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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**___________________**FORM 10-Q**_________________________

**ý                                QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

  

For the quarterly period endedJune 30, 2007

  

OR

  

** ̈                                TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

  

For the transition period from               to              

  

Commission File No.:1-33640

**AMERICANINTERNATIONAL INDUSTRIES, INC.**(Exact Name Of RegistrantAs 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'sTelephone Number, Including Area Code: (281) 334-9479

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes  ̈ No x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.
| Large accelerated    filer  ̈ | Accelerated filer  ̈  | Non-accelerated    filer x |
|----------------------------------|-------------------------------|--------------------------------|

At June 30, 2007,the Registrant had 5,484,002 shares of common stock issued.

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**TABLE OF CONTENTS**
| Item | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              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|      | **PART I - FINANCIAL INFORMATION**  ITEM 1.FINANCIAL STATEMENTS.3ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL    CONDITION AND RESULTS OF OPERATION.20ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS22ITEM 4.CONTROLS    AND PROCEDURES.23  
**PART II - OTHER INFORMATION**  ITEM 1.LEGAL    PROCEEDINGS.23ITEM 1A.RISK FACTORS23ITEM 2.UNREGISTERED    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS23ITEM 3.DEFAULT    UPON SENIOR SECURITIES.23ITEM 4.SUBMISSION    OF MATERS TO A VOTE OF SECURITY HOLDERS.23ITEM 5.OTHER    INFORMATION.23ITEM 6.EXHIBITS24
 
