-month period ended
        September 30, 2007, compared to net income from operations of $614,804 for
        the
        same period in the prior year. NPI’s net loss from operations for the nine-month
        period ended September 30, 2007 was $34,908, compared to net income of $669,391
        for the same period in 2006. NPI experienced higher freight and product costs
        due to higher energy prices and an increase in product liability
        insurance.
  Hammonds
        Industries, Inc., reported net losses from operations of $419,244 for the
        three-month period ended September 30, 2007, compared to net losses of $746,259
        during the same period in 2006. Hammonds’ loss from operations for the nine
        months ended September 30, 2007, was $1,548,376 compared to a loss of $1,305,610
        for the nine months ended September 30, 2006. The increase in net loss for
        the nine-month period ended September 30, 2007 was primarily due to
        increased sales and marketing expenses associated Hammonds’ new line of omni
        direction utility vehicles (ODVs), the on-going sales and marketing efforts
        associated with all of its product lines, and the increase in amortization
        costs
        of the patents and trademarks. Hammonds recently purchased 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, Hammonds installed new compressed air systems, new production flow
        testing stands, hydrostatic test stations, and expanded plant lighting and
        power
        distribution to support additional welding and assembly stations.  The cost
        of the new equipment, machinery and systems was $40,670 and $109,847 during
        the
        three and nine-month periods ended September 2007. This new machinery will
        significantly increase production capability and efficiency. In addition,
        Hammonds is implementing manufacturing and cost saving procedures in order
        to
        generate increased revenues with greater cost efficiencies.
  Corporate
        operating expenses decreased by $65,131 and increased by $597,388 during
        the
        three and nine-month periods ended September 30, 2007, respectively, compared
        to
        the same periods in the prior year. For the nine months ended September 30,
        2007, Corporate incurred real estate consulting fees of $202,034, "key" man
        life
        insurance of $25,000, and reduced reimbursements for rent and management
        fees of
        $354,000. In the nine-month period ended September 30, 2006, Corporate operating
        expenses included offsets for $287,000 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 $67,000 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 expense was $320,499 for the three month period ended
        September 30, 2007, compared to other income of $2,073,774 for the same period
        in the prior year. Other income was $168,376 for the nine months ended September
        30, 2007, compared to other income of $1,878,244 for the nine months ended
        September 30, 2006. In September 2007, we were required to recognize a non-cash
        finance expense of $386,334 associated with Hammonds' issuance and sale of
        Series A, B and C Convertible Preferred Stock (See footnote 13).  Other
        income for the three and nine months ended September 30, 2006, included
        $2,000,000 received in connection with the settlement of the lawsuit involving
        the Nixon Refinery transaction.. For the three and nine months ended September
        30, 2007, interest and dividend income increased by $9,741 and $343,354,
        respectively, compared to the same periods in 2006, primarily due to a
        significant increase in investment in certificates of deposit and interest
        on
        notes receivable. Delta recognized other income from a Texas Emissions
        Reduction Plan (TERP) grant in the amount of $431,595 for the nine months
        ended
        September 30, 2007. For further disclosure regarding the TERP grant, see
        note
        15.
 
 Net
        realized/unrealized gain on trading securities was $232,433 for the nine-month
        period ended September 30, 2007, compared to a loss of $50,555 for the same
        nine-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. Interest expense was $155,531
        higher
        in the first half of 2007 than it was in the same period in 2006.
  *Net
        loss.*Net loss was $1,363,542 and $3,343,808, respectively, for the three
        and nine-months ended September 30, 2007, compared to net income of $695,762
        and
        net loss of $156,214, respectively, for the same period in
        2006.
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**Liquidity
      and Capital Resources**




*Total
      assets/liabilities.*Total assets at September 30, 2007 were $44,403,029,
      compared to $36,596,931 at December 31, 2006. Total liabilities at September
      30,
      2007 were $20,104,969, compared to $14,034,924 at December 31, 2006. At
      September 30, 2007, consolidated working capital was $26,298,746, compared
      to
      working capital of $17,625,203 at December 31, 2006. Our consolidated cash
      position at September 30, 2007 was $3,993,361 compared to $3,275,803 at December
      31, 2006.


