**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      quarterly period ended January 31, 2007




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      transition period from __________ to ____________




Commission
      file number 0-23268





**AMERICAN
      TECHNOLOGIES GROUP, INC.**


(Name
      of
      small business issuer in its charter)




Nevada
            
            95-4307525(State
                or other jurisdiction of
            
            (IRS
                Employerincorporation
                or organization)
            
            Identification
                No.)




412
      W. Bolt St.


Ft.
      Worth, TX 76113


(Address
      of principal executive offices) (zip code)




Issuer's
      telephone number:





Securities
      registered under Section 12(b) of the Exchange Act:





Title
      of
      each class Name of exchange on which registered


None




Check
      whether the issuer (1) filed all reports to be filed by Section 13 or 15(d)
      of
      the Exchange Act during the past 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 o




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**





**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes o No o













**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the registrant's classes of common
      equity, as of the latest practicable date: As of March 26, 2007 the registrant
      had 10,382,047 shares of common stock outstanding, 1,500 shares of Series E
      Stock issued and outstanding, and 376,794 shares of Series A Stock outstanding.




Transitional
      Small Business Disclosure Format (Check one): Yes o No x




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


Yes o No x


TABLE
        OF
        CONTENTS


PART
                I
            FINANCIAL
                INFORMATIONITEM
                1
            Financial
                Statements
            1Condensed
                Consolidated Balance Sheet as of January 31, 2007
                (unaudited)
            1Condensed
                Consolidated Statements of Operations (unaudited) for the three months
                and
                six months ended January 31, 2007 and 2006
            2Condensed
                Consolidated Statement of Stockholders' Equity (unaudited) for
                the six months ended January 31, 2007
            3Condensed
                Consolidated Statements of Cash Flows (unaudited) for the six months
                ended January 31, 2007 and January 31, 2006
            4Notes
                to Condensed Consolidated Financial Statements (unaudited)
            5ITEM
                2
            Management's
                Discussion and Analysis or Plan of Operation
            11ITEM
                3
            Controls
                and Procedures
            14PART
                II
            OTHER
                INFORMATION
            16ITEM
                1
            Legal
                Proceedings
            16ITEM
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            16ITEM
                3
            Defaults
                Upon Senior Securities
            16ITEM
                4
            Submission
                of Matters to a Vote of Security Holders
            16ITEM
                5
            Other
                Information
            16ITEM
                6
            Exhibits
            16SIGNATURES
            17




IN
      ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT CONTAINS
      FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT
      REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
      PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
      AND
      UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN AND IN OTHER REPORTS FILED
      WITH
      THE SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE ACTUAL RESULTS TO
      DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT,
      THE WORDS "ANTICIPATES", "BELIEVES", "INTENDS", "FUTURE", AND SIMILAR
      EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK
      ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
      REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
      THAT
      MAY ARISE AFTER THE DATE HEREOF.










**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS******





AMERICAN
      TECHNOLOGIES GROUP, INC.


CONDENSED CONSOLIDATED
      BALANCE SHEET


JANUARY
      31, 2007


(UNAUDITED)


ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              561,693Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $59,002
              
              
              6,303,252Inventory
              
              
              4,226,015Cost
                  and estimated earnings in excess of billings
              
              
              258,929Total
                  current assets
              
              
              11,349,889Cash
                  surrender value of officers' life insurance
              
              
              101,413Property
                  and equipment, net
              
              
              2,492,260Goodwill
              
              
              3,390,370Total
                  assets
              
              $
              17,333,932LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              3,490,376Accrued
                  expenses
              
              
              2,945,368Billings
                  in excess of costs and estimated earnings
              
              
              1,465,332Notes
                  payable, current portion, net ofdiscount
                  of $1,063,512
              
              
              1,596,559Total
                  current liabilities
              
              
              9,497,635Notes
                  payable, long term portion, net ofdiscount
                  of $2,802,933
              
              
              6,426,618Total
                  liabilities
              
              
              15,924,253Stockholders'
                  equity:Preferred
                  stock, series A
              
              
              377Preferred
                  stock, series E
              
              
              2Common
                  stock
              
              
              10,382Common
                  stock to be issued
              
              
              14Stock
                  subscription
              
              
              6,750Additional
                  paid-in capital
              
              
              78,562,313Accumulated
                  deficit
              
              
              (77,170,159
              )Total
                  stockholders' equity
              
              
              1,409,679Total
                  liabilities and stockholders' equity
              
              $
              17,333,932
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  1





AMERICAN
      TECHNOLOGIES GROUP, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


FOR
      THREE
      MONTHS AND SIX MONTHS ENDED


JANUARY
      31, 2007 AND 2006


(UNAUDITED)


Three
                  Months ended January 31,
              
              Six
                  Months ended January 31,2007
              
              2006
              
              2007
              
              2006(Restated)
              
