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, 2008




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 large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company.  See the definitions of "large accelerated filer, "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
  Large
      accelerated filer  ̈
              Accelerated filer ̈Non-accelerated
      filer  ̈ (Do not check if a
      smaller reporting company)
              Smaller
      reporting company x
  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈ Nox
 At November
14, 2008, the Registrant had 8,695,326 shares of common stock
issued.





TABLE OF
CONTENTS




Item
            Description
            PagePART I - FINANCIAL
      INFORMATIONITEM
      1.
            FINANCIAL
      STATEMENTS
            3ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
            24ITEM
      3.
            QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISKS
            28ITEM
      4.
            CONTROLS AND PROCEDURES
            28PART II -
      OTHER INFORMATIONITEM
      1.
            LEGAL PROCEEDINGS
            29ITEM
      1A.
            RISK FACTORS
            29ITEM
      2.
            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            29ITEM
      3.
            DEFAULT UPON SENIOR SECURITIES
            29ITEM
      4.
            SUBMISSION OF MATERS TO A VOTE OF SECURITY
      HOLDERS
            29ITEM
      5.
            OTHER INFORMATION
            30ITEM
      6.
            EXHIBITS
            30






2


PART I - FINANCIAL
INFORMATION






ITEM 1. FINANCIAL
STATEMENTS




Consolidated
      Financial StatementsUnauditedConsolidated
      Balance Sheets - September 30, 2008 and December 31,
      2007
            4Unaudited Consolidated Statements of
      Operations - Three and Nine Months Ended September 30, 2008 and
      2007
            5Unaudited Consolidated Statements of Cash Flows - Nine
      Months Ended September 30, 2008 and 2007
            6Notes to Unaudited Consolidated Financial
      Statements
            8
















3


AMERICAN INTERNATIONAL INDUSTRIES, INC. AND
      SUBSIDIARIESConsolidated
      Balance Sheets (Unaudited)September
      30, 2008
              
              
              December
      31, 2007AssetsCurrent
      assets:Cash and cash equivalents
              
              $
              3,630,761
              
              
              $
              3,891,156Certificate of deposit
              
              
              3,975,000
              
              
              
              5,195,000Trading securities
              
              
              2,615,358
              
              
              
              6,810,382Accounts receivable, less allowance for doubtful accountsof $240,908 and $231,870, respectively
              
              
              9,466,052
              
              
              
              4,835,452Current portion of notes receivable
              
              
              4,463,843
              
              
              
              3,898,831Accounts and notes receivable from related parties
              
              
              31,606
              
              
              
              30,000Inventories
              
              
              5,778,185
              
              
              
              5,811,997Real estate held for sale
              
              
              1,909,066
              
              
              
              1,909,066Deposits for pipe inventory purchases
              
              
              1,748,601
              
              
              
              -Drilling rigs held for sale
              
              
              1,734
              
              
              
              187,611Prepaid expenses and other current assets
              
              
              452,336
              
              
              
              296,981Total current assets
              
              
              34,072,542
              
              
              
              32,866,476Long-term
      notes receivable, less current portion
              
              
              133,181
              
              
              
              618,129Investment
      in Las Vegas Premium Gold Products
              
              
              250,000
              
              
              
              250,000Property
      and equipment, net of accumulated depreciation and
      amortization
              
              
              4,718,625
              
              
              
              4,619,940Goodwill
              
              
              674,539
              
              
              
              674,539Patents
      and trademarks, net of amortization
              
              
              5,014,719
              
              
              
              5,457,365Other
      assets
              
              
              145,414
              
              
              
              100,105Total assets
              
              $
              45,009,020
              
              
              $
              44,586,554Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable and accrued expenses
              
              $
              7,023,247
              
              
              $
              3,197,415Margin loans from financial institutions
              
              
              1,319,112
              
              
              
              1,443,424Short-term notes payable
              
              
              1,917,015
              
              
              
              219,970Property dividend payable
              
              
              654,364
              
              
              
              -Current
      installments of long-term capital lease obligations
              
              
              67,762
              
              
              
              29,967Current installments of long-term debt
              
              
              3,016,638
              
              
              
              185,328Total current liabilities
              
              
              13,998,138
              
              
              
              5,076,104Long-term
      debt, less current installments
              
              
              9,360,247
              
              
              
              10,766,951Long-term
      capital lease obligations, less current installments
              
              
              242,748
              
              
              
              123,100Deferred
      tax liability
              
              
              156,535
              
              
              
              156,535Minority
      interest
              
              
              2,217,756
              
              
              
              1,370,196Total liabilities
              
              
              25,975,424
              
              
              
              17,492,886Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders'
      equity:Preferred stock, $0.001 par value, 1,000,000 authorized: none
      issued
              
              
              -
              
              
              
              -Common stock, $0.001 par value, 50,000,000
    authorized:8,702,031 and
      7,107,842 shares issued, respectively8,651,697
      and 7,070,480 shares outstanding, respectively
              
              
              8,702
              
              
              
              7,108Additional paid-in capital - common stock
              
              
              47,091,679
              
              
              
              46,327,209Accumulated deficit
              
              
              (27,852,097
              )
              
              
              (19,045,752
              )Less
      treasury stock, at cost50,334
      and 37,362 shares, respectively
              
              
              (214,688
              )
              
              
              (194,897
              )Total stockholders' equity
              
              
              19,033,596
              
              
              
              27,093,668Total liabilities and stockholders' equity
              
              $
              45,009,020
              
              
              $
              44,586,554The
      accompanying notes are an integral part of these
      unaudited consolidated financial statements
  Back to Table of Contents
 4


AMERICAN
      INTERNATIONAL INDUSTRIES, INC. AND
  SUBSIDIARIESConsolidated Statements of
      Operations(Unaudited)


Three Months
      Ended
            
            
            Three Months
      Ended
            
            
            Nine Months
      Ended
            
            
            Nine Months
      EndedSeptember 30,
      2008
            
            
            September 30,
      2007
            
            
            September 30,
      2008
            
            
            September 30,
      2007Revenues
            
            $
            13,632,262
            
            
            $
            8,276,370
            
            
            $
            28,844,385
            
            
            $
            21,916,235Costs
      and expenses:Cost of sales
            
            
            9,130,796
            
            
            
            5,098,197
            
            
            
            19,093,309
            
            
            
            14,054,552Selling, general and administrative
            
            
            4,134,982
            
            
            
            4,204,701
            
            
            
            11,759,281
            
            
            
            11,113,201Total operating
      expenses
            
            
            13,265,778
            
            
            
            9,302,898
            
            
            
            30,852,590
            
            
            
            25,167,753Operating
      profit (loss)
            
            
            366,484
            
            
            
            (1,026,528
            )
            
            
            (2,008,205
            )
            
            
            (3,251,518
            )Other
      income (expenses):Interest and dividend income
            
            
            162,676
            
            
            
            245,725
            
            
            
            464,732
            
            
            
            678,889Finance expense for issuance of preferred stock of subsidiary
            
            
            -
            
            
            
            (386,334
            )
            
            
            -
            
            
            
            (386,334
            )Gain on property dividend distribution
            
            
            -
            
            
            
            -
            
            
            
            2,945,133
            
            
            
            -Delta lawsuit settlement
            
            
            -
            
            
            
            -
            
            
            
            (1,450,000
            )
            
            
            -Realized gains (losses) on investments
            
            
            8,414
            
            
            
            63,112
            
            
            
            (20,447
            )
            
            
            (565,897
            )Unrealized gains (losses) on trading securities
            
            
            (1,578,551
            )
            
            
            155,956
            
            
            
            (4,160,535
            )
            
            
            798,330Interest expense
            
            
            (246,295
            )
            
            
            (262,995
            )
            
            
            (780,298
            )
            
            
            (723,592
            )Texas Emissions Reduction Plan Grant
            
            
            -
            
            
            
            84,435
            
            
            
            57,589
            
            
            
            431,595Gain on sale of assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,944Other income (expense)
            
            
            23,384
            
            
            
            (220,398
            )
            
            
            49,616
            
            
            
            (68,559
            )Total other income (expenses)
            
            
            (1,630,372
            )
            
            
            (320,499
            )
            
            
            (2,894,210
            )
            
            
            168,376Net loss before income tax
            
            
            (1,263,888
            )
            
            
            (1,347,027
            )
            
            
            (4,902,415
            )
            
            
            (3,083,142
            )Income tax expense (benefit)
            
            
            44,878
            
            
            
            48,358
            
            
            
            (50,476
            )
            
            
            48,358Net loss before minority interest
            
            
            (1,308,766
            )
            
            
            (1,395,385
            )
            
            
            (4,851,939
            )
            
            
            (3,131,500
            )Minority interest
            
            
            (728,535
            )
            
            
            31,843
            
            
            
            (189,909
            )
            
            
            (212,308
            )Net loss
            
            
            (2,037,301
            )
            
            
            (1,363,542
            )
            
            
            (5,041,848
            )
            
            
            (3,343,808
            )Preferred
      dividends of subsidiaryRegular dividends
            
            
            (60,000
            )
            
            
            (45,000
            )
            
            
            (165,000
            )
            
            
            (135,000
            )Deemed dividend
            
            
            -
            
            
            
            (1,981,162
            )
            
            
            -
            
            
            
            (1,981,162
            )Forgiveness of dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            150,425Net loss applicable to common shareholders
            
            $
            (2,097,301
            )
            
            $
            (3,389,704
            )
            
            $
            (5,206,848
            )
            
            $
            (5,309,545
            )Net
      loss per common share - basic and
      diluted
            
            $
            (0.25
            )
            
            $
            (0.60
            )
            
            $
            (0.69
            )
            
            $
            (0.96
            )Weighted
      average common shares - basic and diluted
            