****
**PART I - FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS****Back to Table of Contents
Condensed    Consolidated Financial Statements   Consolidated Balance    Sheets - June 30, 2007 (Unaudited) and December 31, 2006 (Audited)4   Unaudited    Consolidated Statements of Operations - Three and six month ended June 30, 2007 and 20065   Unaudited    Consolidated Statement of Cash Flows - Six months ended June 30, 2007 and 20066Notes to Unaudited Condensed Consolidated Financial    Statements7**AMERICAN    INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**Consolidated Balance SheetsBack to Table    of ContentsJune 30, 2007 and    December 31, 2006   **June 30, 2007****December 31, 2006**   
(Unaudited)
(Restated)(Audited)
AssetsCurrent assets:
      Cash and cash equivalents
$
2,919,185
$
3,275,803   Certificate of    deposit5,925,0006,139,000   Trading securities569,445724,255   Accounts    receivable, less allowance for doubtful accounts      of    $232,307 at June 30, 2007 and December 31, 20064,726,4985,221,072   Current portion of    notes receivable683,5111,021,593   Accounts and notes    receivable from related parties225,250235,000   Inventories6,273,9565,303,418   Real estate    acquired for resale1,909,066225,000   Drilling rigs held    for sale187,611187,611   Prepaid expenses    and other current assets844,010320,498        Total current assets24,263,53222,653,250   Long-term notes receivable,    less current portion4,065,9054,043,322Investment in Whittingdon Oil    & Gas6,0006,000Property and equipment, net of    accumulated depreciation and amortization3,768,1313,141,867Goodwill, less accumulated    amortization of  $205,295 at June 30,    2007 and December 31, 2006674,539674,539Patents and trademarks, net of    amortization5,710,4606,038,870Other assets556,89539,083          Total assets$39,045,462$36,596,931
Liabilities    and Stockholders' Equity  Current liabilities:   Accounts payable    and accrued expenses$3,145,484$3,667,108   Margin loans from    financial institutions146,296341,058   Short-term notes    payable720,242917,301   Current    installments of long-term debt72,437102,580        Total current liabilities4,084,4595,028,047  Long-term debt, less current    installments11,007,0046,945,282Deferred tax liability503,200503,200Minority interest1,802,5461,558,395        Total liabilities17,397,20914,034,924  Stockholders' equity:   Preferred stock,    $0.001par value, 1,000,000 authorized: none issued   Common stock,    $0.001 par value, 10,000,000 authorized:         5,484,002 shares issued and 5,455,802 shares outstanding at June 30, 2007;        5,340,852 shares issued and 5,335,452 shares outstanding at December 31, 20065,4845,341   Additional paid-in    capital38,940,25037,324,641   Accumulated    deficit(17,148,905)(15,229,064)   Common stock    issuance obligation-508,620  21,796,82922,609,538   Less treasury    stock, at cost (28,200 shares at June 30, 2007       and    5,400 shares at December 31, 2006)(148,576)(47,531)     Total    stockholders' equity21,648,25322,562,007        Total liabilities and stockholders' equity39,045,462
$36,596,931  The accompanying    notes are an integral part of these consolidated financial statements**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**Consolidated Statements of OperationsBack to Table    of ContentsThree    and six months ended June 30, 2007 and 2006 (Unaudited)  **Three Months Ended**Three Months Ended**Six Months Ended**Six Months Ended   
**June 30, 2007**
**June 30, 2006**
**June 30, 2007**
**June 30, 2006**  Revenues****
$
7,027,294
$
7,551,558
$
13,639,864
$
14,411,440Costs and expenses:    Cost of sales 
4,358,831
4,748,538
8,962,355
9,064,751   Selling, general    and administrative 
3,448,631
2,768,636
6,902,499
5,630,508    ****Total operating expenses****
7,807,462
7,517,174
15,864,854
14,695,259  Operating income (loss)
(780,168)
34,384
(2,224,990)
(283,819)   Other income (expenses):    Interest and    dividend income 
272,475
39,313
433,164
99,551   Realized gains    (losses) on investments
(30,303)
-
(629,008)
-   Unrealized gains    (losses) on trading securities
(544)
(1,165)
642,374
(10,714)   Interest expense 
(240,785)
(134,792)
(460,597)
(305,066)   Texas Emissions    Reduction Plan Grant347,160-347,160-   Gain on sale of    assets3,944-3,944-   Other income    (expense)
(63,031)
27,144
151,838
20,699     Total    other income (expenses)
288,916
(69,500)
488,875
(195,530)        Net    loss before income tax(491,252)(35,116)(1,736,115)(479,349)Provision for income taxes----       Net    loss from operations before minority interest
(491,252)
(35,116)
(1,736,115)
(479,349)Minority interest
(196,114)
(133,198)
(244,151)
(372,628)        Net loss
$(687,366)
$(168,314)
$(1,980,266)$(851,977)          Preferred dividends105,425-60,425-        Net loss applicable to common shareholders
(581,941)
(168,314)
(1,919,841)
(851,977)   Net loss applicable to common    shareholders:      Basic and diluted$
(0.11)$
(0.04)$
(0.35)
$
(0.20)   Weighted average common shares:      Basic and diluted
5,486,981
4,364,828
5,474,038
4,354,448   The accompanying    notes are an integral part of these consolidated financial statements.**AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES**Consolidated Statements of Cash FlowsBack to Table    of ContentsSix    months ended June 30, 2007 and 2006 (Unaudited)     **Six Months Ended**Six Months Ended   
**June 30, 2007**
**June 30, 2006****  ****Cash    flows from operating activities:**   Net loss
$
(1,980,266)
$
(851,977)   Adjustments to    reconcile net loss to net cash used in operating activities:           Depreciation and amortization
576,347
326,776          Common shares issued for services 
341,775
357,614          Compensation - stock warrants
70,685
-          Realized (gains) losses on the sale of trading securities 
629,008
-          Unrealized (gain) losses on the sale of trading securities
(642,374)
122,030          Stock returned in lawsuit settlement
(39,600)
-          Texas Emissions Reduction Plan Grant(347,160)-          Gain on sale of assets(3,944)-          Minority interest244,151372,628     (Increase)    decrease of operating assets, net of acquisition of subsidiary:           Accounts receivable 
494,574
1,479,271          Trading securities
268,175
-       Inventories    
(970,538)
(815,819)       Prepaid    expenses and other current assets
(523,512)
(763,931)       Other    assets(517,812)33,625          Increase (decrease) in operating liabilities, net of acquisition of subsidiary:              Accounts payable and accrued expenses(461,199)(825,915)                **Net cash used in operating activities**
(2,861,690)
(565,698)  **Cash    flows from investing activities:**   Purchase of    property and equipment 
(522,256)
(167,018)   Patents and    trademarks(4,840)(25,193)   Proceeds from the    sale of property4,000-   Issuance of note    receivable(25,000)-   Investment in    certificate of deposit(3,100,000)-   Redemption of    certificate of deposit3,214,000406,734   Notes receivable340,498191,772   Loans to/from    related parties
9,750
(255,553)               **Net cash provided by (used in) investing activities**
(83,848)
150,742   **Cash    flows from financing activities:**   Net borrowings    under line-of-credit agreements
1,518,218
-   Proceeds from    short-term debt657,420212,974   Proceeds from    long-term debt
362,185
666,858   Margin loans(194,762)30,324   Proceeds from    issuance of common stock of subsidiary694,672-   Principal payments    on short-term debt
(322,609)
(447,449)   Principal payments    on long-term debt
(64,759)
(50,637)   Acquisition on    treasury stock
(61,445)
-               **Net cash provided by financing activities**
2,588,920
412,070                 Net increase (decrease) in cash and cash equivalents
(356,618)
(2,886)Cash and cash equivalents at    beginning of year 
3,275,803
2,709,105**Cash    and cash equivalents at end of year**
$
2,919,185
$
2,706,219   Supplemental schedule of cash    flow information:    Interest paid 
$
460,597
$
305,066  Non-cash transactions:   Issuance of note    payable for real estate acquired for sale
$
1,684,066
$
-  The accompanying    notes are an integral part of these consolidated financial statements
**American International Industries, Inc.**Back to Table of Contents****Notes to UnauditedCondensed Consolidated Financial Statements
**(1) Summary of Significant Accounting Policies 

