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 March 31, 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.: 0-25223




AMERICAN
INTERNATIONAL INDUSTRIES, INC.




(Exact
Name Of Registrant As Specified In Its Charter)




Nevada
            88-0326480(State
      of Incorporation)
            (I.R.S.
      Employer Identification No.)601 Cien Street, Suite 235,Kemah,TX
            77565-3077(Address
      of Principal Executive Offices)
            (ZIP
      Code)




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




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




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




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




Large
      accelerated filer  ̈
            Accelerated filer ̈
            Non-accelerated
      filer x




At March
31, 2008, the Registrant had 7,115,159 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 CONDITIONS
      AND RESULTS OF OPERATION
              
              
              24ITEM
      3.
              
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              
              
              27ITEM
      4T.
              
              CONTROLS AND
      PROCEDURES
              
              
              27PART
      II - OTHER INFORMATIONITEM
      1.
              
              LEGAL
      PROCEEDINGS
              
              
              28ITEM
      1A.
              
              RISK FACTORS
              
              
              28ITEM
      2.
              
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              
              
              28ITEM
      3.
              
              DEFAULTS UPON
      SENIOR SECURITIES
              
              
              28ITEM
      4.
              
              SUBMISSION OF MATERS
      TO A VOTE OF SECURITY HOLDERS
              
              
              28ITEM
      5.
              
              OTHER
      INFORMATION
              
              
              28ITEM
      6.
              
              EXHIBITS AND REPORTS ON FORM
      8-K
              
              
              28









PART
I - FINANCIAL INFORMATION






ITEM1. FINANCIAL STATEMENTS




Condensed
      Consolidated Financial StatementsConsolidated
      Balance Sheets - March 31, 2008 (Unaudited) and December 31, 2007
      (Audited)
            4Unaudited
      Consolidated Statements of Operations - Three months ended March 31, 2008
      and 2007
            5Unaudited
      Consolidated Statement of Cash Flows - Three months ended March 31, 2008
      and 2007
            6Notes to
      Unaudited Condensed Consolidated Financial Statements
            8









Back to Table of Contents


AMERICAN INTERNATIONAL INDUSTRIES, INC. AND
      SUBSIDIARIESConsolidated
      Balance SheetsMarch
      31, 2008 and December 31, 2007
 March
      31, 2008
              
              
              December
      31, 2007Assets
              
              
              
              
              (Audited)Current
      assets:Cash and cash equivalents
              
              $
              3,483,621
              
              
              $
              3,891,156Certificate of deposit
              
              
              3,939,800
              
              
              
              5,195,000Trading securities
              
              
              5,675,581
              
              
              
              6,810,382Accounts receivable, less allowance for doubtful accountsof $230,310 at March 31, 2008 and $231,870 at December 31,
      2007
              
              
              3,730,410
              
              
              
              4,835,452Current portion of notes receivable
              
              
              3,875,746
              
              
              
              3,898,831Accounts and notes receivable from related parties
              
              
              33,277
              
              
              
              30,000Inventories
              
              
              6,638,867
              
              
              
              5,811,997Real estate acquired for resale
              
              
              1,909,066
              
              
              
              1,909,066Drilling rigs held for sale
              
              
              1,734
              
              
              
              187,611Prepaid expenses and other current assets
              
              
              212,250
              
              
              
              296,981Total current assets
              
              
              29,500,352
              
              
              
              32,866,476Long-term
      notes receivable, less current portion
              
              
              581,977
              
              
              
              618,129Investment
      in Las Vegas Premium Gold Products
              
              
              250,000
              
              
              
              250,000Property
      and equipment, net of accumulated depreciation and
      amortization
              
              
              4,827,698
              
              
              
              4,619,940Goodwill,
      less accumulated amortization of$205,295 at March 31, 2008 and December 31, 2007
              
              
              674,539
              
              
              
              674,539Patents
      and trademarks, net of amortization
              
              
              5,305,785
              
              
              
              5,457,365Other
      assets
              
              
              158,309
              
              
              
              100,105Total assets
              
              $
              41,298,660
              
              
              $
              44,586,554Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable and accrued expenses
              
              $
              3,037,003
              
              
              $
              3,197,415Margin loans from financial institutions
              
              
              1,293,588
              
              
              
              1,443,424Short-term notes payable
              
              
              122,492
              
              
              
              219,970Current
      installments of long-term capital lease obligations
              
              
              26,740
              
              
              
              29,967Current installments of long-term debt
              
              
              1,187,487
              
              
              
              185,328Total current liabilities
              
              
              5,667,310
              
              
              
              5,076,104Long-term
      debt, less current installments
              
              
              10,313,839
              
              
              
              10,766,951Long-term
      capital lease obligations, less current installments
              
              
              252,124
              
              
              
              123,100Deferred
      tax liability
              
              
              156,535
              
              
              
              156,535Minority
      interest
              
              
              886,754
              
              
              
              1,370,196Total liabilities
              
              
              17,276,562
              
              
              
              17,492,886Stockholders'
      equity:Preferred stock, $0.001par value, 1,000,000 authorized: none
      issuedCommon stock, $0.001 par value, 10,000,000
    authorized:7,115,159
      shares issued and 7,073,214 shares outstanding at March 31,
      2008;7,107,842 shares issued and 7,070,480 shares outstanding at December
      31, 2007
              
              
              7,115
              
              
              
              7,108Additional paid-in capital
              
              
              46,501,235
              
              
              
              46,327,209Accumulated deficit
              
              
              (22,271,564
              )
              
              
              (19,045,752
              )24,236,786
              
              
              
              27,288,565Less treasury stock, at cost (41,945 shares at March 31,
    2008and 37,362 shares at December 31, 2007)
              
              
              (214,688
              )
              
              
              (194,897
              )Total stockholders' equity
              
              
              24,022,098
              
              
              
              27,093,668Total liabilities and stockholders' equity
              
              $
              41,298,660
              
              
              $
              44,586,554The
      accompanying notes are an integral part of these consolidated financial
      statements
 Back to Table of Contents


AMERICAN INTERNATIONAL INDUSTRIES, INC. AND
      SUBSIDIARIESConsolidated
      Statements of OperationsThree
      months ended March 31, 2008 and 2007 (Unaudited)Three
      Months Ended
              
              
              Three
      Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Revenues
              
              $
              5,716,062
              
              
              $
              6,612,570Costs
      and expenses:Cost of sales
              
              
              3,889,401
              
              
              
              4,603,524Selling, general and administrative
              
              
              3,940,100
              
              
              
              3,453,868Total operating expenses
              
              
              7,829,501
              
              
              
              8,057,392Operating
      loss
              
              
              (2,113,439
              )
              
              
              (1,444,822
              )Other
      income (expenses):Interest and dividend income
              
              
              150,112
              
              
              
              160,689Realized losses on investments
              
              
              (55,427
              )
              
              
              (598,705
              )Unrealized gain (losses) on trading securities
              
              
              (1,304,853
              )
              
              
              642,919Interest expense
              
              
              (161,595
              )
              
              
              (219,812
              )Texas Emissions Reduction Plan Grant
              
              
              57,589Other income (expense)
              
              
              21,567
              
              
              
              214,867Total other income (expenses)
              
              
              (1,292,607
              )
              
              
              199,958Net loss before income taxes
              
              
              (3,406,046
              )
              
              
              (1,244,864
              )Income
      tax expense (benefit)
              
              
              23,008
              
              
              
              -Net loss before minority interest
              
              
              (3,429,054
              )
              
              
              (1,244,864
              )Minority
      interest
              
              
              248,242
              
              
              
              (48,036
              )Net loss
              
              $
              (3,180,812
              )
              
              $
              (1,292,900
              )Preferred dividends
              
              
              (45,000
              )
              
              
              (45,000
              )Net loss applicable to common shareholders
              
              
              (3,225,812
              )
              
              
              (1,337,900
              )Net
      loss applicable to common shareholders:Basic
              
              $
              (0.45
              )
              
              $
              (0.24
              )Weighted
      average common shares:Basic
              
              
              7,112,258
              
              
              
              5,460,951The
      accompanying notes are an integral part of these consolidated financial
      statements
  Back to Table of Contents
  AMERICANINTERNATIONAL INDUSTRIES, INC. AND
      SUBSIDIARIESConsolidated
      Statements of Cash FlowsThree
      months ended March 31, 2008 and 2007 (Unaudited)Three
      Months Ended
              
              
              Three
      Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Cash
      flows from operating activities:Net loss
              
              $
              (3,180,812
              )
              
              $
              (1,292,900
              )Adjustments to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization
              
              
              339,097
              
              
              
              277,549Common shares issued for services
              
              
              85,970
              
              
              
              172,775Compensation - stock warrants
              
              
              88,063
              
              
              
              70,685Realized (gains) losses on the sale of trading securities
              
              
              55,427
              
              
              