            
            8,384,417
            
            
            
            5,692,509
            
            
            
            7,546,963
            
            
            
            5,547,230The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


Back to Table of Contents
 5


AMERICAN INTERNATIONAL INDUSTRIES, INC. AND
      SUBSIDIARIESConsolidated
      Statements of Cash Flows(Unaudited)


Nine
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2007Cash
      flows from operating activities:Net loss
            
            $
            (5,041,848
            )
            
            $
            (3,343,808
            )Adjustments to reconcile net loss to net cash used in operating
      activities:Property dividend distribution gain
            
            
            (2,945,133
            )
            
            
            -Delta lawsuit settlement
            
            
            1,450,000
            
            
            
            -Depreciation and amortization
            
            
            1,048,832
            
            
            
            884,607Finance expense for issuance of preferred stock of subsidiary
            
            
            -
            
            
            
            386,334Share-based compensation
            
            
            737,064
            
            
            
            925,265Realized losses on the sale of trading securities
            
            
            20,447
            
            
            
            565,897Unrealized (gains) losses on the sale of trading
securities
            
            
            4,160,535
            
            
            
            (798,330
            )Stock returned in lawsuit settlement
            
            
            -
            
            
            
            (39,600
            )Receivable obligation released in lawsuit settlement
            
            
            -
            
            
            
            225,000Texas Emissions Reduction Plan Grant
            
            
            (57,589
            )
            
            
            (431,595
            )Gain on sale of assets
            
            
            -
            
            
            
            (3,944
            )Minority interest in net income of consolidated subsidiary
            
            
            189,909
            
            
            
            212,308Change in operating assets and liabilities:Accounts receivable
            
            
            (4,630,599
            )
            
            
            (556,346
            )Trading securities
            
            
            14,042
            
            
            
            (1,077,298
            )Inventories
            
            
            33,812
            
            
            
            (3,186,855
            )Deposits for pipe inventory purchases
            
            
            (1,748,601
            )
            
            
            -Prepaid expenses and other current assets
            
            
            (155,356
            )
            
            
            (375,811
            )Other assets
            
            
            (45,310
            )
            
            
            (44,605
            )Accounts payable and accrued expenses
            
            
            3,660,833
            
            
            
            2,038,657Net
      cash used in operating activities
            
            
            (3,308,962
            )
            
            
            (4,620,124
            )Cash
      flows from investing activities:Purchase of property and equipment
            
            
            (400,797
            )
            
            
            (1,076,361
            )Costs of securing patents and trademarks
            
            
            (42,970
            )
            
            
            (40,718
            )Investment in rigs held for sale
            
            
            (14,123
            )
            
            
            -Proceeds from the sale of drilling rigs
            
            
            200,000
            
            
            
            -Proceeds from the sale of property
            
            
            -
            
            
            
            4,000Issuance of note receivable
            
            
            (225,000
            )
            
            
            (27,000
            )Investment in certificate of deposit
            
            
            (4,575,421
            )
            
            
            (6,100,000
            )Redemption of certificate of deposit
            
            
            5,795,421
            
            
            
            7,414,000Proceeds from notes receivable
            
            
            144,937
            
            
            
            422,885Loans (to) from related parties
            
            
            (1,606
            )
            
            
            10,000Net
      cash provided by investing activities
            
            
            880,441
            
            
            
            606,806Cash
      flows from financing activities:Net borrowings under line-of-credit agreements
            
            
            1,045,000
            
            
            
            1,570,218Proceeds from issuance of debt
            
            
            3,817,663
            
            
            
            1,319,604Capital contributions from minority interest
            
            
            214,273
            
            
            
            -Payments on margin loans
            
            
            (124,312
            )
            
            
            86,380Proceeds from issuance of common stock of subsidiary
            
            
            -
            
            
            
            694,672Proceeds
      from issuance of preferred stock of subsidiary
            
            
            -
            
            
            
            1,981,162Principal payments on debt
            
            
            (2,718,635
            )
            
            
            (825,764
            )Principal payments under capital lease obligations
            
            
            (46,073
            )
            
            
            -Payments for acquisition of treasury stock
            
            
            (19,790
            )
            
            
            (95,396
            )Net
      cash provided by financing activities
            
            
            2,168,126
            
            
            
            4,730,876Net increase (decrease) in cash and cash equivalents
            
            
            (260,395
            )
            
            
            717,558Cash
      at beginning of period
            
            
            3,891,156
            
            
            
            3,275,803Cash
      at end of period
            
            $
            3,630,761
            
            
            $
            3,993,361


Back to Table of Contents
 6


Supplemental
      schedule of cash flow information:Interest paid
            
            $
            716,299
            
            
            $
            723,592Income taxes paid
            
            $
            69,312
            
            
            $
            48,358Non-cash
      transactions:Issuance of note payable for real estate acquired for sale
            
            $
            -
            
            
            $
            1,684,066Issuance of common stock for the purchase of OI Corporation common
      stock
            
            $
            -
            
            
            $
            1,212,000Accrued property dividend payable
            
            $
            654,364
            
            
            $
            -Stock dividend
            
            $
            1,431
            
            
            $
            1,104Acquisition of fixed assets under capital lease obligations
            
            $
            203,516
            
            
            $
            -Accrued debt discount for common shares of subsidiary to be
    issued
            
            $
            29,000
            
            
            $
            -The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements. Back to Table of Contents
 7
 American
International Industries, Inc.


Notes to
Unaudited Consolidated Financial Statements






Note
1 - Summary of Significant Accounting Policies
  The
accompanying unaudited interim consolidated financial statements of
American International Industries, Inc. (“American”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission and should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in American's latest Annual Report filed with the SEC on Form
10-K for the year ended December 31, 2007. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the unaudited interim consolidated financial statements
that would substantially duplicate the disclosures contained in the audited
financial statements for the most recent fiscal year as reported in the Form
10-K have been omitted.
 Organization,
Ownership and Business
  American
International Industries, Inc., a Nevada corporation, operates as a diversified
holding company with a number of wholly-owned subsidiaries and two
majority-owned subsidiaries. American is a diversified corporation with
interests in industrial/commercial companies and an oil and gas service
business. American's business strategy is to acquire controlling equity
interests in businesses that it considers undervalued. American'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 American and its
wholly-owned subsidiary, Northeastern Plastics, Inc. ("NPI"), and its majority
owned subsidiary, Delta Seaboard Well Service, Inc.("Delta"), and its 48%
owned subsidiary, Hammonds Industries, Inc. (OTCBB: "HMDI"), formerly
International American Technologies, Inc. (“Hammonds”).  In accordance
with FIN46(R), American consolidates Hammonds although its ownership is
less than 51%, because American appoints the members of Hammonds' board of
directors. Since Hammonds is incurring losses and the minority interest has no
recorded equity value, American recognizes 100% of Hammond’s losses. All
significant intercompany transactions and balances have been eliminated in
consolidation.
  Certain
reclassifications have been made to amounts in prior periods to conform with the
current period presentation.
  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. Delta
receives purchase orders for all of its service work and related pipe sales. All
sales are recorded when the work is completed or when the pipe is sold. The
Hammonds Companies and NPI have purchase orders for all sales, of which many of
the items are requested to be container shipped and shipped directly to the end
users. All sales are recorded when the inventory items are shipped.Taxes
assessed by a governmental authority that are incurred as a result of a revenue
transaction are not included in revenues.  American has no significant
sales returns or allowances.
  Loss
Per Share
  The basic
net loss per common share is computed by dividing the net loss by the weighted
average number of shares outstanding during a period. Diluted net loss per
common share is computed by dividing the net loss, 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, 2008 and 2007, potential dilutive securities that had an
anti-dilutive effect were not included in the calculation of diluted
net loss per common share. These securities include options to purchase
shares of common stock that were not "in the money".
  Management's
Estimates and Assumptions
  The
preparation of consolidated 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.
  Back to Table of Contents
 8
 Fair
Value of Financial Instruments
  Effective
January 1, 2008, American adopted SFAS 157 for financial assets and
liabilities. SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements by establishing a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1
measurements) and lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under SFAS 157
are described below:
  Basis of Fair Value
Measurement
  Level 1
                  
                  Observable
      inputs that reflect quoted prices (unadjusted) for identical assets or
      liabilities in active markets.Level 2
                  
                  Inputs
      reflect quoted prices for identical assets or liabilities in markets that
      are not active; quoted prices for similar assets or liabilities in active
      markets; inputs other than quoted prices that are observable for the asset
      or the liability; or inputs that are derived principally from or
      corroborated by observable market data by correlation or other
      means.Level 3
                  
                  Unobservable
      inputs reflecting American's own assumptions incorporated in valuation
      techniques used to determine fair value. These assumptions are required to
      be consistent with market participant assumptions that are reasonably
      available.
 