*Cash
        flow from operations.* For the nine months ended September 30, 2007, we had
        negative cash flow from operations of $4,620,124 compared to negative cash
        flow
        from operations of $1,891,445 during the same period in the prior year. This
        decrease was the result of an increase in our net loss from $156,214 for
        nine
        months ended September 30, 2006 to $3,343,808 for the nine months ended
        September 30, 2007. Our net loss of $3,343,808 was offset by non-cash
        compensation of $925,265, depreciation and amortization expenses of $884,607,
        and non-cash finance expenses associated with the Series C Preferred Stock
        Issuance for HMDI of $386,334. Our inventories increased by $3,186,855 for
        the
        nine months ended September 30, 2007, compared to an increase of $1,641,628
        during the nine months ended September 30, 2006, which increase negatively
        impacted our cash flow from operations. Our Accounts receivable increased
        during
        the nine months ended September 30, 2007 by $556,346 compared to an increase
        of
        $2,531,781 during the same nine-month period in the prior year. Trading
        securities increased by $1,077,298 during the nine months ended September
        30,
        2007. Prepaid expenses increased by $375,811, other assets increased by $44,605,
        and accounts payable increased by $2,038,657 for the nine months ended September
        30, 2007.


The
        Company’s subsidiary, Hammonds, entered into preferred stock purchase agreements
        with VOMF, with the strategic objectives of:  raising capital for Hammonds’
production lines and expand production capacity to meet increasing orders
        and
        providing liquidity for Hammonds.
  *Cash
        flow from investing activities.* Our investing activities provided $606,806
        during the nine-month period ended September 30, 2007, as a result of a net
        reduction in investment in certificates of deposit of $1,314,000, receipts
        of
        principal payments on notes receivable of $422,885, offset by purchases of
        property and equipment of $1,076,361. This is compared to cash used in investing
        activities during the same period in the prior year in the amount of $484,110,
        as a result of receipts of principal payments on long-term notes of $423,689,
        a
        net reduction in certificates of deposit of $450,000, and purchases of property
        and equipment of $252,606 and loans to related parties of $180,000.
  *Cash
        flow from financing activities.* During the nine months ended September 30,
        2007, our financing activities provided $4,730,876 compared to cash provided
        of
        $4,189,231 during the same period of 2006. We received  net proceeds
        of $1,981,162 from the issuance of 2,102,960 shares of Hammonds' Series C
        Convertible Preferred Stock in connection with the exercise by VOMF of all
        outstanding Series A, B and C Warrants in September 2007, net proceeds of
        $694,672 from the issuance of 3,970,400 shares of Hammonds' common stock
        upon the exercise by VOMF of Series C Warrants in March 2007, $1,657,420
        from
        short-term borrowings, $662,184 from long-term debt, and from line-of-credit
        agreements of $1,570,218. We made payments of $1,722,514 on short-term notes
        and
        principal payments on long-term debt of $103,250 during the nine month period
        ended September 30, 2007. Margin loans increased by $86,380 and the Company
        purchased 20,662 shares of treasury stock at a cost of $95,396.




*Real
      estate.*During the second quarter of 2007, the Company purchased a 174 acre
      tract of land in Waller County, Texas for $1,684,066. This property is listed
      for sell with a real estate broker. 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.


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ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS




*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 September
      30, 2007, due to the generally short maturities of these items. At September
      30,
      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 September 30, 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 September 30, 2007, our total equity holdings in
      publicly traded companies were valued at $3,245,987 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
            
            $
            (1,622,994
            )
            
            $
            (1,136,095
            )
            
            $
            (486,898
            )




ITEM
      4. CONTROLS AND
      PROCEDURES




*Evaluation
      of disclosure controls and procedures.* As of September 30, 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.