              598,705Unrealized (gain) losses on the sale of trading securities
              
              
              1,304,853
              
              
              
              (642,919
              )Stock returned in lawsuit settlement
              
              
              -
              
              
              
              (39,600
              )Texas
      Emissions Reduction Plan Grant
              
              
              (57,589
              )
              
              
              -Minority interest
              
              
              (483,442
              )
              
              
              48,036(Increase)
      decrease of operating assets, net of acquisitions and
      dispositions:Accounts receivable
              
              
              1,105,043
              
              
              
              1,161,066Trading securities
              
              
              (225,479
              )
              
              
              (90,303
              )Inventories
              
              
              (826,871
              )
              
              
              (767,986
              )Prepaid
      expenses and other current assets
              
              
              84,731
              
              
              
              (212,092
              )Other
      assets
              
              
              (58,204
              )
              
              
              (182,549
              )Increase (decrease) in operating liabilitiesAccounts payable and accrued expenses
              
              
              (205,411
              )
              
              
              (144,050
              )Net cash used in
      operating activities
              
              
              (1,974,624
              )
              
              
              (1,043,583
              )Cash
      flows from investing activities:Purchase of property and equipment
              
              
              (188,268
              )
              
              
              (267,470
              )Patents and trademarks
              
              
              (9,978
              )
              
              
              (4,840
              )Investment
      in Rigs held for Sale
              
              
              (14,123
              )
              
              
              -Proceeds from the sale of drilling rigs
              
              
              200,000
              
              
              
              -Issuance of note receivable
              
              
              -
              
              
              
              (25,000
              )Loans to related parties
              
              
              (3,277
              )
              
              
              -Investment in certificate of deposit
              
              
              (244,800
              )
              
              
              (3,100,000
              )Redemption of certificate of deposit
              
              
              1,500,000
              
              
              
              3,214,000Receipts of principal payments on notes receivable
              
              
              59,238
              
              
              
              307,427Net cash provided by
      investing activities
              
              
              1,298,792
              
              
              
              124,117Cash
      flows from financing activities:Net borrowings under line-of-credit agreements
              
              
              598,000
              
              
              
              324,218Principal payments under capital lease obligations
              
              
              (13,645
              )
              
              
              -Proceeds from short-term debt
              
              
              -
              
              
              
              300,000Proceeds from long-term debt
              
              
              -
              
              
              
              264,946Margin loans
              
              
              (149,836
              )
              
              
              15,501Proceeds from issuance of common stock of subsidiary
              
              
              -
              
              
              
              694,672Principal payments on short-term debt
              
              
              (97,478
              )
              
              
              (257,664
              )Principal payments on long-term debt
              
              
              (48,954
              )
              
              
              (27,768
              )Acquisition on treasury stock
              
              
              (19,790
              )
              
              
              (18,340
              )Net cash provided by
      (used in)  financing activities
              
              
              268,297
              
              
              
              1,295,565Net increase (decrease) in cash and cash equivalents
              
              
              (407,535
              )
              
              
              376,099Cash
      and cash equivalents at beginning of year
              
              
              3,891,156
              
              
              
              3,275,803Cash
      and cash equivalents at end of period
              
              $
              3,483,621
              
              
              $
              3,651,902Supplemental
      schedule of cash flow information:Interest paid
              
              $
              161,595
              
              
              $
              219,812Non-cash transactionsAcquisition of fixed assets under capital lease obligations
              
              
              139,441
              
              
              
              -The
      accompanying notes are an integral part of these consolidated financial
      statements
 Back to Table of Contents


AmericanInternational Industries, Inc.


Notes to
Unaudited Condensed Consolidated Financial Statements






(1)
Summary of Significant Accounting Policies




Organization,
Ownership and Business


American
International Industries, Inc. (the "Company"), a Nevada corporation, operates
as a diversified holding company with a number of wholly-owned subsidiaries and
two majority-owned subsidiaries. The Company is a diversified corporation with
interests in industrial/commercial companies and an oil and gas service
business. The Company's business strategy is to acquire controlling equity
interests in businesses that it considers undervalued. The Company's management
takes an active role in providing its subsidiaries with access to capital,
leveraging synergies and providing management expertise in order to improve its
subsidiaries' growth.
  Principles
of Consolidation
  The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Northeastern Plastics, Inc., and its majority owned
subsidiary, Delta Seaboard Well Service, Inc., and its 48.1% owned subsidiary,
Hammonds Industries, Inc. (OTCBB: "HMDI"), formerly International American
Technologies, Inc. (“Hammonds”).  In accordance with FIN46(r), the
Company consolidates Hammonds although its ownership is less than 51%, because
the Company appoints the members of Hammonds' board of directors. Since Hammonds
is incurring losses and the minority interest has no recorded equity value, the
Company recognizes 100% of Hammond’s losses. All significant intercompany
transactions and balances have been eliminated in consolidation.
  Presentation
of certain amounts for the three months ended March 31, 2007 have been
reclassified to conform to the presentations for the three months ended March
31, 2008.
  Cash
and Cash-Equivalents
  The
Company considers cash and cash-equivalents to include cash on hand and
certificates of deposits with banks with an original maturity of three months or
less, that the Company intends to convert.
  Accounts
Receivable
  Accounts
receivable consist primarily of trade receivables, net of a valuation allowance
for doubtful accounts.
  Allowance
for Doubtful Accounts
  The
Company extends credit to customers and other parties in the normal course of
business. The Company regularly reviews outstanding receivables and provides for
estimated losses through an allowance for doubtful accounts. In evaluating the
level of established reserves, the Company makes judgments regarding its
customers' ability to make required payments, economic events and other factors.
As the financial condition of these parties change, circumstances develop or
additional information becomes available, adjustments to the allowance for
doubtful accounts may be required. When the Company determines that a customer
may not be able to make required payments, the Company increases the allowance
through a charge to income in the period in which that determination is
made.
  Inventories
  Inventories
are valued at the lower-of-cost or market on a first-in, first-out basis. The
Company assesses the realizability of its inventories based upon specific usage
and future utility. A charge to results of operations is taken when factors that
would result in a need for a reduction in the valuation, such as excess or
obsolete inventory, are noted.
 
 Freight
and Shipment Policy
  The
Company's policy is to expense all freight and shipment expenses on a monthly
basis. The Company prepays any shipments greater than $1,250 and to reduce our
freight and shipping costs the Company receives at least three
quotations.
  Investment
Securities
  The
Company accounts for its investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Management determines the appropriate classification of its
investments in marketable securities at the time of purchase and reevaluates
such determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities. Debt securities for which the Company does not have the
intent or ability to hold to maturity and equity securities not classified as
trading securities are classified as available-for-sale. The cost of investments
sold is determined on the specific identification or the first-in, first-out
method. Trading securities are reported at fair value with unrealized gains and
losses recognized in earnings, and available-for-sale securities are also
reported at fair value but unrealized gains and losses are shown in the caption
"unrealized gains (losses) on shares available-for-sale" included in
stockholders' equity. Management determines fair value of its investments based
on quoted market prices at each balance sheet date.
  Property,
Plant, Equipment, Depreciation, Amortization and Long-Lived Assets
  Long-lived
assets include:
  Property,
Plant and equipment – Assets acquired in the normal course of business are
recorded at original cost and may be adjusted for any additional significant
improvements after purchase. We depreciate the cost evenly over the assets’
estimated useful lives. Upon retirement or sale, the cost of the assets disposed
of and the related accumulated depreciation are removed from the accounts, with
any resultant gain or loss being recognized as a component of other income or
expense. As required by SFAS No. 141, the acquisition of Hammonds has been
recorded using the purchase method of accounting with the purchase price
allocated to the acquired assets and liabilities based on their respective
estimated fair values at the acquisition date. For more information on the
acquisition of Hammonds see note 2.
  Identifiable
intangible assets – These assets are recorded at acquisition cost. Intangible
assets with finite lives are amortized evenly over their estimated useful
lives.
 The
Company reviews long-lived assets, including property, plant and equipment and
amortizable intangible assets, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the asset may not be
fully recoverable. The Company performs undiscounted operating cash flow
analyses to determine if impairment exists. For purposes of recognition and
measurement of an impairment for assets held for use, the Company groups assets
and liabilities at the lowest level for which cash flows are separately
identified. If an impairment is determined to exist, any related impairment loss
is calculated based on fair value. Impairment losses on assets to be disposed
of, if any, are based on the estimated proceeds to be received, less costs of
disposal.
 
 Goodwill
is assessed for impairment annually and more frequently if triggering events
occur.  In performing this assessment, management relies on various
factors, including operating results, business plans, economic projections,
anticipated future cash flows, comparable transactions and other market data.
There are inherent uncertainties related to these factors and judgment in
applying them to the analysis of goodwill for impairment. The Company performed
its annual impairment test for goodwill as of December 31, 2007.
 