Organization, Ownership and Business 

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

The consolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries: Northeastern Plastics, Inc., and Brenham Oil & Gas, Inc.,and its majority owned subsidiaries, Delta Seaboard Well Services, Inc. and HammondsIndustries, Inc. (OTCBB: "HMDI"), formerly International American Technologies,Inc. In accordance with FIN46(r), the Company consolidates HMDI although its ownership isless than 51%, because the Company controls the HMDI Board of Directors by havingdesignated two of the three members of HMDI’s Board of Directors. Since Hammonds isincurring losses and there is no minority interest, the Company recognizes 100% ofHammond’s losses. All significant intercompany transactions and balances have beeneliminated in consolidation. 
**Cash and Cash-Equivalents 

The Company considers cash and cash-equivalents to include cash on hand andcertificates 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 valuationallowance for doubtful accounts. 
**Allowance for Doubtful Accounts 

The Company extends credit to customers and other parties in the normal course ofbusiness. The Company regularly reviews outstanding receivables and provides for estimatedlosses through an allowance for doubtful accounts. In evaluating the level of establishedreserves, the Company makes judgments regarding its customers' ability to make requiredpayments, economic events and other factors. As the financial condition of these partieschange, circumstances develop or additional information becomes available, adjustments tothe allowance for doubtful accounts may be required. When the Company determines that acustomer may not be able to make required payments, the Company increases the allowancethrough 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 andfuture utility. A charge to results of operations is taken when factors that would resultin a need for a reduction in the valuation, such as excess or obsolete inventory, arenoted. 
**Freight and Shipment Policy 

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

The Company accounts for its investments in accordance with Statement of FinancialAccounting Standards No. 115, "Accounting for Certain Investments in Debt and EquitySecurities." Management determines the appropriate classification of its investmentsin marketable securities at the time of purchase and reevaluates such determination ateach balance sheet date. Securities that are bought and held principally for the purposeof selling them in the near term are classified as trading securities. Debt securities forwhich the Company does not have the intent or ability to hold to maturity and equitysecurities not classified as trading securities are classified as available-for-sale. Thecost 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 andlosses recognized in earnings, and available-for-sale securities are also reported at fairvalue but unrealized gains and losses are shown in the caption "unrealized gains(losses) on shares available-for-sale" included in stockholders' equity. Managementdetermines fair value of its investments based on quoted market prices at each balancesheet 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 businessare recorded at original cost and may be adjusted for any additional significantimprovements after purchase. We depreciate the cost evenly over the assets’ estimateduseful lives. Upon retirement or sale, the cost of the assets disposed of and the relatedaccumulated depreciation are removed from the accounts, with any resultant gain or lossbeing recognized as a component of other income or expense. As required by SFAS No. 141,HMDI has recorded the acquisition of Hammonds using the purchase method of accounting withthe purchase price allocated to the acquired assets and liabilities based on theirrespective estimated fair values at the acquisition date. For more information on theacquisition 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 usefullives. 