*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.




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**PART
      II - OTHER INFORMATION**




ITEM
      1. LEGAL
      PROCEEDINGS




The
      Registrant's 51% owned subsidiary, Delta Seaboard Well Service, Inc., is a
      defendant in two related lawsuits: (i) in Fort Apache Energy, Inc. v. Delta
      Seaboard Well Service, commenced on  July 26, 2005 and pending in
      the 334th Judicial District Court of Harris County, TX,  Apache
      alleged that Delta, which was contracted to provide well-plugging services
      for
      Apache, negligently damaged Apache in plugging a minimally producing Apache
      well
      and exceeded the contract bid amount, Apache was seeking monetary damages
      equal to the cost of drilling a new well, which Apache alleged was approximately
      $5.6 million. Delta’s expert estimated that the cost of unplugging and drilling
      a new well to be approximately $3.7 million Pre-trial discovery has been
      completed in this matter and a bench trial was held from September 10-September
      17, 2007. During the bench trial, Apache revised its damage estimate to be
      between $2-4 million after deducting the costs of a sidetracking procedure
      and
      also seeks legal fees in excess of $400,000. While Delta believes that it should
      prevail in this matter, no decision has been made by the court and Delta cannot
      predict the outcome at this time; and (ii) in Gemini Insurance Company v. Delta
      Seaboard Well Services, commenced on May 2, 2006 and pending in the 164th
      Judicial District Court of Harris County, TX, Gemini filed an action against
      Delta seeking declaratory judgment that Gemini did not have to defend Delta
      in
      the Apache matter. Delta, which was insured under a Gemini CGL insurance policy
      during the relevant period that Delta provided well-plugging service to Apache,
      made a claim with Gemini demanding that Gemini provide for Delta’s defense in
      the Apache case. Delta has counterclaimed against Gemini seeking to have the
      CGL
      policy enforced as well as alleging breach of insurance contract, deceptive
      practices and acting in bad faith Act in refusing coverage. Pre-trial discovery
      is also pending in this matter. Delta is vigorously defending this matter,
      believes that it has meritorious defenses and valid counterclaims against
      Gemini. We cannot predict the outcome of the Gemini matter at this time. In
      the
      event that Delta is found liable to Apache for damages, and Delta does not
      prevail against Gemini, its insurance carrier, the Company’s financial condition
      could be adversely affected.




ITEM
      1A. RISK
      FACTORS




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




None.






ITEM
      3. DEFAULTS UPON SENIOR
      SECURITIES




None.






ITEM
      4. SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY HOLDERS




None.






ITEM
      5. OTHER INFORMATION




None.


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ITEM
      6. EXHIBITS




(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.**
            **Description**31.1
            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 filed the following Forms 8-K:  on August 2, 2007 with
      disclosure under Item 8.01 "Other Events" and Item 9.01 "Financial Statements
      and Exhibits"; on August 21, 2007 with disclosure under Item 3.01 "Notice of
      Delisting or Failure to Satisfy a Continued Listing Rule or Standard, Transfer
      of Listing", Item 8.01 "Other Events" and Item 9.01 "Financial Statements and
      Exhibits"; on August 30, 2007 with disclosure under Item 8.01 "Other Events"
      and
      Item 9.01 "Financial Statements and Exhibits"; on September 12, 2007 with
      disclosure under Item 3.02 "Unregistered Sales of Equity Securities", Item
      8.01 "Other Events" and Item 9.01 "Financial Statements and Exhibits"; on
      September 24, 2007 with disclosure under Item 8.01 "Other Events" and Item
      9.01
      "Financial Statements and Exhibits".




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**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: November 7, 2007*






/s/
      SHERRY L. COUTURIER


CHIEF FINANCIAL OFFICER


*Dated:  November 7, 2007*