 When
testing for goodwill impairment, the Company first compares the fair value of a
reporting unit with its carrying amount. If the carrying amount of a reporting
unit exceeds its fair value, goodwill is considered potentially impaired and
further tests are performed to measure the amount of impairment loss. In the
second step of the goodwill impairment test, the Company compares the implied
fair value of reporting unit goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to the carrying amount of goodwill over its implied fair value. The
implied fair value of goodwill is determined in the same manner that the amount
of goodwill recognized in a business combination is determined. The Company
allocates the fair value of a reporting unit to all of the assets and
liabilities of that unit, including intangible assets, as if the reporting unit
had been acquired in a business combination. Any excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities
represents the implied fair value of goodwill.
  During
April, 2005, the Company's subsidiary International American Technologies, Inc.,
n/k/a Hammonds Industries, Inc., acquired Hammonds Technical Services, Inc. for
a purchase price of approximately $2,455,700. Long-lived assets totaling
$2,958,900 were recognized as a result of the acquisition. The operations of
Hammonds Technical Services are included in the consolidated statements of
operations from date of acquisition.
  The
following table contains a summary of the tangible and of the intangible assets
acquired:


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




SFAS No.
142 eliminated the amortization of goodwill, and requires annual impairment
testing of goodwill and introduces the concept of indefinite life intangible
assets. The Company adopted SFAS No. 142 effective January 1, 2002.
  On August
1, 2006, Hammonds acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc., by issuing Carl Hammonds 16,000,000 restricted shares or 44.4% of
HMDI common stock at a conversion rate of $0.25 a share. The additional cost of
$4,000,000 has been allocated to patents, trademarks, and sole source contract
and is being amortized in a manner equivalent to the amortization used on the
intangible assets acquired in the initial purchase of 51% of
Hammonds.
  March 31,
2008 and December 31, 2007 balances for long-lived assets are detailed in later
footnotes: Property and Equipment (note 7) and Intangible Assets (note
8).
  Revenue
Recognition
  Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured. 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.  The Company has no
significant sales returns or allowances.
  Income
Taxes
  The
Company is a taxable entity and recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.  Interest
and penalties associated with income taxes are included in selling, general and
administrative expense.
  Earnings
Per Share
  The basic
net earnings per common share is computed by dividing the net earnings by the
weighted average number of shares outstanding during a period. Diluted net
earnings per common share is computed by dividing the net earnings, adjusted on
an as if converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities. For the three months ended March
31, 2008 and 2007, potential dilutive securities that had an anti-dilutive
effect were not included in the calculation of diluted net earnings (loss) per
common share. These securities include options to purchase shares of common
stock.
  Advertising
Costs
  The cost
of advertising is expensed as incurred.
  Management's
Estimates and Assumptions
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
  Stock-Based
Compensation
  The
Company sometimes grants shares of stock for goods and services and in
conjunction with certain agreements. These grants are accounted for under FASB
Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant
date fair values.
 
 Fair
Value of Financial Instruments
  The
Company estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the Company estimates of fair value are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumption and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The interest rates payable by the Company on its notes payable
approximate market rates. The Company believes that the fair value of its
financial instruments comprising accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.
  New
Standards Implemented
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” which is effective for fiscal years beginning after November
15, 2007. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option is elected would be reported in
earnings.
 
 In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations".
SFAS 141R requires the acquiring entity in a business combination to record
all assets acquired and liabilities assumed at their respective acquisition-date
fair values, changes the recognition of assets acquired and liabilities assumed
arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related
costs as incurred. SFAS 141R also requires additional disclosure of
information surrounding a business combination, such that users of the entity's
financial statements can fully understand the nature and financial impact of the
business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008.
  Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133." This
Statement requires enhanced disclosures about an entity’s derivative and hedging
activities, including (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008.
  Management
has reviewed these new standards and believes that they have no impact on the
financial statements of the Company at this time; however, they may apply in the
future.
 (2)
Acquisition of Hammonds Technical Services, Inc.
  On
February 28, 2005,  the Company's subsidiary, International American
Technologies, Inc. n/k/a Hammonds Industries, Inc. (“Hammonds”), entered into a
Stock Purchase Agreement  to acquire a 51% interest in the capital
stock of Hammonds Technical Services, Inc., a privately owned Texas corporation
in consideration for Hammonds or its parent, American International Industries,
Inc., providing: (i) $998,300 in cash to Hammonds for working capital; (ii) a
secured revolving long-term line of credit in the amount of $2,000,000; and
(iii) issuing 145,000 restricted shares of the Company’s  common stock
to Hammonds  in consideration for a $1,450,000 promissory note. The
value of the stock at $10.00 per share was guaranteed. The sellers of 51% of
Hammonds and Mr. Daniel Dror entered into a stock repurchase agreement as of
April 28, 2005, where the sellers agreed to sell the 145,000 shares to Mr.
Daniel Dror for $10.00 per share through the third anniversary of the effective
date of the agreement. These restricted shares were exchanged for two minority
equity interests in Hammonds owned by third parties, which minority interests
were canceled. The total purchase price to acquire the 51% in Hammonds was
$2,455,700 representing cash payments of $825,000, 145,000 shares of AMIN’s
restricted common stock valued at $1,450,000 and the assumption of a note
payable to one of the former shareholders in the amount of $173,300 and
liabilities in excess of assets in the amount of $7,400. Pursuant to the Stock
Purchase Agreement, which was effective on April 28, 2005, Hammonds became a 51%
owned subsidiary of the Company.
  In 2006,
Hammonds Technical Services was separated into three separate entities, Hammonds
Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water
Treatment Systems, Inc.
 
 As
required by SFAS No. 141, the Company's subsidiary has recorded the acquisition
using the purchase method of accounting with the purchase price allocated to the
acquired assets and liabilities based on their respective estimated fair values
at the acquisition date. The purchase price of $2,455,700 had been allocated at
follows:


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




Revenues
and expenses are included in HMDI’s statement of operations from May 1, 2005
through March 31, 2008.
  (3)
Trading Securities
  Investments
in marketable securities primarily include shares of common stock in various
companies. The investments are considered trading securities, and accordingly
any changes in market value are reflected in the consolidated statement of
operations. At March 31, 2008 and 2007, the Company has unrealized trading
losses of $1,304,853 and gains of $642,919, respectively, related to securities
held on those dates. These unrealized gains / losses are included in the
consolidated statements of operations for the respective periods. The Company
recorded realized losses of $55,427 for the three months ended March 31, 2008
and realized losses of $598,705 on the sales of trading securities and for the
three months ended March 31, 2007.
  On September
12, 2007, the Company 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 the Company’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.  At
March 31, 2008, our investment in the 170,345 shares of OICO
common stock is classified on the balance sheet as trading securities for
$2,015,971 valued at $11.80 per share based upon the closing market price on
that date.  At
December 31, 2007, our investment in the 170,345 shares of OICO common stock is
classified on the balance sheet as trading securities for $2,201,198 valued at
$12.92 per share based upon the closing market price on that date.The closing market price on the date of this transaction for OICO was
$13.23 per common share.  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.
  On
November 27, 2007, the Company 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 the Company’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.  At March 31,
2008, our investment in the 1,000,000 shares of RBCF common stock is
classified on the balance sheet as trading securities for $2,700,000, valued at
$2.70 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 on the balance sheet as trading securities for $3,700,000, valued
at $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
$4,715,971 at March 31, 2008, or 83% 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.
 
 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. The Company seeks to manage exposure to adverse equity
returns by maintaining diversified securities portfolios.
  The
following table represents the potential decrease in fair values of our
marketable equity securities that are sensitive to changes in the stock market.
Fair value deteriorations of 50%, 35% and 15% were selected for illustrative
purposes because none is more likely to occur than another.
  50%
              
              
              
              35%
              
              
              
              15%Marketable
      equity securities
              
              $
              (2,837,791
              )
              
              $
              (1,986,453
              )
              
              $
              (851,337
              )


(4)
Inventories




Inventories
consisted of the following:




March
      31, 2008
            
            
            December
      31, 2007Part
      and materials
            
            $
            1,584,342
            
            
            $
            1,420,043Work
      in process
            
            
            19,066
            
            
            
            186,045Finished
      goods
            
            
            5,175,304
            
            
            
            4,346,867Less
      reserve
            
            
            (139,845
            )
            
            
            (140,958
            )$
            6,638,867
            
            
            $
            5,811,997




(5)
Real Estate Transactions




During
the second quarter of 2007, the Company purchased for investment a 174 acre
tract of land in Waller County, Texas for $1,684,066. This property is listed
for sale with a real estate broker.  This property is not going to be
developed by nor is it being held as inventory by the Company.  The Company
continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou
and Galveston Bay in Galveston County, Texas. The book value for this property
is $225,000.  In November 2005, the Company signed a contract for sale
of the property for a cash consideration of $16,000,000 with Lakeland Partners
III. In January 2007, Lakeland assigned all of its interest in the contract to
Westfield Forest, L.P. Westfield is a recognized developer of waterfront
properties in the Houston, Texas area. 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.  On November 12, 2007, the contract
was amended to extend the feasibility period to July 31, 2008.  No revenue
has been recognized for this transaction because the development of the property
requires permits from the City of Texas City and the U. S. Army Corp of
Engineers, which the developer believes they can obtain timely within the terms
of the contract.  As a result, the transaction has not had all the elements
necessary for it to be considered a completed revenue recognition
event.