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

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

The following table contains a summary of the tangible and of the intangible assetsacquired:
**Acquired Assets****Amount****Life**Machinery & Equipment$408,1622-10 yearsPatents1,621,5005-17 livesTrade Marks465,19910 yearsSole Source Contract464,0397 years$2,958,900
SFAS No. 142 eliminated the amortization of goodwill, and requires annual impairmenttesting of goodwill and introduces the concept of indefinite life intangible assets. TheCompany adopted SFAS No. 142 effective January 1, 2002. 

On August 1, 2006, HMDI acquired the 49% minority interest of Hammonds TechnicalServices, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc.by issuing 16,000,000 restricted shares or 44.4% of HMDI common stock at a conversion rateof $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 theamortization used on the intangible assets acquired in the initial purchase of 51% of thecompany. 

June 30, 2007 and December 31, 2006 balances for long-lived assets are detailed inlater 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 ofownership have transferred to the customer, which is generally the same day as delivery orshipment of the product, the price to the buyer is fixed or determinable, and collectionis reasonably assured. The Company has no significant sales returns or allowances. 
**Income Taxes 

The Company is a taxable entity and recognizes deferred tax assets and liabilities forthe future tax consequences attributable to differences between the financial statementcarrying 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 ineffect when the temporary differences reverse. The effect on the deferred tax assets andliabilities of a change in tax rates is recognized in income in the year that includes theenactment date of the rate change. A valuation allowance is used to reduce deferred taxassets to the amount that is more likely than not to be realized. 
**Earnings Per Share 

The basic net earnings per common share is computed by dividing the net earnings by theweighted average number of shares outstanding during a period. Diluted net earnings percommon share is computed by dividing the net earnings, adjusted on an as if convertedbasis, by the weighted average number of common shares outstanding plus potential dilutivesecurities. For the three and six months ended June 30, 2006 and June 30, 2007, potentialdilutive securities that had an anti-dilutive effect were not included in the calculationof diluted net earnings (loss) per common share. These securities include options topurchase 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 acceptedaccounting principles requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amounts of revenuesand expenses. Actual results could differ from these estimates. 
**Stock-Based Compensation 

The Company grants shares of stock to non-employees for goods and services and inconjunction with certain agreements. These grants are accounted for under FASB StatementNo. 123R, "Accounting for Stock-Based Compensation" based on the grant date fairvalues. 
**Fair Value of Financial Instruments 

The Company estimates the fair value of its financial instruments using availablemarket information and appropriate valuation methodologies. However, considerable judgmentis required in interpreting market data to develop the estimates of fair value.Accordingly, the Company estimates of fair value are not necessarily indicative of theamounts that the Company could realize in a current market exchange. The use of differentmarket assumption and/or estimation methodologies may have a material effect on theestimated fair value amounts. The interest rates payable by the Company on its notespayable approximate market rates. The Company believes that the fair value of itsfinancial instruments comprising accounts receivable, notes receivable, accounts payable,and notes payable approximate their carrying amounts. 
**New Standards Implemented 

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

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

- SFAS No. 155: *Accounting for Certain Hybrid Financial Instruments -*SFAS No. 156:*Accounting for Servicing of Financial Assets -*SFAS No. 157:*Fair Value Measurements -*SFAS No. 158:*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans -*SFAS No. 159:*The Fair Value Option for Financial Assets and FinancialLiabilities—Including an amendment of FASB Statement No. 115 -*FIN No. 48:*Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109*

Management has reviewed these new standards and believes that they have no impact onthe financial statements of the Company at this time; however, they may apply in thefuture. 
**(2) Acquisition of Hammonds Technical Services, Inc. 