              
              
              (Restated)Net
                  sales
              
              $
              8,715,054
              
              $
              6,313,535
              
              $
              16,347,015
              
              $
              10,306,040Cost
                  of sales
              
              
              7,441,035
              
              
              5,561,793
              
              
              14,035,559
              
              
              9,113,357Gross
                  profit
              
              
              1,274,019
              
              
              751,742
              
              
              2,311,456
              
              
              1,192,683Selling,
                  general and administrative expenses
              
              
              807,911
              
              
              1,376,837
              
              
              1,783,148
              
              
              8,708,884Operating
                  income (loss)
              
              
              466,108
              
              
              (625,095
              )
              
              528,308
              
              
              (7,516,201
              )Other
                  income (expense)Interest
                  income
              
              
              (876
              )
              
              36,557
              
              
              15,449
              
              
              59,308Interest
                  expense
              
              
              (333,955
              )
              
              (1,340,811
              )
              
              (683,141
              )
              
              (2,329,106
              )Financing
                  costs
              
              
              (923,591
              )
              
              -
              
              
              (1,899,237
              )
              
              (3,450,150
              )Total
                  other income (expense)
              
              
              (1,258,422
              )
              
              (1,304,254
              )
              
              (2,566,929
              )
              
              (5,719,948
              )Loss
                  before income taxes
              
              
              (792,314
              )
              
              (1,929,349
              )
              
              (2,038,621
              )
              
              (13,236,149
              )Provision
                  for income taxes
              
              
              -
              
              
              7,500
              
              
              -
              
              
              11,905Net
                  loss
              
              
              (792,314
              )
              
              (1,936,849
              )
              
              (2,038,621
              )
              
              (13,248,054
              )Preferred
                  dividend
              
              $
              3,000
              
              
              3,000
              
              
              6,000
              
              $
              154,800Net
                  loss attributable to common shareholders
              
              $
              (795,314
              )
              $
              (1,939,849
              )
              $
              (2,044,621
              )
              $
              (13,402,854
              )Loss
                  per share, basic and diluted
              
              $
              (0.05
              )
              $
              (0.52
              )
              $
              (0.14
              )
              
              (4.67
              )Loss
                  per share attributable to commonshareholders,
                  basic and diluted
              
              $
              (0.05
              )
              $
              (0.52
              )
              $
              (0.14
              )
              
              (4.73
              )Weighted
                  average shares outstanding
              
              
              15,080,766
              
              
              3,723,783
              
              
              15,080,766
              
              
              2,833,931
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  2





AMERICAN
      TECHNOLOGIES GROUP, INC.


CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
      THE
      SIX MONTHS ENDED JANUARY 31, 2007


(UNAUDITED)






Preferred
                  Stock Series A
              
              Preferred
                  Stock Series E
              
              Common
                  Stock
              
              Common
                    StockTo
                  be Issued
              
              Additional
                  Paid in
              
              Stock
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Subscriptions
              
              Deficit
              
              Total**Balance,
                  July 31, 2006**
              
              
              376,794
              
              $
              377
              
              
              1,500
              
              $
              2
              
              
              10,382,047
              
              $
              10,382
              
              
              13,719
              
              $
              14
              
              $
              78,562,313
              
              $
              6,750
              
              $
              (75,125,538
              )
              $
              3,454,300Preferred
                  dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              (6,000
              )
              
              (6,000
              )Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,038,621
              )
              
              (2,038,621
              )**Balance,
                  January 31, 2007**
              
              
              376,794
              
              $
              377
              
              
              1,500
              
              $
              2
              
              
              10,382,047
              
              $
              10,382
              
              
              13,719
              
              $
              14
              
              $
              78,562,313
              
              $
              6,750
              
              $
              (77,170,159
              )
              $
              1,409,679


The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.




3




AMERICAN
      TECHNOLOGIES GROUP, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
      THE
      SIX MONTHS ENDED JANUARY 31, 2007 AND 2006


(UNAUDITED)






2007
              
              2006(Restated)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (2,038,621
              )
              $
              (13,248,054
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
                  and amortization
              
              
              83,354
              
              
              69,645Amortization
                  of discount
              
              
              1,899,237
              
              
              1,665,699Amortization
                  of loan costs
              
              
              -
              
              
              58,500Stock
                  issued for services
              
              
              -
              
              
              12,995Changes
                  in operating assets and liabilities:(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (254,619
              )
              
              (2,326,298
              )Restricted
                  cash
              
              
              280,000
              
              
              -Inventory
              
              
              (652,570
              )
              
              (285,121
              )Costs
                  and earnings in excess of billings
              
              
              (74,918
              )
              
              1,489,569Prepaid
                  expenses
              
              
              118,966
              
              
              20,888Increase
                  (decrease) in:Accounts
                  payable and accrued expenses
              