 American
believes that the fair value of its financial instruments comprising cash,
certificates of deposit, accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.  The
interest rates payable by American on its notes payable approximate market
rates.  The fair values of American's Level 1 financial assets,
trading securities that primarily include shares of common stock in various
companies, are based on quoted market prices of the identical underlying
security.  As of September 30, 2008, American did not have any
significant Level 2 or 3 financial assets or liabilities.  The following
table provides fair value measurement information for American's trading
securities:
  As
      of September 30, 2008Fair
      Value Measurements Using:Carrying
                      Amount
                    
                    
                    Total
                      Fair
      Value
                    
                    
                    Quoted
      Prices
                      in
      Active Markets
                      (Level
      1)
                    
                    
                    Significant
      Other
                      Observable
      Inputs
                      (Level
      2)
                    
                    
                    Significant
                      Unobservable
      Inputs
                      (Level
      3)Financial
      Assets:Trading
      Securities
                    
                    $
                    2,615,358
                    
                    
                    $
                    2,615,358
                    
                    
                    $
                    2,615,358
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 Note
2 - Trading Securities
 Investments
in marketable securities primarily include shares of common stock in various
companies that are bought and held principally for the purpose of selling them
in the near term with the objective of generating profits on short-term
differences in price. These investments are classified as trading securities
and, accordingly, any unrealized changes in market values are recognized in the
consolidated statements of operations.  At September 30, 2008 and
2007, American had unrealized trading losses of $4,160,535 and gains of
$798,330, respectively, related to securities held on those dates. During the
nine months ended September 30, 2008 and 2007, American recorded
realized losses of $20,447 and $565,897, respectively, on the sales of
trading securities.
 On September
12, 2007, American acquired 170,345 shares, or approximately 7%, of OI
Corporation's (NasdaqGM: OICO) common stock for a $1,000,000 cash
payment and the issuance of 240,000 restricted shares of American's common
stock, valued at $5.05 per common share based upon the closing market
price on that date, for a total purchase price of $2,212,000.  The
closing market price on the date of this transaction for OICO was $13.23 per
common share.  During the nine months ended September 30,
2008, American purchased an additional 4,700 shares at an average
purchase price of $12.14 per share.  At
September 30, 2008, our investment in the 175,045 shares of OICO
common stock is classified as trading securities on the balance
sheet.  The OICO securities were valued at $1,851,976, or $10.58 per
share, using the closing market price on that date.  At December 31, 2007,
our investment in the 170,345 shares of OICO common stock is classified as
trading securities on the balance sheet and was valued at $2,201,198, or $12.92
per share, using the closing market price on that date.  The OICO
shares were purchased from OI Corporation's former President and CEO, William W.
Botts.  OI Corporation engages in the design, manufacture, marketing, and
service of analytical, monitoring, and sample preparation products, components,
and systems.
 Back to Table of Contents
 9
 On
November 27, 2007, American acquired 1,000,000 restricted shares, or
approximately 9% of Rubicon Financial Incorporated’s (OTCBB:  RBCF.OB)
common stock for a $1,000,000 cash payment and the issuance of 200,000
restricted shares of American's common stock, valued at $4.90 per common share
based upon the closing market price on that date, for a total purchase price of
$1,980,000.  The closing market price on the date of this transaction for
RBCF was $2.87 per common share.  During the nine months ended September
30, 2008, American purchased an additional 1,400 shares at an
average purchase price of $1.30 per share.  At September 30, 2008, our
investment in the 1,001,400 shares of RBCF common stock is classified as
trading securities on the balance sheet and was valued at $350,490, or $0.35 per
share, based upon the closing market price on that date.  At December 31,
2007, our investment in the 1,000,000 shares of RBCF common stock is classified
as trading securities on the balance sheet and was valued at $3,700,000, or
$3.70 per share, based upon the closing market price on that date. Rubicon
Financial Incorporated is a development stage company, operating as a full
service insurance agency offering personal and commercial lines, health, and
life insurance products to individuals and companies in California.
 The
market value of the trading securities for these two companies was
$2,202,466 at September 30, 2008, or 84% of our portfolio of trading
securities.  The
market value of the trading securities for these two companies was $5,901,198 at
December 31, 2007, or 87% of our portfolio of trading
securities.





In
October 2008, American reduced its holdings in trading securities by
$1,977,486.  The impact of these transactions on net income was a loss of
$11,018.





Equity
markets can experience significant volatility and therefore are subject to
changes in value. Based upon the current volatile nature of the U.S. securities
markets and the decline in the U.S. economy, we believe that it is possible,
that the market values of our marketable equity securities could decline 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. American seeks to manage exposure to adverse equity
returns in the future by pursuing to increase the diversity our securities
portfolios.





Note
3 - Inventory and Deposits for Pipe Inventory Purchases




Inventories
consisted of the following:




September
      30, 2008
            
            
            December
      31, 2007Parts
      and materials
            
            $
            1,488,161
            
            
            $
            1,420,043Work
      in process
            
            
            383,315
            
            
            
            186,045Finished
      goods
            
            
            4,132,143
            
            
            
            4,346,867Less
      reserve
            
            
            (225,434
            )
            
            
            (140,958
            )$
            5,778,185
            
            
            $
            5,811,997








Note
4 - Real Estate Transactions




During
the second quarter of 2007, American 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 by nor is it being held as inventory by
American.  American continues to own 287 undeveloped acres of
waterfront property on Dickinson Bayou and Galveston Bay in Galveston County,
Texas. American is carrying this property on the balance sheet at its historical
book value of $225,000.  In November 2005, American signed a
contract for sale of the property for $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. Westfield deposited $95,000 in earnest money with the title
company upon assignment of the contract, which had an initial feasibility period
of one year.  In July 2008, the contract was amended to extend the
feasibility period to October 31, 2008.  American advised Westfield that it
would not extend the contract any further.  In October, American was
advised by Westfield that due to unforeseen serious health reasons of its main
principal, Westfield could not finalize all of the permits and financing for the
development of the 287 acres, timely.  Westfield delivered to American all
of their studies and project development documents.  American believes that
this property and its development plans will sell for substantially more than
the price for which the property was being sold to Westfield, due to
the fact that the property is in a rapidly growing Galveston / Houston, Texas
metropolitan area and real estate in the surrounding areas have increased
substantially in value in the past 24 months.  American has engaged CBRE on
an exclusive basis to sell the property.
 Back to Table of Contents
 10


Note
5 - Long-term Notes Receivable
  Long-term
notes receivable at September 30, 2008 consisted of the following:
  September
      30, 2008
              
              
              December
      31, 2007Net
      note receivable from sale of real estate, principal balance due on or
      before July 30, 2008, secured by property lien (a)
              
              $
              3,020,044
              
              
              $
              3,020,044Sale
      of machinery and equipment, principal balance due on or before December 1,
      2008, secured by machinery and equipment
              
              
              164,000
              
              
              
              164,000Unsecured
      note receivable for sale of former subsidiary, Marald, Inc., principal and
      interest due monthly through June 5, 2012
              
              
              137,441
              
              
              
              160,892Unsecured
      note receivable for sale of former subsidiary, Marald, Inc., principal and
      interest due monthly through July 2012 (b)
              
              
              200,000
              
              
              
              200,000Sale
      of refinery to settle lawsuit, principal and interest due on June
      1 and December 1, through June 1, 2010
    (c)
              
              
              700,000
              
              
              
              750,000Unsecured
      note receivable for sale of drilling rig, principal and interest due
      monthly through December 31, 2009
              
              
              150,539
              
              
              
              222,024Note
      secured by property and shares of stock, interest due monthly at 18%,
      principal payment due on or before May 9, 2009
              
              
              225,000
              
              
              
              -Notes
      receivable
              
              
              4,597,024
              
              
              
              4,516,960Less
      current portion
              
              
              (4,463,843
              )
              
              
              (3,898,831
              )Notes
      receivable, less current portion
              
              $
              133,181
              
              
              $
              618,129
  (a) Net note receivable from sale of
real estate, principal payment due on or before July 30,
2008.  On July 30, 2004, American sold real estate to an
unaffiliated third party for a cash payment equal to the first lien and $250,000
owed to Orion HealthCorp, Inc. and a note receivable in the amount of $5,000,000
secured by a lien on the real estate. The note is being amortized over a 20 year
period, with a balloon payment at the end of five years in the amount of
$4,012,084, and bears interest of 3% per annum. The note was discounted by $1.6
million to the present value of the lowest level of annual payments required by
the sales contract, or $3.4 million, over the maximum period specified by SFAS
No. 66.  Principal payments have reduced the note balance to $3.0
million as of September 30, 2008.  American recorded a gain, using the
reduced profit method for recording the sale of land, in the amount of
$1,815,070 on the sale of this real estate based on discounting the $5,000,000
note at a 7.6% interest rate (approximating the market rate for real estate
transactions by the buyer).  The principal payment of $3,020,044 due
on July 30, 2008 was not received.  American is in the process of
extending the due date on this note to January 30, 2009.  The borrower
is in the process of refinancing this note with a new
lender.  The property securing this note was appraised in November
2007 for $9,175,000 by an independent appraiser.
 
 (b) Sale of former subsidiary, Marald,
Inc., principal and interest due monthly through July
2012.  The original note was for $300,000 and was discounted to
$200,000 for the receipt of full payment on or before October 25,
2007.  New payment terms are being negotiated for this note
receivable.  Since the
loan is reflected at a $100,000 discount to the original note face value and
payments are currently being made on the other note receivable with Marald in
accordance with note terms, American believes payment terms will be successfully
negotiated and no further discounting of the loan was deemed necessary as of
September 30, 2008.
  (c) Sale of refinery to settle lawsuit,
principal and interest due on June 1 and December 1, through June 1,
2010.  In October of 2008, American received the full principal
balance owed of $700,000.
 Back to Table of Contents
 11
 Note
6 - Property and Equipment
  Major
classes of property and equipment together with their estimated useful lives,
consisted of the following:
  Years
              
              September
      30, 2008
              
              
              December
      31, 2007Land
              
              
              $
              892,945
              
              
              $
              892,945Building
      and improvements
              20
              
              
              1,029,996
              
              
              
              1,029,996Machinery
      and equipment
              7-15
              
              
              4,811,569
              
              
              
              4,314,861Office
      equipment and furniture
              7
              
              
              1,035,053
              
              
              
              892,399Automobiles
              5
              
              
              1,047,803
              
              
              
              1,025,2648,817,366
              
              
              
              8,155,465Less
      accumulated depreciation and amortization
              
              
              
              (4,098,741
              )
              