(6)
Long-term Notes Receivable
  Long-term
notes receivable at March 31, 2008 consisted of the following:
  March
      31, 2008
              
              
              December
      31, 2007Net
      note receivable from sale of real estate, principal payment due on or
      before July 30, 2008 (a)
              
              $
              3,020,044
              
              
              $
              3,020,044Sale
      of machinery and equipment, principal payment due on or before December 1,
      2008
              
              
              164,000
              
              
              
              164,000Sale
      of former subsidiary, Marald, Inc., principal and interest due monthly
      through June 5, 2012
              
              
              153,211
              
              
              
              160,892Sale
      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)
              
              
              725,000
              
              
              
              750,000Sale
      of drilling rig, principal and interest due monthly through December 31,
      2009
              
              
              195,468
              
              
              
              222,024Other
              
              
              -
              
              
              
              -Notes
      receivable
              
              
              4,457,723
              
              
              
              4,516,960Less
      current portion
              
              
              3,875,746
              
              
              
              3,898,831Notes
      receivable, less current portion
              
              $
              581,977
              
              
              $
              618,129
  (a) Net note receivable from sale of
real estate, principal payment due on or before July 30,
2008.  On July 30, 2004, the Company 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 December 31, 2007.  The Company 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).
 (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, the Company believes that no further discounting of the loan is
necessary as of December 31, 2007.
 
 (c) Sale of refinery to settle lawsuit,
principal and interest due on June 1 and December 1, through June 1,
2010.  The Company received principal payments of $25,000 and
$12,500 on February 15, 2008 and May 6, 2008, respectively, towards the $125,000
that was due on December 1, 2007.  Notre Dame Investors, Inc. has
agreed with Lazarus Energy LLC to catch up on the principal amounts due on June
16, 2008.  Additionally, the loan is collateralized by the Nixon
Refinery.  We have reviewed SFAS No. 114: Accounting by Creditors for
Impairment of a Loan—an amendment of FASB Statements No. 5 and 15, and based on
current information and events, management does not believe that it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement.  Therefore, we have not
recognized an impairment of this loan.
  (7)
Property and Equipment
  Major
classes of property and equipment together with their estimated useful lives,
consisted of the following:
  Years
              
              March
      31, 2008
              
              
              December
      31, 2007Land
              
              
              $
              892,945
              
              
              $
              892,945Building
      and improvements
              20
              
              
              1,029,996
              
              
              
              1,029,996Machinery
      and equipment
              7-15
              
              
              4,584,795
              
              
              
              4,314,861Office
      equipment and furniture
              7
              
              
              988,724
              
              
              
              892,399Automobiles
              5
              
              
              1,044,303
              
              
              
              1,025,2648,540,763
              
              
              
              8,155,465Less
      accumulated depreciation and amortization
              
              
              
              (3,713,065
              )
              
              
              (3,535,525
              )Net
      property and equipment
              
              
              $
              4,827,698
              
              
              $
              4,619,940
  Depreciation
expense for the three months ended March 31, 2008 and 2007 was $177,540 and
$110,944, respectively.
  During
the fourth quarter of 2007 and first quarter of 2008, the Company entered into
capital lease agreements for machinery and equipment included in the March 31,
2008 and December 31, 2007 balances as follows:
  March
      31, 2008
                  
                  
                  December
      31, 2007Machinery
      and equipment
                  
                  $
                  308,647
                  
                  
                  $
                  163,174Less
      accumulated depreciation and amortization
                  
                  
                  (11,817
                  )
                  
                  
                  -Net
      property and equipment
                  
                  $
                  296,830
                  
                  
                  $
                  163,174
 Principal
repayment provisions of long-term capital leases are as follows at March 31,
2008:
  2008
                
                $
                54,3582009
                
                
                45,7742010
                
                
                64,7782011
                
                
                61,6542012
                
                
                52,300Total
                
                $
                278,864
 (8)
Intangible Assets
  Intangible
assets at March 31, 2008 consisted of the following:
  As
      of March 31, 2008Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              Average
      Weighted LivesGoodwill
              
              $
              879,834
              
              
              $
              205,295
              
              N/APatents
              
              $
              4,554,476
              
              
              $
              936,991
              
              12
      yearsTrademarks
              
              
              1,149,199
              
              
              
              249,683
              
              10
      yearsSole
      Source Contract
              
              
              1,144,039
              
              
              
              355,255
              
              7
      yearsPatents,
      Trademarks, and Sole Source Contract
              
              $
              6,847,714
              
              
              $
              1,541,929
              
              11
      years
  Intangible
assets at December 31, 2007 consisted of the following:
  As
      of December 31, 2007Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              Average
      Weighted LivesGoodwill
              
              $
              879,834
              
              
              $
              205,295
              
              N/APatents
              
              $
              4,544,498
              
              
              $
              845,022
              
              12
      yearsTrademarks
              
              
              1,149,199
              
              
              
              220,953
              
              10
      yearsSole
      Source Contract
              
              
              1,144,039
              
              
              
              314,396
              
              7
      yearsPatents,
      Trademarks, and Sole Source Contract
              
              $
              6,837,736
              
              
              $
              1,380,371
              
              11
      years
  Aggregate
      Amortization ExpenseFor
      year ending December 31, 2008
                
                $
                646,855For
      year ending December 31, 2009
                
                $
                647,064For
      year ending December 31, 2010
                
                $
                647,064For
      year ending December 31, 2011
                
                $
                647,064For
      year ending December 31, 2012
                
                $
                602,766For
      year ending December 31, 2013
                
                $
                539,849For
      year ending December 31, 2014
                
                $
                482,819For
      year ending December 31, 2015
                
                $
                450,722For
      year ending December 31, 2016
                
                $
                404,102For
      year ending December 31, 2017
                
                $
                270,523For
      year ending December 31, 2018
                
                $
                128,341
 The
Company’s patents, trademarks, and sole source contract resulted from the April
28, 2005 acquisition of 51% of Hammonds Technical Services and from the August
1, 2006 acquisition of the 49% minority interests of the three Hammonds
subsidiaries.
 The
following table contains a summary of the intangible assets acquired from the
acquisition of Hammonds Technical Services on April 28, 2005:
  As
      of March 31, 2008Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                Average
      Weighted LivesPatents
                
                $
                1,806,387
                
                
                $
                561,087
                
                12
      yearsTrademarks
                
                
                465,199
                
                
                
                135,683
                
                10
      yearsSole
      Source Contract
                
                
                464,039
                
                
                
                193,350
                
                7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                
                $
                2,735,625
                
                
                $
                890,120
                
                11
      years
  On August
1, 2006, Hammonds acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. owned by Carl Hammonds, in consideration for the issuance of
16,000,000 restricted shares of common stock at a price of $0.25 a share. The
additional cost of $4,000,000 has been allocated to patents, trademarks, and
sole source contract for the additive injection system and is being amortized in
a manner equivalent to the amortization used on the intangible assets acquired
in the initial purchase of 51% of Hammonds.
Additionally, Hammonds incurred costs related to the securing of
additional patents totaling $26,393 in 2006, $75,718 during the year ended
December 31, 2007 and $9,978 during the three months ended March 31, 2008. The
following table contains a summary of the intangible assets acquired in 2006,
during the year ended December 31, 2007, and during the three months ended March
31, 2008:
  As
      of March 31, 2008Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                Average
      Weighted LivesPatents
                
                $
                2,748,089
                
                
                $
                375,904
                
                12
      yearsTrademarks
                
                
                684,000
                
                
                
                114,000
                
                10
      yearsSole
      Source Contract
                
                
                680,000
                
                
                
                161,905
                
                7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                
                $
                4,112,089
                
                
                $
                651,809
                
                11
      years
 
 Amortization
expense for the three months ended March 31, 2008 and 2007 was $161,557 and
$166,605, respectively.
  (9)
Short-term Notes Payable
  March
      31, 2008
              
              
              December
      31, 2007Note
      payable with interest at 10.5%, interest payments due
    monthly
              
              
              89,999
              
              
              
              89,999Insurance
      note payable with interest at 7.86%, principal and interest due in monthly
      payments of $32,492.73 through May 1, 2008
              
              
              32,493
              
              
              
              129,971$
              122,492
              
              
              $
              219,970
  Each of
the Company’s subsidiaries that have outstanding notes payable has secured such
notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from the Company.
 