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

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

As required by SFAS No. 141, HMDI has recorded the acquisition using the purchasemethod of accounting with the purchase price allocated to the acquired assets andliabilities based on their respective estimated fair values at the acquisition date. Thepurchase price of $2,455,700 had been allocated at follows: 
Current assets$1,435,939Property and equipment, net826,765Patents and trademarks, net of amortization2,724,487Other non-current assets70,085Current 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 June 30, 2007. 
**(3) Trading Securities 

Investments in marketable securities primarily include shares of common stock invarious companies. The investments are considered trading securities, and accordingly anychanges in market value are reflected in the consolidated statement of operations. At June30, 2007 and 2006, the Company has unrealized trading gains of $642,374 and losses of$10,714, respectively, related to securities held on those dates. These unrealized gains /losses are included in the consolidated statements of operations for the respective years.The Company recorded realized losses of $629,008 and realized gains / losses of $-0- onthe sales of trading securities for the six months ended June 30, 2007 and 2006. TheCompany sold 180,500 ONH shares for proceeds of $103,954 in February 2007. ThroughDecember 31, 2006, the Company had an unrealized loss on these shares of $633,227. Therealized loss from the sale of the shares in 2007 was $585,228. The net income effect ofthe sale of these shares is a gain of $47,999 in 2007. 
**(4) Inventories 

Inventories consisted of the following: 

**June 30, 2007**
**December 31, 2006**
Part and    materials
$
1,430,975
$
1,332,446
Work in process
391,961
232,451
Finished goods
4,710,143
4,034,699Less reserve(259,123)(296,178)
$
6,273,956
$
5,303,418**(5) Real Estate Transactions 

During the second quarter of 2007, the Company purchased a 174 acre tract of land inWaller County, Texas for $1,684,066. This property is listed for sell with a real estatebroker. The Company continues to own 287 undeveloped acres of waterfront property onDickinson Bayou and Galveston Bay in Galveston County, Texas. The book value for thisproperty is $225,000. The property's appraised value is substantially more than the bookvalue. In November 2005, the Company signed a contract for sale of the property for a cashconsideration of $16,000,000 with Lakeland Partners III. In January 2007, Lakelandassigned all of its interest in the contract to Westfield Forest, L.P. Westfield is arecognized developer of waterfront properties in the Houston, Texas area. No revenue hasbeen recognized for this transaction because the development of the property requirespermits from certain governmental agencies, which the developer believes they can obtaintimely. The projected closing of the transaction is scheduled for sometime in 2007. 
**(6) Long-term Notes Receivable 

Long-term notes receivable at June 30, 2007 consisted of the following:
**June    30, 2007**December    31, 2006Net note receivable from sale of real estate,    principal payment due on or before July 30, 2008
$
3,020,044
$
3,020,044Sale of machinery and equipment, principal    payment due on or before December 1, 2008
164,000
439,200Sale of former subsidiary, Marald, Inc.,    principal and interest due monthly through June 5, 2012
175,858
190,310Sale of former subsidiary, Marald, Inc.,    principal due October 5, 2007
200,000
200,000Sale of refinery to settle lawsuit, principal    and interest due on June 1 and December 1, through June 1, 2010
875,000
875,000Sale of drilling rig, principal and interest    due monthly through December 31, 2009
274,155
325,000Other
40,359
15,361Notes receivable
4,749,416
5,064,915Less current portion
683,511
1,021,593Notes receivable, less current portion
$
4,065,905
$
4,043,322**(7) Property and Equipment 

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

**Years**
**June 30, 2007**
**December 31, 2006**
Land
$
892,945
$
817,595
Building and improvements
20
1,061,233
1,009,001
Machinery and equipment
7-15
3,431,847
2,910,871
Office equipment and    furniture
7
765,528
701,682
Automobiles
5
881,589
724,827
7,033,142
6,163,976
Less accumulated    depreciation and amortization
(3,265,011)
(3,022,109)
Net property and equipment
$
3,768,131
$
3,141,867
Depreciation expense for the three and six months ended June 30, 2007 was $132,152 and$243,096, respectively.
**(8) Intangible Assets 

Intangible assets at June 30, 2007 consisted of the following: 
**As of June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Goodwill
$
879,834
$
205,295
N/A
Patents
$
4,473,620
$
660,227
12 years
Trademarks
1,149,199
163,493
10 years
Sole Source    Contract
1,144,039
232,678
7 years
Patents,    Trademarks, and Sole Source Contract
$
6,766,858
$
1,056,398
11 years
Intangible assets at December 31, 2006 consisted of the following: 
**As of December 31, 2006
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Goodwill
$
879,834
$
205,295
N/A
Patents
$
4,468,780
$
466,154
12 years
Trademarks
1,149,199
106,033
10 years
Sole Source    Contract
1,144,039
150,961
7 years
Patents,    Trademarks, and Sole Source Contract
$
6,762,018
$
723,148
11 years
 

**Aggregate    Amortization Expense**
For year ending December    31, 2007
$
654,906
For year ending December    31, 2008
$
638,979
For year ending December    31, 2009
$
638,979
For year ending December    31, 2010
$
638,979
For year ending December    31, 2011
$
638,979
The Company’s patents, trademarks, and sole source contract resulted from theApril 28, 2005 acquisition of 51% of Hammonds Technical Services and from the August 1,2006 acquisition of the 49% minority interest of the Hammonds Companies. 