              
              (3,535,525
              )Net
      property and equipment
              
              
              $
              4,718,625
              
              
              $
              4,619,940
  Depreciation
expense for the three and nine months ended September 30, 2008 and 2007 was
$194,939, $146,141, $563,217, and $389,238, respectively.
  During
the year ended December 31, 2007 and nine months ended September 30, 2008,
Hammonds entered into capital lease agreements for machinery and equipment
included in the September 30, 2008 and December 31, 2007 balances as
follows:
 September
      30, 2008
                  
                  
                  December
      31, 2007Machinery
      and equipment
                  
                  $
                  372,722
                  
                  
                  $
                  163,174Less
      accumulated depreciation and amortization
                  
                  
                  (43,247
                  )
                  
                  
                  -Net
      property and equipment
                  
                  $
                  329,475
                  
                  
                  $
                  163,174
 Principal
repayment provisions of long-term capital leases are as follows at September 30,
2008:
  2008
                
                $
                14,7412009
                
                
                71,2982010
                
                
                76,7452011
                
                
                75,0432012
                
                
                67,2802013
                
                
                5,403Total
                
                $
                310,510
 Note
7 - Intangible Assets
  Intangible
assets at September 30, 2008 consisted of the following:
  Gross
      Carrying Amount
                    
                    
                    Accumulated
      Amortization
                    
                    
                    
                    Intangibles,
      net
                    
                    Average
      Weighted LivesGoodwill
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    674,539
                    
                    N/APatents
                    
                    $
                    4,587,467
                    
                    
                    $
                    1,121,871
                    
                    
                    $
                    3,465,596
                    
                    12
      yearsTrademarks
                    
                    
                    1,149,199
                    
                    
                    
                    307,143
                    
                    
                    
                    842,056
                    
                    10
      yearsSole
      Source Contract
                    
                    
                    1,144,039
                    
                    
                    
                    436,972
                    
                    
                    
                    707,067
                    
                    7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                    
                    $
                    6,880,705
                    
                    
                    $
                    1,865,986
                    
                    
                    $
                    5,014,719
                    
                    11
      years
 Back to Table of Contents
 12
  Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  
                  Intangibles,
      net
                  
                  Average
      Weighted LivesGoodwill
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  674,539
                  
                  N/APatents
                  
                  $
                  4,544,498
                  
                  
                  $
                  845,022
                  
                  
                  $
                  3,699,476
                  
                  12
      yearsTrademarks
                  
                  
                  1,149,199
                  
                  
                  
                  220,953
                  
                  
                  
                  928,246
                  
                  10
      yearsSole
      Source Contract
                  
                  
                  1,144,039
                  
                  
                  
                  314,396
                  
                  
                  
                  829,643
                  
                  7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                  
                  $
                  6,837,736
                  
                  
                  $
                  1,380,371
                  
                  
                  $
                  5,457,365
                  
                  11
      years
  Amortization
expense for the three and nine months ended September 30, 2008 and 2007 was
$162,259, $162,119, $485,615, and
$495,369 respectively.
 
 Note
8 - Short-term Notes Payable
  September
      30, 2008
              
              
              December
      31, 2007Note
      payable with interest at 10.5%, interest payments due monthly, principal
      due on demand
              
              $
              89,999
              
              
              $
              89,999Note
      payable for $250,000 with interest at 10%, principal due December 31,
      2008, discounted by $29,000 for Hammonds stock
    consideration
              
              
              221,000
              
              
              
              -Note
      payable with interest at 6%, principal and interest due monthly, with a
      balloon payment due April 30, 2009
              
              
              957,003
              
              
              
              -Note
      payable with interest at 5.8%, principal due November 18, 2008
              
              
              180,000
              
              
              
              -Delta
      lawsuit settlement with interest at 5.25%, principal and
      interest due in monthly payments of $25,000 through August 1,
      2009
              
              
              250,000
              
              
              
              -Insurance
      note payable with interest at 5.24%, principal and interest due in monthly
      payments of $31,288 through May 1, 2009
              
              
              219,013
              
              
              
              -Insurance
      note payable with interest at 7.86%, principal and interest due in monthly
      payments of $32,493 through May 1, 2008
              
              
              -
              
              
              
              129,971$
              1,917,015
              
              
              $
              219,970
  On July
23, 2008, Delta Seaboard Well Service, Inc., our 51% owned
subsidiary, negotiated a settlement in the Fort Apache Energy, Inc. v. Delta
Seaboard Well Service, Inc. lawsuit for $1,450,000, with
$1,150,000 paid on July 30, 2008, and monthly payments of $25,000
beginning September 1, 2008 through August 1, 2009.  After minority
interest, the net impact of this settlement on American's net income is
$739,500.  Management
believes that the settlement amount will be recoverable through
insurance.
 
 Each
of American's subsidiaries that have outstanding notes payable has secured
such notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from American.
 
 At
September 30, 2008 and December 31, 2007, the average annual interest rates of
our short-term borrowings were approximately 6.5% and 8.9%,
respectively.
 Back to Table of Contents
 13
 Note
9 - Long-term Debt
  Long-term
debt consisted of the following:
  September
      30, 2008
              
              
              December
      31, 2007Note
      payable to a bank, interest due quarterly at prime plus 1%, principal
      balance due January 1, 2010, secured by real property
              
              $
              1,000,000
              
              
              $
              1,000,000Note
      payable to bank, which allows Hammonds to borrow up to $2,000,000,
      interest due quarterly at prime plus 1%, principal balance due January 1,
      2010, secured by assets of Hammonds' subsidiary, Hammonds Technical
      Services, Inc.
              
              
              1,992,189
              
              
              
              1,992,189Note
      payable to a bank, which allows Delta 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 assets
      of Delta Seaboard Well Service, Inc.
              
              
              1,091,631
              
              
              
              1,876,631Note
      payable to bank due in monthly installments of interest only, principal
      balance due June 13, 2010 with interest at 1% above the prime
      rate secured by real property
              
              
              943,500
              
              
              
              -Note
      payable to bank due in monthly installments of principal and interest
      through July 2025 with interest at prime floating rate secured by real
      property
              
              
              -
              
              
              
              423,967Note
      payable to a bank, due in monthly installments of $6,170, including
      interest at 6.6% through May 2018, secured by real
property
              
              
              523,892
              
              
              
              552,312Note
      payable to a bank, which allows Northeastern Plastics to borrow
      up to $5,000,000, interest due monthly at the prime rate, principal
      balance due July 31, 2010, secured by assets of Northeastern Plastics,
      Inc.
              
              
              3,084,000
              
              
              
              1,254,000Note
      payable to a bank, due in monthly installments of interest only at prime
      plus 1%, with a principal balance due on January 1, 2010, secured by
      assets of Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              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 1, 2010, secured by a certificate
      of deposit
              
              
              1,000,000
              
              
              
              1,000,000Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,120 through April 3, 2011, secured by assets of Hammonds'
      subsidiary, Hammonds Technical Services, Inc.
              
              
              55,444
              
              
              
              72,389Note
      payable to a bank, with interest at 9.25%, due in monthly installments of
      principal and interest of $4,054 through February 26, 2012, secured by
      assets of Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              197,046
              
              
              
              220,338Note
      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
              
              
              
              1,740,000Note
      payable to a bank, due in monthly payments of $6,120, including interest
      at 8.25%, through August 9, 2012, secured by assets of Delta
      Seaboard Well Service, Inc.
              
              
              244,834
              
              
              
              279,204Other
      secured notes with various terms
              
              
              104,349
              
              
              
              141,24912,376,885
              
              
              
              10,952,279Less
      current portion
              
              
              (3,016,638
              )
              
              
              (185,328
              )$
              9,360,247
              
              
              $
              10,766,951
  Each
of American's subsidiaries that have outstanding notes payable has secured
such notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from American.
 Back to Table of Contents
 14
 Principal
repayment provisions of long-term debt are as follows at September 30,
2008:
  2008
              
              $
              46,4312009
              
              
              3,018,3052010
              
              
              8,614,0652011
              
              
              183,5302012
              
              
              183,641Thereafter
              
              
              330,913Total
              
              $
              12,376,885
  Note
10 - Capital
Stock and Stock Options
  American 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.
  American is
authorized to issue up to 50,000,000 shares of Common Stock, $.001 par value per
share, of which 864,000 are reserved for issuance pursuant to the exercise of
options pursuant to an employment agreement with American's Chairman
and CEO. On March 30, 2007, American issued 144,000 stock options
to American's Chairman and CEO, with an exercise price of $7.00 per
share, expiring in 2 years, valued at $70,685 to American and recorded as
share-based compensation.  In connection with American's 20% stock
dividends to all shareholders on September 19, 2007 and July 16, 2007, the terms
of these options were adjusted to reflect the dividends, resulting in
the option being exercisable to buy 207,360 shares for $4.86 per
share.
  During
the three months ended September 30, 2008, American issued 100,000 shares of
common stock to the CEO for services representing $290,000 of cost to
American.
   American 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 2008 and 2007 as follows:
 March
      30, 2008
              
              
              March
      30, 2007Dividend
      yield
              
              
              0.00
              %
              
              
              0.00
              %Expected
      volatility
              
              
              38.64
              %
              
              
              38.68
              %Risk
      free interest
              
              
              2.5
              %
              
              
              6.25
              %Expected
      lives
              
              2
      years
              
              
              2
      years
  A summary
of the status of American's stock options to employees as of September 30,
2008 is presented below:
 Shares
              
              
              Weighted
      Average Exercise Price
                September
      30, 2008Outstanding
      at beginning of period
              
              
              207,360
              
              
              $
              4.86Granted
              
              
              207,360
              
              
              
              4.86Exercised
              
              
              -
              
              
              
              N/ACanceled
              
              
              -
              
              
              