 At
March 31, 2008 and December 31, 2007, the average annual interest rates of
our short-term borrowings were approximately 9.8% and 8.9%,
respectively.
 
 (10)
Long-term Debt
  Long-term
debt consisted of the following:
  March
      31, 2008
              
              
              December
      31, 2007Note
      payable to a bank, interest due quarterly at prime plus 1%, principal
      payment due August 26, 2009, secured by real property
              
              $
              1,000,000
              
              
              $
              1,000,000Note
      payable to bank, which allows the Company to borrow up to $2,000,000,
      interest due quarterly at prime plus 1%, principal payment due August 26,
      2009, secured by assets of the Company's subsidiary, Hammonds Technical
      Services, Inc.
              
              
              1,992,189
              
              
              
              1,992,189Note
      payable to a bank, which allows the Company to borrow up to $2,000,000,
      due in monthly payments of interest only, with interest at prime floating
      rate, with the principal balance due in June 2009, secured by assets of
      the Company's subsidiary, Delta Seaboard Well Service,
Inc.
              
              
              2,441,631
              
              
              
              1,876,631Note
      payable to bank due in monthly installments of principal and interest
      through July 2025 with interest at prime floating rate secured by real
      property
              
              
              421,690
              
              
              
              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
              
              
              542,959
              
              
              
              552,312Note
      payable to a bank, which allows the Company to borrow up to $5,000,000,
      interest due monthly at the prime rate, principal payment April 30, 2009,
      secured by assets of the Company's subsidiary, Northeastern Plastics,
      Inc.
              
              
              1,287,000
              
              
              
              1,254,000Note
      payable to a bank, due in monthly installments of interest only at prime
      plus 1%, with a principal balance due on August 26, 2009
              
              
              400,000
              
              
              
              400,000Note
      payable to a bank, due in quarterly installments of interest only at 7.5%,
      with a principal balance due on January 19, 2009
              
              
              1,000,000
              
              
              
              1,000,000Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
              
              
              65,949
              
              
              
              72,389Note
      payable to a bank, with interest at 9.25%, due in monthly installments of
      principal and interest of $4,054.12 through February 26, 2012, secured by
      assets of the Company’s subsidiary, Hammonds Technical Services,
      Inc.
              
              
              270,733
              
              
              
              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 $6,120.38, including
      interest at 8.25%, through August 9, 2012, secured by assets of the
      Company's subsidiary, Delta Seaboard Well Service, Inc.
              
              
              212,697
              
              
              
              279,204Other
      notes with various terms
              
              
              126,478
              
              
              
              141,24911,501,326
              
              
              
              10,952,279Less
      current portion
              
              
              (1,187,487
              )
              
              
              (185,328
              )$
              10,313,839
              
              
              $
              10,766,951
  Each of
the Company’s subsidiaries that have outstanding notes payable has secured such
notes by that subsidiary’s inventory, accounts receivable, property and
equipment and guarantees from the Company.
 
 Principal
repayment provisions of long-term debt are as follows at March 31,
2008:
  2008
              
              $
              1,187,4872009
              
              
              9,007,8942010
              
              
              609,8042011
              
              
              184,7512012
              
              
              185,223Thereafter
              
              
              326,167Total
              
              $
              11,501,326
  (11)
Related Party Notes Payable and Accounts Receivable
  Transactions
related to accounts receivable from related parties arise from compensation
arrangements, expense allowances and other similar items conducted in the
ordinary course of business.
  (12)
Capital Stock and Stock Options
  The
Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.001
par value per share, of which no shares are presently outstanding. The Preferred
Stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion, redemption rights and sinking fund provisions.
  The
Company is authorized to issue up to 10,000,000 shares of Common Stock, of which
864,000 are reserved for issuance pursuant to the exercise of warrants pursuant
to an employment agreement with the Company’s Chairman, CEO. On March 30, 2007,
the Company issued 144,000 stock warrants to the Company’s Chairman, CEO, with
an exercise price of $7.00 per share, expiring in 2 years, at a cost of $70,685
to the Company.  In connection with the Company's 20% stock dividend
to all shareholders on September 19, 2007, the terms of these
warrants were adjusted to reflect the dividend, resulting in the
warrant being exercisable to buy 172,800 shares for $5.83 per
share.
    The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2008 and 2007 as follows:
 
 March
      30, 2008
              
              
              March
      30, 2007Dividend
      yield
              
              
              0.00
              %
              
              
              0.00
              %Expected
      volatility
              
              
              38,64
              
              
              
              38.68Risk
      free interest
              
              
              2.5
              %
              
              
              6.25
              %Expected
      lives
              
              2
      years
              
              
              2
      years
  A summary
of the status of the Company's stock options to employees as of March 31, 2008
is presented below:
 
 Shares
              
              
              Weighted
      Average Exercise
                March
      31, 2008Outstanding
      at beginning of period
              
              
              172,800
              
              
              $
              5.83Granted
              
              
              172,800
              
              
              
              5.83Exercised
              
              
              -
              
              
              
              N/ACanceled
              
              
              -
              
              
              
              N/AOutstanding
      and exercisable at end of period
              
              
              345,600
              
              
              $
              5.83Weighted
      average fair value of options granted during the period
              
              
              172,800
              
              
              
              5.83
  The
following table summarizes information about fixed stock options to employees
outstanding at March 31, 2008:
  Exercise
      Price
              
              
              Number
      Outstanding and Exercisable at March 31, 2008$
              5.83
              
              
              
              345,600


(13)
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. Hammonds received net proceeds of approximately
$2,710,120 from the sale of Series A and Series B Preferred Stock.
  On
September 20, 2007, Hammonds  and VOMF agreed to  amend the
Series A, B and C Warrants to: (i) adjust the exercise price of all of the
Warrants to $0.10; and (ii) provide for the issuance of a total of 2,102,960
shares of Hammond's newly designated Series C Convertible Preferred Stock in
lieu of 21,029,599 shares of common stock. On September 21, 2007, VOMF delivered
a notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per Warrant from which Hammonds received net proceeds of $981,162
and VOMF cancelled a short-term promissory note in the amount of $1,000,000,
representing a loan made by VOMF to Hammonds on August 17, 2007.  As a
result of this agreement, there are no warrants outstanding related to the
Series A, B and C Convertible Preferred Stock.
 The
Company reviewed the following accounting standards to determine the appropriate
accounting for these issuances:
 - SFAS
No. 133: Accounting for
Derivative Instruments and Hedging Activities
 -
SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity
 -
EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock
 -
EITF 98-5: Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios
 -
EITF 00-27: Application of Issue No. 98-5 to Certain Convertible
Instruments
 -
EITF Topic D-98: Classification and Measurement of Redeemable
Securities
 -
ASR No. 268: Redeemable Preferred Stocks
  We
concluded that all components of these issuances should be classified as equity,
because the only way for the value of the conversion feature 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.
  The
Company 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
  On July
25, 2007, Hammonds and VOMF entered into an agreement pursuant to which VOMF
waived the cash dividends of $150,425 on the Series A and Series B Convertible
Preferred Stock accrued from August and September 2006, respectively, through
September 30, 2007.  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
the Company.
  (14)
Concentration of Credit Risk
  The
Company maintains its cash in commercial accounts at major financial
institutions. Although the financial institutions are considered creditworthy,
at March 31, 2008, the Company's cash balances exceeded the limits ($100,000)
covered by the Federal Deposit Insurance Corporation. The terms of these
deposits are on demand to minimize risk. The Company has not incurred losses
related to these deposits.
  Trade
accounts receivable subject the Company to the potential for credit risk with
customers in the retail and distribution sectors. To reduce credit risk, the
Company performs ongoing evaluations of its customer’s financial condition but
generally does not require collateral. During the three months ended March 31,
2008, the Company had one customer on a consolidated basis that accounted for
11% of the Company's revenues.
 
 We are
exposed to equity price risk on our portfolio of trading securities. As of March
31, 2008, our total equity holdings in publicly traded companies were valued at
$5,675,581, 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.  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.  The
market value of the trading securities for these two companies was
$4,715,971 at March 31, 2008, or 83% 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.
  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. The Company seeks to manage exposure to adverse equity
returns by maintaining diversified securities portfolios.
 The
following table represents the potential decrease in fair values of our
marketable equity securities that are sensitive to changes in the stock market.
Fair value deteriorations of 50%, 35% and 15% were selected for illustrative
purposes because none is more likely to occur than another.
  50%
                
                
                
                35%
                
                
                
                15%Marketable
      equity securities
                
                $
                (2,837,791
                )
                
                $
                (1,986,453
                )
                
                $
                (851,337
                )
  (15)
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. The Company applied this guidance
and during the three months ended March 31, 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. The Company has not recorded any
liabilities in connection with this matter because management has determined
that return of any grant receipts is not likely.  Based on the advice of
the State of Texas authorities who administer the grant, the taxability of this
grant has not been determined and the advice of the Internal Revenue Service has
been inconsistent.  The Company is still determining the effect this
will have, but believes it will not materially affect the Company because of the
tax loss carryforwards explained in note (16) below.
 