The following table contains a summary of the intangible assets acquired from theacquisition of Hammonds Technical Services on April 28, 2005: 
**As of June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
1,806,387
$
455,546
12 years
Trademarks
465,199
100,793
10 years
Sole Source    Contract
464,039
143,631
7 yearsPatents, Trademarks and Sole    Source Contracts
$
2,735,625
$
699,970
11 years
On August 1, 2006 The Company acquired the 49% minority interest of Hammonds TechnicalServices, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc.by issuing 16,000,000 restricted shares or 44.4% of HMDI common stock at a price of $0.25a share. The additional cost of $4,000,000 has been allocated to patents, trademarks, andsole source contract for the additive injection system and is being amortized in a mannerequivalent to the amortization used on the intangible assets acquired in the initialpurchase of 51% of the company. Additionally, the Company acquired patents totaling$26,393 in 2006 and $4,840 during the six months ended June 30, 2007. The following tablecontains a summary of the intangible assets acquired in 2006 and during the quarter endedJune 30, 2007: 
**As of June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
2,667,233
$
204,681
12 years
Trademarks
684,000
62,700
10 years
Sole Source    Contract
680,000
89,047
7 yearsPatents, Trademarks and Sole    Source Contracts
$
4,031,233
$
356,428
11 years
Amortization expense for the three and six months ended June 30, 2007 was $166,645 and$333,250, respectively.
**(9) Short-term Notes Payable To Banks
**June    30, 2007**December    31, 2006
Note payable to a bank,    which allows the Company to borrow up to $5,000,000, interest due monthly at the prime    rate, principal payment April 30, 2008, secured by assets of the Company's subsidiaries
$
-
$
531,871Note payable to a bank with interest at 7.25%,    interest payments due monthly, with a principal balance due on September 15, 2007
300,000
-
Note payable with interest    at 10.75%, interest payments due quarterly, with a principal balance due on December 10,    2007
90,459
90,459
Insurance note payable with    interest at 7.86%, principal and interest due in monthly payments of $32,492.73 through    may 1, 2008
324,927
109,020
Note    payable to former owner of equity interest in Hammonds payable on July 20, 2005 with    accrued interest at prime plus 4%
-
173,300
Other    notes with various terms
4,856
12,651
$
720,242
$
917,301
Each of the Company’s subsidiaries that have outstanding notes payable has securedsuch notes by that subsidiary’s inventory, accounts receivable, property andequipment and guarantees from the Company. 
**(10) Long-term Debt 

Long-term debt consisted of the following: 
**June    30, 2007**December    31, 2006
Note payable to a bank,    interest due monthly at prime plus 1%, principal payment due August 26, 2008, secured by a    Deed of Trust on the Company’s property
$
1,000,000
$
1,000,000
Note payable to bank, which    allows the Company to borrow up to $2,000,000, interest due monthly at prime plus 1%,    principal payment due August 26, 2008, secured by assets of the Company's subsidiary
1,992,189
1,992,189
Note payable to a bank,    which allows the Company to borrow up to $2,000,000, due in monthly payments of interest    only, with interest at prime floating rate, with the principal balance due in June 2009,    secured by subsidiary's property
1,821,631
1,469,542
Note payable to bank due in    monthly installments of principal and interest through July 2025 with interest at prime    floating rate secured by property
425,514
426,508
Note payable to a bank, due    in monthly installments of $6,170, including interest at 6.6% through May 2018, secured by    property
570,352
588,106
Note payable to a bank,    which allows the Company to borrow up to $5,000,000, interest due monthly at the prime    rate, principal payment April 30, 2009, secured by assets of the Company's subsidiaries
$
1,698,000************************************************************************************ |