              N/AOutstanding
      and exercisable at end of period
              
              
              414,720
              
              
              $
              5.83Weighted
      average fair value of options granted during the period
              
              
              207,360
              
              
              $
              4.86
  Stock-based
compensation consists of the following:
 September
      30, 2008
                
                
                September
      30, 2007Common
      shares issued for services
                
                $
                649,001
                
                
                $
                854,580Stock
      options issued for services
                
                
                88,063
                
                
                
                70,685Stock-based
      compensation
                
                $
                737,064
                
                
                $
                925,265
 Back to Table of Contents
 15
 The
following table summarizes information about fixed stock options to employees
outstanding at September 30, 2008:
  Exercise
      Price
              
              
              Number
      Outstanding and Exercisable at September 30, 2008$
              4.86
              
              
              
              207,360


Note
11 - Preferred Stock of Subsidiary




In August
and September 2006, Hammonds entered into stock purchase agreement with
Vision Opportunity Master Fund Limited (“VOMF”), an institutional investor,
pursuant to which Hammonds sold to VOMF 833,333 shares of Series A
Preferred Stock and 833,333 shares of Series B Preferred Stock, respectively.
(the “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 2006 Private Financing Transactions from
August 2007 to August 2008.
  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
$1,981,162.  As a result of this agreement, there are no warrants
outstanding related to the Series A, B and C Convertible Preferred
Stock.
 Hammonds
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 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.
  Hammonds
valued the warrants using the Black-Scholes model and allocated t he
proceeds from the preferred share issuances based on the relative fair values of
the securities issued.
  Hammonds determined
that a beneficial conversion feature exists for the Series A, B and C
Convertible Preferred Stock issuances. 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
                
                $
                387,499Preferred
      A – August 23, 2006
                
                
                176,643Preferred
      B – September 30, 2006
                
                
                726,756Preferred C
      – September 20, 2007
                
                
                1,981,162Total
      deemed dividend
                
                $
                3,272,060
 Back to Table of Contents
 16
 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, 2008.  Additionally, VOMF agreed that future accrued
dividends may be paid, at Hammonds' 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
Hammonds.
  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, Hammonds calculated a fair value
increase of $386,334 for this modification. Since additional value was given to
the holders of these warrants, $386,334 was recognized and recorded as finance
expense in September 2007, in accordance with SFAS No. 123R, Share-Based
Payment.
  Hammonds
valued the warrants using the Black-Scholes model, using the following
assumptions:
  Stock
      Price on Date of Reduction
                    
                    
                    Volatility
                    
                    
                    Risk-Free
      Interest RateWarrants
      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
      ValueWarrants
      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 increase
                    
                    
                    $
                    386,334
 Note
12 - Concentration of Credit Risk
  American maintains
its cash in commercial accounts at major financial institutions. Although the
financial institutions are considered creditworthy, at September 30, 2008,
American's cash balances exceeded the limit covered by the Federal Deposit
Insurance Corporation. The terms of these deposits are on demand to minimize
risk. American has not incurred losses related to these
deposits.
 Trade
accounts receivable subject American to the potential for credit risk with
customers in the retail and distribution sectors. To reduce credit
risk, American performs ongoing evaluations of its customer’s financial
condition but generally does not require collateral. During the nine months
ended September 30, 2008, American had one customer on a consolidated basis
that accounted for 16% of American's revenues.
 Back to Table of Contents
 17
 Note
13 - Texas Emissions Reduction Plan Grant
  Delta
Seaboard Well Service, 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. American applied this
guidance and during the nine months ended September 30, 2008, Delta increased
machinery and equipment and recognized other income for this grant in the amount
of $57,589.
  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. American 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.  American is still determining the effect this will
have, but believes it will not materially affect American because of the
tax loss carryforwards explained in note 15 below.
 Back to Table of Contents
 18
 Note
14 - Property Dividend Distribution Gain and Property Dividend
Payable
  On April
16, 2008, American declared a special dividend of shares of common stock of
its subsidiary, Hammond Industries, Inc. (OTCBB: “HMDI”) to American's
shareholders.  American's shareholders will be issued one share of
HMDI common stock for each share of American's common stock owned and held
on the record date.  American is working with its transfer agent on the
administrative procedures related to the dividends and will announce the record
and distribution dates once these issues are resolved.  As a result of this
declaration, American recorded a property dividend distribution gain of
$2,945,133 and a payable in the amount of $654,364.  The amount of the gain
was determined as the difference between the market price of HMDI common stock
on April 16, 2008 of $0.42 per share and American's book value per share of
$0.076 for the approximately 8,570,231 shares of American's common
stock outstanding on June 30, 2008, plus the 20% stock dividend
on American's stock.  The payable amount represents American's
book value for these shares.
  Note
15 - Income Taxes
  The
provision for income taxes consists of the following:
  September
      30, 2008
                
                
                September
      30, 2007Current
      taxes
                
                $
                (94,118
                )
                
                $
                (1,248,040
                )Deferred
      tax benefit
                
                
                (1,434,039
                )
                
                
                -Benefits
      of operating loss carryforwards
                
                
                1,539,098
                
                
                
                1,248,040Current
      Federal Taxes
                
                
                10,941
                
                
                
                -Refund
      due Delta Seaboard Well Service, Inc. for 2005 overpayment of Federal
      Taxes
                
                
                (93,616
                )
                
                
                -Prior
      year taxes paid
                
                
                15,289
                
                
                
                48,358Actual
      vs. accrued Texas Margin Tax - 2007
                
                
                (39,583
                )
                
                
                -Texas
      Margin Tax estimate - 2008
                
                
                56,493
                
                
                
                -Income
      tax expense (benefit)
                
                $
                (50,476
                )
                
                $
                48,358
  The tax
provision differs from amounts that would be calculated by applying federal
statutory rates to income before income taxes primarily
because:
  -
American consolidates subsidiaries for financial statements which cannot be
consolidated for income tax purposes; therefore, some subsidiaries may pay
federal income tax despite the accumulated net operating losses of American
as a whole;
 - no tax
benefits have been recorded for nondeductible expenses totaling $381,476
and
 - the
valuation allowance for deferred tax assets increased by
$1,864,210.
  The
following table sets forth a reconciliation of statutory income
taxes:
 
 Three
      Months Ended September 30,
                
                
                
                Nine
      Months Ended September 30,2008
                
                
                2007
                
                
                
                2008
                
                
                2007Net
      loss before taxes
                
                $
                (1,263,888
                )
                
                $
                (1,347,027
                )
                
                $
                (4,902,415
                )
                $
                (3,083,142
                )Income
      tax benefit computed at statutory rate
                
                $
                (684,944
                )
                
                $
                (447,163
                )
                
                $
                (1,731,187
                )
                $
                (1,120,453
                )Permanent
      differences
                
                
                263,969
                
                
                
                -
                
                
                
                129,702
                
                
                84,600Net
      effects of temporary differences
                
                
                -
                
                
                
                (64,192
                )
                
                
                105,059
                
                
                (212,187
                )Effect
      of federal graduated rates
                
                
                427,602
                
                
                
                -
                
                
                
                1,463,005
                
                
                -Tax
      credits
                
                
                (36,622
                )
                
                
                -
                
                
                
                (736,731
                )
                
                -Increase
      in valuation allowance
                
                
                40,936
                
                
                
                511,355
                
                
                
                781,093
                
                
                1,248,040Refund
      due Delta Seaboard Well Service, Inc. for 2005 overpayment of Federal
      Taxes
                
                
                -
                
                
                
                -
                
                
                
                (93,616
                )
                
                -Prior
      year taxes paid
                
                
                8,928
                
                
                
                48,358
                
                
                
                15,289
                
                
                48,358Difference
      between actual and estimated 2007 Texas Margin Tax
                
                
                (1,776
                )
                
                
                -
                
                
                
                (39,583
                )
                
                -Texas
      Margin Tax estimated for 2008
                
                
                26,785
                
                
                
                -
                
                
                
                56,493
                
                
                -Income tax expense (benefit)
                
                $
                44,878
                
                
                $
                48,358
                
                
                $
                (50,476
                )
                $
                48,358
 Back to Table of Contents
 19
 American has
loss carryforwards totaling $21,370,015 available at September 30, 2008 that may
be offset against future taxable income.  If not used, the
carryforwards will expire as follows:
 Operating
      LossesAmount
                
                Expires$
                1,761,086
                
                2013$
                1,462,959
                
                2014$
                2,086,064
                
                2015$
                860,006
                
                2017$
                566,409
                
                2018$
                1,028,302
                
                2019$
                1,551,019
                
                2020$
                2,587,701
                
                2021$
                4,939,710
                
                2022$
                4,526,759
                
                2023
 Note
16 - Loss Per Share
  Basic
losses per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted losses 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 September 30,
                
                
                
                Nine
      Months Ended September 30,2008
                
                
                2007
                
                
                
                2008
                
                
                2007Basic
      loss per share:Net
      loss
                
                $
                (2,037,301
                )
                
                $
                (1,363,542
                )
                
                $
                (5,041,848
                )
                $
                (3,343,808
                )Preferred
      dividends of subsidiary:Regular dividends
                
                
                (60,000
                )
                
                
                (45,000
                )
                
                
                (165,000
                )
                
                (135,000
                )Deemed dividends
                
                
                -
                
                
                
                (1,981,162
                )
                
                
                -
                
                
                (1,981,162
                )Forgiveness of dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                150,425Net
      loss applicable to common shareholders
                
                $
                (2,097,301
                )
                
                $
                (3,389,704
                )
                
                $
                (5,206,848
                )
                $
                (5,309,545
                )Weighted
      average common shares outstanding
                
                
                8,384,417
                
                
                
                5,692,509
                
                
                