 (16)
Income Taxes
  The
provision for income taxes as of March 31, 2008 and 2007 consists of the
following:
  March
      31, 2008
                
                
                March
      31, 2007Current
      taxes
                
                $
                (105,059
                )
                
                $
                (681,658
                )Deferred
      tax benefit
                
                
                (238,917
                )
                
                
                -Benefits
      of operating loss carryforwards
                
                
                343,976
                
                
                
                681,658Current
      Federal Taxes
                
                
                -
                
                
                $
                -Texas
      Margin Tax
                
                
                23,008
                
                
                
                -Total
      provision for income taxes
                
                
                23,008
                
                
                $
                -
  The tax
provision differs from amounts that would be calculated by applying federal
statutory rates to income before income taxes primarily because:
  - the
Company 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 the Company
as a whole;
 - no tax
benefits have been recorded for nondeductible expenses totaling $(172,459)
and
 - the
valuation allowance for deferred tax assets increased by
$1,770,309.
  The
following table sets forth a reconciliation of the statutory income tax for the
years ended March 31, 2008 and 2007:
 
 March
      31, 2008
                
                
                March
      31, 2007Net
      income (loss) before taxes
                
                $
                (3,406,046
                )
                
                $
                (1,292,900
                )Income
      tax benefit computed at statutory rate
                
                $
                (991,818
                )
                
                $
                (439,586
                )Permanent
      differences
                
                
                (58,636
                )
                
                
                84,600Net
      effects of temporary differences
                
                
                105,058
                
                
                
                (326,672
                )Effect
      of federal graduated rates
                
                
                1,359,425
                
                
                
                -Increase
      (decrease) in valuation allowance
                
                
                (414,029
                )
                
                
                681,658Texas
      Margin Tax
                
                
                23,008
                
                
                
                -$
                23,008
                
                
                $
                -
  Deferred
taxes are recognized for temporary differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences
relate primarily to depreciable assets (using accelerated depreciation methods
for income tax purposes) and unrealized gains and losses on trading
securities.  The tax effects of temporary differences and
carryforwards that give rise to significant portions of deferred tax assets and
liabilities consist of the following:
 March
      31, 2008
                
                
                December
      31, 2007Deferred
      tax assets:Net
      operating loss carryforwards
                
                $
                5,688,405
                
                
                $
                5,344,429Bad
      debts
                
                
                
                
                
                
                39,505Unrealized
      loss on trading securities
                
                
                466,218
                
                
                
                1,061Inventory
                
                
                79,723
                
                
                
                47,926Valuation
      allowance
                
                
                (6,284,681
                )
                
                
                (4,573,456
                )Deferred
      tax asset
                
                $
                (50,335
                )
                
                $
                859,465Deferred
      tax liabilities:Fixed
      asset temporary difference
                
                $
                5,478
                
                
                $
                152,744Intangible
      asset temporary difference
                
                
                37,280
                
                
                
                7,415Current
      installments on long-term debt
                
                
                37,265
                
                
                
                35,012Unrealized
      gain on trading securities
                
                
                26,177
                
                
                
                817,515Other
                
                
                -
                
                
                
                3,314Deferred
      tax liability
                
                $
                106,200
                
                
                $
                1,016,000Net
      deferred tax liability
                
                $
                156,535
                
                
                $
                156,535
 
 The
Company has loss carryforwards totaling $16,730,603 available at March 31,
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$
                3,815,364
                
                2022$
                1,011,693
                
                2023
 (17)
Earnings Per Share
  Basic
earnings per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share, in addition to the
weighted average determined for basic loss per share, include common stock
equivalents, which would arise from the conversion of the preferred stock to
common shares.
 
 Quarter
      Ended
              
              
              Quarter
      EndedMarch
      31, 2008
              
              
              March
      31, 2007Basic
      income (loss) per share:Net
      income (loss)
              
              $
              (3,180,812
              )
              
              $
              (1,292,900
              )Weighted
      average common shares outstanding
              
              
              7,112,258
              
              
              
              5,460,951Weighted
      average common shares outstanding for diluted net income (loss) per
      share
              
              
              7,112,258
              
              
              
              5,460,951Net
      income (loss) per share - basic
              
              $
              (0.45
              )
              
              $
              (0.24
              )Net
      income (loss) per share - diluted
              
              $
              (0.45
              )
              
              $
              (0.24
              )
  (18)
Commitments and Contingencies
  Various
key officials of the Company have entered into employment agreements with the
Company. In March 2007, the CEO of the Company entered into a five-year
employment agreement which provides for a monthly salary of $10,000 plus a bonus
as determined by the Board of Directors. Also, the agreement provides for the
grant of 144,000 warrants per annum with an exercise price of $7.00, beginning
March 15, 2007. The CFO of the Company entered into a three-year employment
agreement beginning June 1, 2007, which provides for an annual salary of $75,000
plus a bonus as determined by the Board of Directors. The president of NPI
previously entered into an at-will employment agreement that provides an annual
salary of $158,000 plus a bonus based upon operating results of this subsidiary.
The employment agreement also grants the president of NPI an option to purchase
NPI common stock equal to 5% of NPI's equity at an exercise price of 5% of the
total stockholder's equity, if NPI conducts an initial public offering of its
common stock during the time of his employment. Delta’s president and vice
president entered into an employment agreement that provides for an annual base
salary of $150,000 each. The employment agreement for Hammonds’ president
provides for an annual base salary of $90,000.
 
 As of
December 31, 2007, our Delta subsidiary is involved in three related lawsuits.
In the first lawsuit, Fort Apache Energy, Inc. v. Delta Seaboard Well Service,
Inc., Fort Apache alleges that Delta breached its contract with Fort Apache and
violated the Texas Deceptive Trade and Practices Act. Fort Apache drilled a well
which they subsequently decided to plug. Fort Apache contracted with Delta to
plug the well. Fort Apache alleges that Delta bid the job with a specified lump
sum plugging operation and that Delta went over the bid amount. Fort Apache
claims that it never authorized the costs of the extra labor, operation or
additional equipment to plug the well. Also, Fort Apache claims that the well is
still commercially viable as Delta encountered pressure at the well site during
its plugging operations. Fort Apache claims that Delta acted negligently in
failing to contact Fort Apache regarding the pressure at the well so as to allow
Fort Apache to determine the feasibility of production at the well. Fort Apache
claims that it was damaged as a result of the omissions of Delta, and Delta’s
actions in force-plugging the well and that its damages are the costs of
drilling a new well.
 
 The trial
was divided into two phases:  (i) Phase I to try the claims of Fort
Apache against Delta: and (ii) Phase II to try the counterclaim and the issue of
attorneys’ fees.  Closing arguments of Phase I of the bench trial were
heard by the judge on September 17, 2007.  On January 30, 2008, the
judge entered her Findings of Fact and Conclusions of Law and, as a result of a
request by Delta, issued an Amended Findings of Fact and Conclusions of Law on
February 15, 2008, in which the judge found, among other things, that Delta
breached its contract with Fort Apache and acted negligently, which actions and
inactions caused the loss of Fort Apache’s wellbore.  The judge found
actual damages to be $1,508,846.  The second phase of the
trial occurred on March 6, 2008. On April 1, 2008, the judge entered
Phase II Findings of Fact and Conclusions of Law, stating that Fort Apache is
entitled to $373,000 in attorneys' fees through the time of trial and up to
$76,500 in attorneys' fees for any appeal.  As of this date, a final
judgment has not been entered in the case.  Management is vigorously
defending this matter and Delta has retained the services of Byron Keeling of
the firm Keeling & Downes to file an appeal if an adverse judgment is
entered against Delta.  An evaluation of the outcome of this case
cannot be made at this time. In the unlikely event that Fort Apache successfully
defends any judgment in this case on appeal, management believes that any
damages assessed will be recoverable through favorable verdicts in the two
lawsuits discussed below.
  In the
second lawsuit, 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.  Written
discovery has been exchanged between both Gemini and Delta.  No
depositions have been taken in this matter.  Summary judgment motions
must be heard by June 20, 2008, and expert designations for parties seeking
affirmative relief are due on that date.  Defense expert designations
are due July 21, 2008.  The discovery deadline in this litigation is
September 19, 2008, and a trial date has not yet been
reset.  Management is vigorously defending this matter and asserting
its affirmative claims.  An evaluation cannot be made at this time in
connection with the outcome of the Gemini litigation.
 
 In the
third lawsuit, 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.  One of the
broker’s defenses is that all claims in the Broker Lawsuit are barred by the
March 2007 settlement reached in Gemini Insurance Company, Houstoun, Woodard,
Easton, Gentle Tomforde and Anderson, Inc., D/B/A Insurance Alliance and Robert
Holman for a rig damaged in Hurricane Katrina, mentioned above.  On
April 15, 2008, the broker filed a motion for summary judgment asserting that
this release applies to the claims in the Broker Lawsuit and thus, the broker is
entitled to judgment as a matter of law.  The motion for summary judgment
is set for oral hearing on May 23, 2008.  The response to the motion is due
May 16, 2008.  If the release is found by the court to include the
claims asserted in the Broker Lawsuit, the Broker Lawsuit will be barred and
will be dismissed by the court.  In such event, Delta would have a
potential professional malpractice claim against the attorney that represented
it in the Property Lawsuit for not properly advising Delta as to the scope and
effect of the release.  If the court finds that the release does not
bar the Broker Lawsuit, then it will continue on the merits of the case. 
As a result, it is premature to analyze the potential outcome of the Broker
Lawsuit.  As part of the attorney’s work on the Broker Lawsuit, the
attorneys determined that Delta has a potential claim against American
International Specialty Lines Insurance Company (AISLIC) for coverage for the
Fort Apache lawsuit under a commercial umbrella policy.  AISLIC was
first provided notice of the Fort Apache lawsuit in March 2008.  On
March 17, 2008, the attorneys received an initial response from AISLIC,
acknowledging receipt of the notice and indicated that a claims technician would
be assigned to the matter.  An evaluation of these potential claims is
premature because AISLIC has not taken a coverage position at this
time.
 
 In the
event that Delta is found liable to Fort Apache for damages, and Delta does not
prevail against Gemini, its insurance carrier, and / or Insurance Alliance and
Robert Holman, its insurance agent, the Company’s financial condition could be
adversely affected.  However, Delta expects to prevail in these matters,
the Company has not recorded any liabilities in connection with these
lawsuits.
 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 March 31, 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. The Company has not recorded any liabilities in connection
with this matter because management has determined that return of any grant
receipts is not likely.
 The
Hammonds Companies lease office space under an operating lease which expires in
October 2016. Future minimum lease payments under the operating lease are as
follows:
 
 Year
      December 31,
              
              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 2009. Future minimum
lease payments are as follows:
  Year
      December 31,
              
              Amount2008
              
              $
              36,0612009
              
              
              18,030$
              54,091
 
 (19)
Related Party Transactions
  The stock
grants to related parties mentioned below were accounted for under FASB
Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant
date fair values.
  On March
30, 2008, the Company issued 172,800 stock warrants to the Company’s Chairman,
CEO, with an exercise price of $5.83 per share, expiring in 2 years, at a cost
of $88,063 to the Company. See note 12 for additional valuation
information.
  (20)
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- 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.
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performances
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses and foreign exchange gains and
losses.
  The
Company's reportable segments are strategic business units that offer different
technology and marketing strategies. Most of the businesses were acquired as
subsidiaries and the management at the time of the acquisition was
retained.
  The
Company's areas of operations are principally in the United States. No single
foreign country or geographic area is significant to the consolidated financial
statements.
 Consolidated
revenues from external customers, operating income/(losses), and identifiable
assets were as follows:
 March
      31, 2008
                  
                  
                  March
      31, 2007Revenues:Hammonds
      Technical Services
                  
                  $
                  1,151,872
                  
                  
                  $
                  650,483Hammonds
      Fuel Additives
                  
                  
                  272,598
                  
                  
                  
                  309,008Hammonds
      Water Treatment
                  
                  
                  780,687
                  
                  
                  
                  659,908Northeastern
      Plastics
                  
                  
                  1,427,956
                  
                  
                  
                  2,332,925Delta
      Seaboard
                  
                  
                  2,082,949
                  
                  
                  
                  2,660,246$
                  5,716,062
                  
                  
                  $
                  6,612,570Income
      (loss) from operations:Hammonds
      Technical Services
                  
                  $
                  (676,328
                  )
                  
                  $
                  (761,401
                  )Hammonds
      Fuel Additives
                  
                  
                  14,477
                  
                  
                  
                  40,162Hammonds
      Water Treatment
                  
                  
                  29,266
                  
                  
                  
                  20,298Northeastern
      Plastics
                  
                  
                  (139,925
                  )
                  
                  
                  (51,295
                  )Delta
      Seaboard
                  
                  
                  (529,800
                  )
                  
                  
                  81,127Corporate
                  
                  
                  (811,129
                  )
                  
                  
                  (773,713
                  )Income
      (loss) from operations
                  
                  
                  (2,113,439
                  )
                  
                  
                  (1,444,822
                  )Other
      income (expenses)
                  
                  
                  (1,292,607
                  )
                  
                  
                  199,958Net
      income (loss) before income tax
                  
                  $
                  (3,406,046
                  )
                  
                  $
                  (1,244,864
                  )Identifiable
      assets:
                  
                  
                  March
      31, 2008
                  
                  
                  
                  December
      31, 2007Hammonds
      Technical Services
                  
                  $
                  8,840,047
                  
                  
                  $
                  8,925,595Hammonds
      Fuel Additives
                  
                  
                  2,076,051
                  
                  
                  
                  2,025,761Hammonds
      Water Treatment
                  
                  
                  758,902
                  
                  
                  
                  772,179Northeastern
      Plastics
                  
                  
                  6,380,884
                  
                  
                  
                  6,592,980Delta
      Seaboard
                  
                  
                  5,325,408
                  
                  
                  
                  5,974,714Corporate
                  
                  
                  17,917,368
                  
                  
                  
                  20,295,325$
                  41,298,660
                  
                  
                  $
                  44,586,554
 
 (21)
Subsequent Events
 On April
16, 2008, the board of directors of the Company declared a special
dividend of shares of common stock of its subsidiary, Hammond Industries,
Inc. to the Company's shareholders. Shareholders will be issued one
share of HMDI common stock (free-trading to non-affiliates) for each share of
the Company's common stock owned and held on the record date.  According
to the announcement of the special dividend, the shares of the Company's common
stock should be issued on or about Tuesday, August 12, 2008.  On May 7,
2008, the Company announced that the record date for the special dividend had to
be postponed and would be rescheduled.
   Back to Table of Contents


ITEM2. 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 48.1% 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.
  The
condensed consolidated balance sheets, statements of operations and
comprehensive income, and cash flow included herein are unaudited, except for
the condensed consolidated balance sheet as of December 31, 2007. The unaudited
financial statements include, in the opinion of management, all the adjustments,
consisting only of the normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The unaudited financial statements included herein have
been prepared in accordance with the rules of the Securities and Exchange
Commission for Form 10-Q and accordingly do not include all footnote disclosures
that would normally be included in financial statements prepared in accordance
with generally accepted accounting principles, although the Company believes
that the disclosures presented are adequate to make the information presented
not misleading.
  The
nature of the Company’s business is such that the results of interim periods are
not necessarily indicative of results that may be expected for any future
interim period or for a full year.




Results
of Operations




Three months Ended March 31,
2008 Compared to Three months Ended March 31, 2007.




Net revenues. For the three
month period ended March 31, 2008, our consolidated net revenues were
$5,716,062, compared to $6,612,570 for the three month period ended March 31,
2007, or a decrease of $896,508.




Hammonds'
revenues increased to $2,205,157 for the three months ended March 31, 2008,
compared to $1,619,399 for the same period in 2007, or an increase of
$585,758, or 36%.  The
increase in revenues was due to higher demand for Hammonds Water Treatment
products and increased sales of Hammonds Technical Services’ transport mounted
injection systems and Hammonds’ line of Omni Directional Vehicles (ODVs®). 
Hammonds Water Treatment revenues increased by $120,779, or 18%, and Hammonds
Technical Services revenues increased by $501,389, or 77%.  In addition,
Hammonds projected backlog of orders is $4.2 million as of March 31,
2008.




NPI
reported revenues of $1,427,956 for the three months ended March 31, 2008,
compared to $2,332,925 for the same period in 2007.  The decline in
revenues of $904,969 is due to an overstock position from the 2007 holiday
season from one large customer and an order for another large customer that was
expected for the first quarter, but was delayed to the second quarter because
the shipping vessel was overbooked.  Sales under the MOTOR
TREND® and Good
Choice®programs have remained steady or grown slightly during the first
quarter.  A new 2008 "big box" customer has been ordering consistently
and NPI received its first order from another new 2008 "big box" customer in the
second quarter, which is ahead of NPI's forecast. 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.