                7,546,963
                
                
                5,547,230Weighted
      average common shares outstanding for diluted net loss per share
                
                
                8,384,417
                
                
                
                5,692,509
                
                
                
                7,546,963
                
                
                5,547,230Net
      loss per share - basic
                
                $
                (0.25
                )
                
                $
                (0.60
                )
                
                $
                (0.69
                )
                $
                (0.96
                )Net
      loss per share - diluted
                
                $
                (0.25
                )
                
                $
                (0.60
                )
                
                $
                (0.69
                )
                $
                (0.96
                )
 Note
17 - Commitments and Contingencies
  Various
key officials of American have entered into employment agreements
with American. In March 2007, the CEO of American 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 options (207,360 options after the effect of the 20% stock
dividends issued in 2007 and 2008) per year with an exercise price of $7.00
($4.86 after the effect of the 20% stock dividends), beginning March 15, 2007.
Additionally, beginning January 2008, the CEO will receive an additional 2,000
shares of American common stock on a monthly basis for the remaining term of the
agreement.  The CFO of American entered into a three-year employment
agreement beginning June 1, 2008, which provides for an annual salary of $95,000
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 Hammonds’ president
provides for an annual base salary of $90,000.
 On July
23, 2008, Delta Seaboard Well Service, Inc., our 51% owned
subsidiary negotiated a settlement in the Fort Apache Energy, Inc. v. Delta
Seaboard Well Service, Inc. lawsuit for $1,450,000, with $1,150,000 paid
on July 30, 2008, and monthly payments of $25,000 beginning September 1, 2008
through August 1, 2009, totaling $300,000, or $275,000 if paid by October 21,
2008.  After minority interest, the net impact of this settlement
on American's net income is $739,500.  Management
believes that the settlement amount will be recoverable through insurance as
described below.
 Back to Table of Contents
 20
 Gemini Insurance Company v. Delta Seaboard Well
Service, Inc., Delta had a CGL insurance policy with Gemini Insurance
Company ("Gemini") for 2003, naming Delta as an insured, which policy was in
effect at such time as Delta began the plugging operation referenced in the
first lawsuit. Delta made a claim under the policy for a defense in the Fort
Apache case; however, Gemini has filed suit against Delta seeking a declaratory
judgment that it owes no defense under the policy. In connection with such
declaration, Delta has filed a counterclaim seeking to have the policy declared
applicable as to the claims of Fort Apache against Delta and claims for breach
of contract, violations of the Texas Deceptive Trade and Practices Act,
violations of the Insurance Code and bad faith on the part of Gemini in refusing
coverage.  In October 2008, the court granted Gemini's motion for
summary judgment and declared that the insurance policy provides no coverage for
the claims made against Delta in the Fort Apache case.
  Delta Seaboard Well Service, Inc. v. Houstoun,
Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance Alliance and
Robert Holman, Delta’s position is that if there is not coverage under
the Gemini policy, its broker failed to obtain appropriate insurance coverage
and misrepresented the coverage it did obtain through the Gemini
policy.  The parties agreed to refrain from actively working on the
Broker Lawsuit pending the outcome of the Fort Apache lawsuit and the Gemini
lawsuit because the results of those two lawsuits could render the Broker
Lawsuit unnecessary.  The court
eventually formally abated the Broker Lawsuit subject to either party filing a
motion to lift the abatement.  Since that time, Delta settled the Fort
Apache Lawsuit and the court recently granted summary judgment in favor of
Gemini in the Gemini Lawsuit.  The settlement and the judgment did not
render the Broker Lawsuit unnecessary.  Thus, Delta is ready to move
forward in the Broker Lawsuit and anticipates filing a motion to lift the
abatement in the near future.  It is premature to analyze the potential
outcome of the Broker Lawsuit because it has been largely dormant since being
filed.
  As part of the attorney’s work on the
Broker Lawsuit, Delta filed a claim for coverage with American Specialty Lines
Insurance Company (AISLIC). While AISLIC denied coverage, Delta’s attorneys
believe they should prevail against the grounds AISLIC used to deny the claim
but cannot fully analyze the claim because there has not been any discovery.
Delta has filed a lawsuit against AISLIC and anticipates moving forward in the
near future in light of the outcome of the Apache Lawsuit and the Gemini
Lawsuit.
 Delta
Seaboard Well Service, Inc. is the recipient of a TERP grant from the Texas
Commission on Environmental Quality in the amount of $1,157,273, of which
$561,711 has been recognized through September 30, 2008. 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. American 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,
              
              Amount2008
              
              $
              436,3802009
              
              
              436,3802010
              
              
              436,3802011
              
              
              436,3802012
              
              
              436,380Thereafter
              
              
              1,745,520$
              3,927,420
  Delta
leases space under a commercial lease which expires in June 2010. Future minimum
lease payments are as follows:
  Year
      December 31,
              
              Amount2008
              
              $
              27,7502009
              
              
              111,0002010
              
              
              55,500$
              194,250
 
 Back to Table of Contents
 21
 Note
18 - Segment Information
 We have
five reporting segments and corporate overhead:
  - Hammonds Technical Services-
a business engaged in fuel handling equipment for the United States military and
industrial customers, a provider of fuel injection services for the aviation
industry, and the designer of a new line of omni directional vehicles (ODV®) for
a wide variety of uses;
 - Hammonds Fuel Additives –
produces and markets motor and aviation fuel additives;
 - Hammonds Water Treatment–
manufactures patented 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;
 - Corporate overhead- American's investment holdings including financing current
operations and expansion of its current holdings as well as evaluating the
feasibility of entering into additional businesses.  Corporate overhead
also includes Brenham Oil & Gas, a division that owns an oil, gas and
mineral royalty interest in Washington County, Texas, which is carried
on American's balance sheet at $0.  Through Brenham Oil &
Gas, American is engaged in negotiations with financial institutions for
the purpose of financing potential acquisitions of existing oil and gas
properties and reserves.  American is seeking to enter into
arrangements with third-party owners and potential partners with proven oil and
gas reserves, but who lack the financial resources and/or the technical
expertise possessed by American, to assist them with the resources required to
develop their reserves.
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. American evaluates performances
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses and foreign exchange gains and losses. American'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. American'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 (loss), and identifiable
assets were as follows:


Three months ended September
      30,
              
              
              Nine months ended September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue:Hammonds
      Technical Services
              
              $
              618,581
              
              
              $
              1,962,312
              
              
              $
              3,061,558
              
              
              $
              3,938,724Hammonds
      Fuel Additives
              
              
              294,643
              
              
              
              281,292
              
              
              
              803,046
              
              
              
              824,714Hammonds
      Water Treatment
              
              
              889,005
              
              
              
              839,682
              
              
              
              2,563,553
              
              
              
              2,357,023Northeastern
      Plastics
              
              
              5,160,059
              
              
              
              2,309,175
              
              
              
              8,493,456
              
              
              
              6,166,189Delta
      Seaboard
              
              
              6,669,974
              
              
              
              2,883,909
              
              
              
              13,922,772
              
              
              
              8,629,585Total revenue
              
              $
              13,632,262
              
              
              $
              8,276,370
              
              
              $
              28,844,385
              
              
              $
              21,916,235Income
      (loss) from operations:Hammonds
      Technical Services
              
              $
              (952,046
              )
              
              $
              8,275
              
              
              $
              (2,198,434
              )
              
              $
              (1,103,253
              )Hammonds
      Fuel Additives
              
              
              62,924
              
              
              
              43,229
              
              
              
              45,962
              
              
              
              107,177Hammonds
      Water Treatment
              
              
              18,990
              
              
              
              38,807
              
              
              
              76,619
              
              
              
              88,228Northeastern
      Plastics
              
              
              311,368
              
              
              
              114,422
              
              
              
              66,765
              
              
              
              (34,908
              )Delta
      Seaboard
              
              
              1,606,713
              
              
              
              (129,638
              )
              
              
              2,006,489
              
              
              
              130,827Corporate
              
              
              (681,465
              )
              
              
              (1,101,623
              )
              
              
              (2,005,606
              )
              
              
              (2,439,589
              )Total income (loss) from operations
              
              
              366,484
              
              
              
              (1,026,528
              )
              
              
              (2,008,205
              )
              
              
              (3,251,518
              )Other
      income (expense)
              
              
              (1,630,372
              )
              
              
              (320,499
              )
              
              
              (2,894,210
              )
              
              
              168,376Net
      loss before income tax
              
              $
              (1,263,888
              )
              
              $
              (1,347,027
              )
              
              $
              (4,902,415
              )
              
              $
              (3,083,142
              )September
      30, 2008
              
              
              
              December 31,
      2007Identifiable
      assets:Hammonds
      Technical Services
              
              
              
              
              
              
              
              
              
              $
              8,839,442
              
              
              $
              8,925,595Hammonds
      Fuel Additives
              
              
              
              
              
              
              
              
              
              
              2,076,974
              
              
              
              2,025,761Hammonds
      Water Treatment
              
              
              
              
              
              
              
              
              
              
              1,029,121
              
              
              
              772,179Northeastern
      Plastics
              
              
              
              
              
              
              
              
              
              
              9,415,683
              
              
              
              6,592,980Delta
      Seaboard
              
              
              
              
              
              
              
              
              
              
              9,853,837
              
              
              
              5,974,714Corporate
              
              
              
              
              
              
              
              
              
              
              13,793,963
              
              
              
              20,295,325Total identifiable assets
              
              
              
              
              
              
              
              
              
              $
              45,009,020
              
              
              $
              44,586,554


Back to Table of Contents
 22


Note 19 - Subsequent
Events


On
October 7, 2008, a subsidiary of American completed the purchase of 100% of the
assets of Shumate Machine Works Corporation, a subsidiary of Shumate Industries,
Inc. The purchase price was approximately $6.4 million in cash, which was
financed in large part through long-term debt provided by Stillwater National
Bank and Trust. The assets are now owned by a wholly-owned AMIN subsidiary,
Shumate Energy Technologies, Inc.
    In
October 2008, American reduced its holdings in trading securities by
$1,977,486.  The impact of these transactions on net income is a loss of
$11,018.
   