Delta
reported revenues of $2,082,949 for the three months ended March 31, 2008,
compared to $2,660,246 for the same period in 2007, or a decrease of
$577,297.  Pipe sales revenues were $1,095,661 for the three months ended
March 31, 2008, compared to $1,446,064 for the same period in 2007, representing
a decrease of $350,403, or 24%.  This decrease is primarily due to two of
Delta's larger pipe customers completing their drilling programs and selling
their production at the end of 2007.  Delta is hopeful that these
two companies will develop new drilling programs and pipe sales will begin to
increase in the second or third quarter of 2008. Rig
service revenues for the first quarter of 2008 were $987,289, compared to
$1,214,182 for the same period in 2007, representing a decrease of $226,893, or
19%.  This decrease is due to a rig being taken out of service
for extensive maintenance in February.  Delta anticipates putting the
rig back into service and will activate a seventh service rig on or about May
15, 2008.




Net loss from operations.Our
consolidated net loss from operations for the three month period ended March 31,
2008 was $2,113,439, compared to a loss of $1,444,822 during the same three
month period in the prior year. The primary reason for the increase in loss from
operations of $668,617 was due to an increase in net loss from operations
from Delta of $610,927, to a net loss of $529,800 for the three month period
ended March 31, 2008, compared to net income from operations of $81,127 for the
three month period ended March 31, 2007.  Delta's revenues declined by
$577,297, as described above, and operating costs increased, primarily due to
vendors passing along higher fuel costs for materials and services provided
in the generation of rig service and pipe sales revenues.




Other income.Other expense
was $1,292,607 for the three month period ended March 31, 2008, compared
to other income of $199,958 for the same period in the prior year. 
Net realized/unrealized loss on trading securities was $1,360,280 for the three
month period ended March 31, 2008, compared to $44,214 for the same three month
period in the prior year.  The net unrealized loss on trading securities of
$1,304,853 was due primarily to declines in the market values of our investments
in OI Corporation and Rubicon Financial Incorporated of $1,191,080. 
Interest expense was $58,217 lower in the first quarter of 2008 than it was
in the same period in 2007.




Net loss.Net loss was
$3,180,812 in the first quarter of 2008, compared to $1,292,900 in the same
period in 2007.  Our net loss of $3,180,812 included non-cash expenses
of $1,817,983, including unrealized losses on the sale of trading
securities of $1,304,853, depreciation and amortization of $339,097, and
non-cash compensation of $174,033.  Our net loss of $1,292,900 for the
three months ended March 31, 2007 included non-cash expenses of $521,009,
including compensation of $243,460 and depreciation and amortization
expenses of $277,549.




Liquidity
and Capital Resources




Total assets/working capital.Total assets at March 31, 2008 were $41,298,660, compared to $44,586,554at December 31, 2007, representing a decrease of $3,287,894.  At
March 31, 2008, consolidated working capital was $23,833,042, compared to
working capital of $27,790,372 at December 31, 2007, representing a decrease of
$3,957,330.  The primary reason for the decrease in working capital was a
non-cash net unrealized loss on trading securities of $1,304,853. 
Additionally, working capital was used to fund operations and for the
purchase of plant and equipment.




Cash flow from operations.For the three months ended March 31, 2008, we had negative cash flow from
operations of $1,974,624, compared to negative cash flow from operations of
$1,043,583 during the same period in the prior year. The decrease in cash
flow from operations was the result of an increase in our net loss
from $1,292,900 for three months ended March 31, 2007 to $3,180,812 for the
three months ended March 31, 2008. Our net loss of $3,048,650 included
non-cash expenses of $1,817,983, including unrealized losses on the sale of
trading securities of $1,304,853, depreciation and amortization of $339,097, and
non-cash compensation of $174,033.  Our inventories increased by
$826,871 for the three months ended March 31, 2008, compared to an increase of
$767,986 during the three months ended March 31, 2007.  We increased our
investments in trading securities by $225,479 during the three months ended
March 31, 2008.  Accounts receivable decreased during the three months
ended March 31, 2008 by $1,105,043 compared to a decrease of $1,161,066 during
the same three month period in the prior year.  Prepaid
expenses decreased by $84,731, other assets increased by
$58,204, and accounts payable decreased by $205,411 for the three
months ended March 31, 2008.  Our net loss of $1,292,900 for the three
months ended March 31, 2007 included non-cash expenses of $521,009,
including compensation of $243,460 and depreciation and amortization
expenses of $277,549.  For the three months ended March 31, 2007, trading
securities increased by $90,303, prepaid expenses increased by $212,092, other
assets increased by $182,549, and accounts payable decreased by
$144,050.




Cash flow from investing activities.Our investing activities provided $1,298,792 during the three month
period ended March 31, 2008, as a result of a net reduction in investment in
certificates of deposit of $1,255,200, 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 $198,246.  This
is compared to cash provided by investing activities during the same period in
the prior year in the amount of $124,117
during the three month period ended March 31, 2007, as a result of a net
reduction in investment in certificates of deposit of $114,000, receipts of
principal payments on notes receivable of $307,427, offset by purchases of
property, equipment, and expenditures related to securing additional patents of
$272,310.




Cash flow from financing activities.During the three months ended March 31, 2008, our financing activities
provided $268,297 compared to $1,295,565 during the same period of 2007. During
the 2008 period, we received proceeds from line-of-credit agreements of
$598,000.  We reduced our borrowings on margin loans by $149,836 and made
payments of $146,432 on debt during the three month period ended March 31,
2008.  During
the 2007 period, we received net proceeds from the issuance of common stock of
our subsidiary in the amount of $694,672, from short-term borrowings in the
amount of $300,000, from long-term debt of $264,946, and from line-of-credit
agreements of $324,218. We made payments of $257,664 on short-term notes and
principal payments on long-term debt of $27,768 during the three month period
ended March 31, 2007.




Real estate.During the
second quarter of 2007, the Company purchased for investment a 174 acre
tract of land in Waller County, Texas for $1,684,066. This property is listed
for sale with a real estate broker.  This property is not going to be
developed by nor is it being held as inventory by the Company.  The Company
continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou
and Galveston Bay in Galveston County, Texas. The book value for this property
is $225,000.  In November 2005, the Company signed a contract for sale
of the property for a cash consideration of $16,000,000 with Lakeland Partners
III. In January 2007, Lakeland assigned all of its interest in the contract to
Westfield Forest, L.P. Westfield is a recognized developer of waterfront
properties in the Houston, Texas area. 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.  On November 12, 2007, the contract
was amended to extend the feasibility period to July 31, 2008.  No revenue
has been recognized for this transaction because the development of the property
requires permits from the City of Texas City and the U. S. Army Corp of
Engineers, which the developer believes they can obtain timely within the terms
of the contract.  As a result, the transaction has not had all the elements
necessary for it to be considered a completed revenue recognition
event.




Back to Table of Contents


ITEM3. 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 March 31, 2008, due to the
generally short maturities of these items. At March 31, 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 March 31, 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 March
31, 2008, our total equity holdings in publicly traded companies were valued at
$5,675,581, 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.  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.  The
market value of the trading securities for these two companies was
$4,715,971 at March 31, 2008, or 83% 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. 
 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. The Company seeks to manage exposure to adverse equity
returns by maintaining diversified securities portfolios.
 The
following table represents the potential decrease in fair values of our
marketable equity securities that are sensitive to changes in the stock market.
Fair value deteriorations of 50%, 35% and 15% were selected for illustrative
purposes because none is more likely to occur than another.
  50%
                
                
                
                35%
                
                
                
                15%Marketable
      equity securities
                
                $
                (2,837,791
                )
                
                $
                (1,986,453
                )
                
                $
                (851,337
                )




ITEM4T. CONTROLS AND PROCEDURES




Evaluation of disclosure controls
and procedures.As of March 31, 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.




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




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




Back to Table of Contents




PART
II - OTHER INFORMATION






ITEM1. LEGAL PROCEEDINGS




Fort Apache Energy, Inc. v. Delta
Seaboard Well Service, Inc.






Gemini Insurance Company v. Delta
Seaboard Well Service, Inc.


There have been no material developments in this case
since December 31, 2007.




Delta Seaboard Well Service, Inc. v.
Houstoun, Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance
Alliance and Robert Holman










In the
event that Delta is found liable to Fort Apache for damages, and Delta does not
prevail against Gemini, its insurance carrier, and / or Insurance Alliance and
Robert Holman, its insurance agent, the Company’s financial condition could be
adversely affected.  However, Delta expects to prevail in these matters,
the Company has not recorded any liabilities in connection with these
lawsuits.




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.






ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS








ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None.




ITEM5. OTHER INFORMATION




None.




ITEM6. 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 March 19, 2008 with disclosure under
Item 4.02, "Non-reliance on previously issued financial statements or a related
audit report or completed interim review."  The Registrant filed a Form 8-K
on April 16, 2008 with disclosure under Item 8.01, "Other Events" and Item 9.01,
"Financial Statements and Exhibits."




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SIGNATURES






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






/s/ DANIEL
DROR


CEO, PRESIDENT AND CHAIRMAN


Dated:May 14,
2008






/s/ SHERRY L.
COUTURIER


CHIEF FINANCIAL OFFICER


Dated:May 14,
2008