 On
November 7, 2008, American set new record and issue dates of December 31, 2008
and February 25, 2009, respectively, for the special dividend of Hammonds’
common stock to American shareholders.  Additionally, American
increased the special dividend from one to two shares of Hammonds’ common stock
for each share of American common stock.  The difference between the
current market value and the book value of the additional dividend shares will
result in a gain on disposition of approximately $1.9 million in addition to the
$2.9 million gain recognized during the three months ended June 30, 2008.
American owns approximately 24 million shares, or 48%, of Hammonds’ issued and
outstanding common stock.  After the distribution of the special
dividend of approximately 17.4 million shares, American’s ownership will be
approximately 13% of the issued and outstanding common stock of
Hammonds.


Back to Table of Contents
 23


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 interests, oilfield supply and 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 and take an active role in its new subsidiaries to improve
their growth, by providing its subsidiaries with access to capital, leveraging
synergies and providing its subsidiaries with the Company's management
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 five reporting
segments and corporate overhead:
  - Hammonds Technical Services-
a business engaged in fuel handling equipment for the United States military and
industrial customers, a provider of fuel injection services for the aviation
industry, and the designer of a new line of omni directional vehicles (ODV®) for
a wide variety of uses;
 - Hammonds Fuel Additives –
produces and markets motor and aviation fuel additives;
 - Hammonds Water Treatment–
manufactures patented 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;
 - 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.  Corporate overhead also includes
Brenham Oil & Gas, a division that owns an oil, gas and mineral royalty
interest in Washington County, Texas, which is carried on the Company's balance
sheet at $0.  Through Brenham Oil & Gas, the Company is engaged in
negotiations with financial institutions for the purpose of financing potential
acquisitions of existing oil and gas properties and reserves.  The Company
is seeking to enter into arrangements with third-party owners and potential
partners with proven oil and gas reserves, but who lack the financial resources
and/or the technical expertise possessed by the Company, to assist them with the
resources required to develop their reserves.
 
 Hammonds
Industries, Inc. (OTCBB: "HMDI"), our 48% subsidiary, 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 appoints the members of
Hammonds' board of directors. Since Hammonds is incurring losses and the
minority interest has no recorded common stock equity value, the Company
recognizes 100% of Hammonds' losses.
 
 The
historical financial statements of the Company include the acquisitions of
acquired companies as of the effective dates of the acquisitions, 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 by providing 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 for financing current operations and
expansion of our current holdings, as well as evaluating the feasibility of
acquiring additional businesses.
 Back to Table of Contents
 24


Results of
Operations




Three and Nine Months Ended
September 30, 2008 Compared to Three and Nine Months Ended September 30,
2007.




The
following is derived from, and should be read in conjunction with, our unaudited
consolidated financial statements, and related notes for the three and nine
months ended September 30, 2008 and 2007.


Net revenues. For the
three months ended September 30, 2008, revenues were $13,632,262, compared to
$8,276,370 for the three months ended September 30, 2007, representing an
increase of $5,355,892, or 65%. For the nine month period ended September 30,
2008, revenues were $28,844,385, compared to $21,916,235 for the same period in
2007, representing an increase of $6,928,150, or 32%.




Delta
reported revenues of $6,669,974 for the three months ended September 30, 2008,
compared to 2,883,909 for the same period in 2007, representing an increase
of $3,786,065, or 131%. The increase in revenues at Delta is due to an
increase in pipe sales of $3,426,428 to the oil field service industry, for
which Delta experienced 39% margins for the quarter, and an increase in rig
service revenues of $359,637. Delta’s
revenues for the nine months ended September 30, 2008 were $13,922,772, compared
to $8,629,585 for the nine months ended September 30, 2007, representing an
increase of $5,293,187, or 61%.  The increase in revenues at Delta is
primarily due to an increase in pipe sales of $5,286,177.  Pipe sales
revenues have increased due to increased
drilling activity creating a greater demand for pipe.  Delta
expects similar results for the fourth quarter and has already exceeded its 2007
annual revenues of $11.5 million by $2.4 million, or
21%.




Revenues
at NPI during the three months ended September 30, 2008 were $5,160,059,
compared to $2,309,175 for the three months ended September 30, 2007,
representing an increase of $2,850,884, or 123%.  Revenues at NPI
during the nine months ended September 30, 2008 were $8,493,456, compared to
$6,166,189, respectively, for the same period in 2007, representing an increase
of $2,327,267, or 38%.  The increase in revenues is primarily due
to a large
seasonal direct import shipment, which previously shipped in the 4th quarter of
2007, and the addition of new sales from a large national retail
chain. Sales under the MOTOR TREND® and Good Choice® programs have remained
steady during the nine months ended September 30,
2008.NPI's business is seasonal and historically, most of
NPI’s revenues have been generated in the third and fourth
quarters.  NPI is targeting one or two additional large accounts and
adding more mid-size accounts.  NPI's projected backlog of orders at
September 30, 2008 is $1.3 million, compared to a backlog of orders of $5.4
million at September 30, 2007.


Hammonds’
generated revenues for the three months ended September 30, 2008 of $1,802,229,
compared to $3,083,286 for the three months ended September 30, 2007,
representing a decrease of $1,281,057, or 42%. Revenues for the nine months
ended September 30, 2008 were $6,428,157, compared to $7,120,461 for the same
period in 2007, representing a decrease of $692,304, or 10%.  Hammonds
Water Treatment revenues increased by $206,530, or 9%, and Hammonds
Technical Services revenues decreased by $877,166, or 22%.  The
decrease was due to delays in certain materials required for specific job
completion and the influence of an overall worldwide economic
slowdown.  Extensive roof damage caused by Hurricane Ike destroyed the
entire office and sales showroom complex.   Relocation of all
personnel within the complex into temporary facilities has impacted both
production and marketing efforts.  While all computers and the
accounting network were saved, virtually all furniture and fixtures within the
affected area were destroyed.  The Company is pursuing claims under its
insurance policies for lost income and additional expenses. No estimate of
potential recovery can be made at this time since the costs and losses are
continuing. Hammonds
projected backlog of orders at September 30, 2008 is $3.2 million, compared to a
backlog of orders of $4.8 million at September 30, 2007.  The
backlog is principally comprised of orders for injectors and skids.  Subject
to releases by customers, the entire projected backlog at September 30,
2008 is expected to be delivered over the next twelve
months.  Some shipments originally scheduled for September were
shifted to October as a result of delays in components.  Shipping
delays caused by the storm damage result in shifting some sales from the third
quarter to the fourth quarter, while some sales have been lost due to our
limited showroom and marketing presence.


Net income / loss from operations.Our consolidated net income from operations for the three months ended
September 30, 2008 was $366,484, compared to a net loss of $1,026,528 for the
three months ended September 30, 2007, representing an improvement of
$1,393,012, or 136%.  The improvement in the results from operations
was due to the increase in revenues and a decrease in selling, general and
administration costs as a percentage of revenues to 30% for the three months
ended September 30, 2008, compared to 51% for 2007. Consolidated net loss
from operations for the nine months ended September 30, 2008 was $2,008,205,
compared to a net loss of $3,251,518 during the same period in 2007,
representing an improvement of $1,243,313, or 38%.  Selling, general
and administration costs as a percentage of revenues improved to 41% for
the nine months ended September 30, 2008, compared to 51% for
2007.


Back to Table of Contents
 25


Total other income/expenses.Other expenses were $1,630,372 for the three months ended September
30, 2008, compared to other expenses of $320,499 for the three months ended
September 30, 2007. Other expenses were $2,894,210 for the nine months
ended September 30, 2008, compared to other income of $168,376 for the nine
months ended September 30, 2007.  Other expenses for the three and nine
months ended September 30, 2008 included $2,945,133 for recognition of the
property dividend distribution gain associated with the declaration of the
Hammonds’ stock dividend (see note 14) and the recognition of $1,450,000 for the
Delta lawsuit settlement (see notes 8 and 17).  After minority
interest, the net impact of this settlement on the Company's net income is
$739,500.  Net realized/unrealized losses on trading securities were
$1,570,137 and $4,180,982 for the three and nine months ended September 30,
2008, respectively, compared to gains of $219,068 and $232,433 for the
three and nine months ended September 30, 2007, respectively.  The net
unrealized losses on trading securities of $4,160,535 for the nine months
ended September 30, 2008, were due primarily to declines in the market values of
our investments in OI Corporation and Rubicon Financial Incorporated of
$3,757,591 (see note 2).




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
              
              $
              (1,307,679
              )
              
              $
              (915,375
              )
              
              $
              (392,304
              )




In
October 2008, American reduced its holdings in trading securities by
$1,977,486.  The impact of these transactions on net income is a loss of
$11,018.


Delta
recognized other income from a Texas Emissions Reduction Plan (TERP) grant
in the amount of $57,589 for the nine months ended September 30, 2008
compared to $431,595 for the nine months ended September 30, 2007.  For
further disclosure regarding the TERP grant, see note 13.




Net loss.Net losses were
$2,037,301 and $5,041,848, respectively, for the three and nine months
ended September 30, 2008, compared to net losses of $1,363,542 and
$3,343,808, respectively, for the same periods in 2007.  The downturn in
the stock market over the last quarter had a significant impact on our net
losses.  Our non-cash unrealized losses on trading securities for the three
and nine months ended September 30, 2008 of $1,578,551 and $4,160,535,
respectively, represents 77% and 83% of our total net losses,
respectively.




Liquidity
and Capital Resources




Total assets/working capital.Total assets at September 30, 2008 were $45,009,020, compared to
$44,586,554 at December 31, 2007, representing an increase of
$422,466.  At September 30, 2008, consolidated working capital was
$20,074,404, compared to working capital of $27,790,372 at December 31, 2007,
representing a decrease of $7,715,968.  The primary reason for the decrease
in working capital was a non-cash unrealized loss on trading securities of
$4,160,535, an increase in short-term notes payable and the current portion of
long-term debt of $1,697,045 and $2,831,310, respectively, offset by deposits
for pipe purchases of $1,748,601.  Additionally, working capital was
used to fund operations and for the purchase of plant and
equipment.




Cash flow from operations.For the nine months ended September 30, 2008, we had negative cash flow
from operations of $3,308,962, compared to negative cash flow from operations of
$4,620,124 during 2007. The negative cash flow from
operations was the result of our net loss of $5,041,848 for the nine
months ended September 30, 2008. Our net loss for the nine months ended
September 30, 2008 included non-cash income of $2,945,133 for recognition of the
property dividend distribution gain associated with the declaration of the
Hammonds’ stock dividend (see note 14) and non-cash expenses of
$7,396,431, including unrealized losses on the sale of trading securities
of $4,160,535, a $1,450,000 loss from the Delta lawsuit settlement (see
notes 8 and 17), depreciation and amortization of $1,048,832, and non-cash
compensation of $737,064.  Our net loss for the nine months ended September
30, 2007 included non-cash income of $431,595 for the recognition of TERP
grant income (see note 13), and non-cash expenses of
$2,421,206, including depreciation and amortization of $884,607, finance
expense for the issuance of preferred stock of our Hammonds subsidiary of
$386,334, non-cash compensation of $925,265, and the release of a receivable
obligation in a lawsuit settlement of $225,000.  Our
inventories decreased by $33,812 for the nine months ended September 30,
2008, compared to an increase of $3,186,855 during the nine months ended
September 30, 2007.  We decreased our investments in trading
securities by $14,042 during the nine months ended September 30, 2008, compared
to an increase of $1,077,298 during the same period in 2007.  Accounts
receivable increased by $4,630,599 during the nine months ended September
30, 2008, compared to a decrease of $556,346 during the same period
in 2007.  Prepaid expenses increased by $155,356, deposits for
pipe purchases increased by $1,748,601, other assets increased by
$45,310, and accounts payable increased by $3,660,833 for the nine
months ended September 30, 2008.  For 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.


Back to Table of Contents
 26


Cash flow from investing activities.Our investing activities provided cash of $880,441 during the nine
month period ended September 30, 2008, as a result of a net decrease in
investments in certificates of deposit of $1,220,000 and proceeds from the sale
of drilling rig equipment of $200,000, offset by purchases of property,
equipment, and expenditures related to securing additional patents of
$443,767 and the issuance of a note receivable of $225,000.  This is
compared to cash provided by investing activities during the same period in the
prior year in the amount of $606,806 during the nine month period ended
September 30, 2007, as a result of a net decrease in investments in certificates
of deposit of $1,314,000 and receipts of principal payments on notes receivable
of $422,885, offset by purchases of property, equipment, and expenditures
related to securing additional patents of $1,117,079.




Cash flow from financing activities.During the nine months ended September 30, 2008, our financing activities
provided $2,168,126 compared to $4,730,876 during the same period in 2007.
During the 2008 period, we received proceeds from line-of-credit agreements
of $1,045,000 and from borrowings of $3,817,663.  We made
payments of $2,718,635 on debt during the nine month period ended September
30, 2008.  During the 2007 period, we received net proceeds from the
issuance of preferred and common stock of our subsidiary in the amount of
$2,675,834, from borrowings in the amount of $1,319,604, and from line-of-credit
agreements of $1,570,218. We made payments of $825,764 on debt during the nine
month period ended September 30, 2007.




Real estate.During the
second quarter of 2007, American 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 by nor is it being held as inventory by American.  American
continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou
and Galveston Bay in Galveston County, Texas. American is carrying this property
on the balance sheet at its historical book value of $225,000.  In
November 2005, American signed a contract for sale of the property for
$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.
Westfield deposited $95,000 in earnest money with the title company upon
assignment of the contract, which had an initial feasibility period of one
year.  In July 2008, the contract was amended to extend the feasibility
period to October 31, 2008.  American advised Westfield that it would not
extend the contract any further.  In October, American was advised by
Westfield that due to unforeseen serious health reasons of its main principal,
Westfield could not finalize all of the permits and financing for the
development of the 287 acres, timely.  Westfield delivered to American all
of their studies and project development documents.  American believes that
this property and its development plans will sell for substantially more than
the price for which the property was being sold to Westfield, due to
the fact that the property is in a rapidly growing Galveston / Houston, Texas
metropolitan area and real estate in the surrounding areas have increased
substantially in value in the past 24 months.  American has engaged CBRE on
an exclusive basis to sell the property for an increased listing price of
$25,000,000.







Back to Table of Contents
 27
 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, 2008, due to
the generally short maturities of these items. At September 30, 2008, 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, 2008, 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, 2008, our total equity holdings in publicly traded companies were
valued at $2,615,358, compared to $6,810,382 as of December 31,
2007.  On September 12, 2007, the Company acquired 170,345
shares, or approximately 7%, of OI Corporation's common stock for
a $1,000,000 cash payment and the issuance of 240,000 restricted shares of
the Company’s common stock for a total purchase price of $2,212,000. The closing
market price on the date of this transaction for OICO was $13.23 per common
share.  During the nine months ended September 30, 2008, American
purchased an additional 4,700 shares at an average purchase price of $12.14 per
share.  On November 27, 2007, the Company acquired 1,000,000
restricted shares, or approximately 9% of Rubicon Financial Incorporated’s
common stock for a $1,000,000 cash payment and the issuance of 200,000
restricted shares of the Company’s common stock for a total purchase price of
$1,980,000.  The closing market price on the date of this transaction
for RBCF was $2.87 per common share.  During the nine months ended
September 30, 2008, American purchased an additional 1,400 shares
at an average purchase price of $1.30 per share.  The
market value of the trading securities for these two companies was $2,202,466 at
September 30, 2008, or 84% of our portfolio of trading securities.  The
market value of the trading securities for these two companies was $5,901,198 at
December 31, 2007, or 87% of our portfolio of trading
securities. In
October 2008, American reduced its holdings in trading securities by
$1,977,486.  The impact of these transactions on net income was a loss of
$11,018.
 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
                      
                      $
                      (1,307,679
                      )
                      
                      $
                      (915,375
                      )
                      
                      $
                      (392,304
                      )
  ITEM 4T. CONTROLS AND PROCEDURES
  Evaluation of disclosure controls
and procedures.As of September 30, 2008, 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.
  Back to Table of Contents
 28
 PART
II - OTHER INFORMATION
  ITEM 1. LEGAL PROCEEDINGS
  Gemini Insurance Company v. Delta
Seaboard Well Service, Inc.
   Delta Seaboard Well Service, Inc. v.
Houstoun, Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance
Alliance and Robert Holman
 As part of the attorney’s work on the
Broker Lawsuit, Delta filed a claim for coverage with American Specialty Lines
Insurance Company (AISLIC).  Delta has filed a lawsuit against AISLIC and
anticipates moving forward in the near future in light of the outcome of the
Fort Apache Lawsuit and the Gemini Lawsuit.
  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, 2007.
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
    ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  On
September 24, 2008, the Company's annual meeting of shareholders was held. At
the meeting the shareholders voted for the election of Daniel Dror, Charles R.
Zeller, Robert W. Derrick, Jr., and Thomas J. Craft, Jr., and John W. Stump III
to serve on our board until the next annual meeting of shareholders or until
their successors are elected and qualified, voted to ratify our selection of GBH
CPAs, PC as independent auditors for 2008, and voted to increase the number of
authorized shares of common stock from 10,000,000 to 50,000,000 shares. At the
date of the annual meeting, the Company had a total of 8,586,486 shares of
common stock outstanding and a total of 7,314,276 were present and voted. The
following tables set forth the vote of shareholders with respect to the two
proposals:
  Proposal
1. Election of Directors
  Nominees
              For
              WithheldDaniel
      Dror
              7,059,965
              254,311Charles
      R. Zeller
              7,113,313
              200,963Robert
      W. Derrick, Jr.
              7,113,313
              200,963Thomas
      J. Craft, Jr.
              7,113,433
              200,843John
      W. Stump III
              7,109,339
              204,937
  Proposal
2. Ratification of GBH CPAs, PC as Independent Auditors for 2008
  For
              Against
              Abstain
              BNV7,185,046
              69,632
              59,598
              -
  Proposal
3. Increase authorized shares of common stock from 10,000,000 shares to
50,000,000 shares
  For
              Against
              Abstain
              BNV6,781,864
              521,782
              10,629
              -




Back to Table of Contents
 29
 ITEM 5. OTHER INFORMATION
  None.
  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.
              Description31.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to the Sarbanes-Oxley Act of 200231.2
              Certification
      of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
      of 200232.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to the Sarbanes-Oxley Act of 200232.2
              Certification
      of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
      of 2002
  (b)
Reports on Form 8-K During the Period Covered by this Report: The
Registrant filed a Form 8-K on September 5, 2008 with disclosure under Item
8.01, "Other Events" and Item 9.01, "Financial Statements and
Exhibits."


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 30




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 14,
2008






/s/ SHERRY L.
COUTURIER


CHIEF FINANCIAL OFFICER


Dated:November 14,
2008