              
              (916,899
              )
              
              10,046,986Billings
                  in excess of costs
              
              
              (28,143
              )
              
              859,210Net
                  cash used in operating activities
              
              
              (1,584,213
              )
              
              (1,635,981
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Cash
                  paid for acquisitions
              
              
              -
              
              
              (204,570
              )Cash
                  received through acquisition
              
              
              -
              
              
              5,587,017Purchases
                  of property and equipment
              
              
              (12,506
              )
              
              (38,601
              )Net
                  cash provided by (used in) investing activities
              
              
              (12,506
              )
              
              5,343,846CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from sale of common stock
              
              
              -
              
              
              200,000Proceeds
                  from issuance of notes
              
              
              -
              
              
              3,731Net
                  proceeds on revolving line of credit
              
              
              8,372
              
              
              -Payments
                  on notes
              
              
              (187,500
              )
              
              (78,020
              )Net
                  cash provided by (used in) financing activities
              
              
              (179,128
              )
              
              125,711Net
                  increase (decrease) in cash
              
              
              (1,775,847
              )
              
              3,833,576Cash
                  and cash equivalents, beginning of year
              
              
              2,337,540
              
              
              12,953Cash
                  and cash equivalents, end of year
              
              $
              561,693
              
              $
              3,846,529Cash
                  paid for:Interest
              
              $
              719,200
              
              $
              435,527Income
                  taxes
              
              
              -
              
              
              -Non-cash
                  financial activities
 The
          purchase price for the North Texas Steel acquisition of $11,000,000 was
          paid
          directly to the North Texas Steel stockholders by our lenders.
  The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  4


**AMERICAN
        TECHNOLOGIES GROUP, INC.**
  **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
 
 January
        31, 2007 and 2006


**NOTE
        1 - ORGANIZATION AND LINE OF BUSINESS**
  **Organization
        and Line of Business**
 
 American
        Technologies Group, Inc. (the "Company", "ATG", “we”, “us”, “our”), a Nevada
        corporation, was engaged in the development, commercialization and sale of
        products and systems using its patented and proprietary technologies. The
        resulting products are intended to offer cost-effective solutions to reduce,
        and
        in some cases eliminate, hazardous chemical by-products or emissions resulting
        from industrial and combustion processes. The Company's proprietary catalyst
        technology may improve many commercial products including detergents and
        cosmetics.
 
 The
        Company largely ceased operations during 2001 and had begun focusing efforts
        on
        restructuring and refinancing. In fiscal year ended July 31, 2005, we
        successfully continued these efforts to settle various pending lawsuits reduce
        outstanding liabilities, acquire an equity funding facility to finance
        acquisition of new products, entities and technologies, and otherwise strengthen
        the business.
 
 On
        September 7, 2005, ATG, through a newly formed wholly owned subsidiary, Omaha
        Holdings Corp. ("Omaha"), entered into a Share Purchase Agreement ("Agreement")
        with the stockholders of North Texas Steel Company, Inc. ("North Texas"),
        a
        privately-held company. Effective with the Agreement, all previously outstanding
        common stock owned by North Texas's shareholders was exchanged for $11,000,000.
        The transaction is accounted for using the purchase method of accounting
        in
        accordance with SFAS No.141, “Business Combinations.” The results of operations
        for North Texas have been included in the condensed consolidated statements
        of
        operations since the date of acquisition.
 
 North
        Texas Steel Company, Inc., is an American Institute of Steel Construction
        certified structural steel fabrication company and provides fabrication and
        detailing of structural steel components for commercial buildings, office
        buildings, convention centers, sports arenas, airports, schools, churches
        and
        bridges. North Texas fabricates structural steel from two locations in Fort
        Worth, Texas. North Texas fabricates structural steel from two locations
        in Fort
        Worth, Texas. It contracts with and grants credit to customers primarily
        located
        in southwestern United States.
 
 On
        April
        25, 2006, ATG, through a newly formed wholly owned subsidiary, Whitco Poles,
        Inc. (“Whitco”), acquired certain assets of Whitco Company, LP. The transaction
        is accounted for using the purchase method of accounting in accordance with
        SFAS
        No.141, “Business Combinations.” The results of operations for the Whitco
        Company, LP assets have been included in the condensed consolidated statements
        of operations since the date of acquisition.
 
 Whitco
        Company has been a provider of light poles to commercial and industrial markets
        worldwide. Whitco provides marketing expertise and engineering knowledge
        to a
        nationwide contracted lighting representative base as well as OEM
        customers.
 
 The
        accompanying financial statements present on a consolidated basis the accounts
        of the Company and its wholly owned subsidiaries. All significant intercompany
        accounts and transactions have been eliminated in consolidation.
  A
        summary
        of the significant accounting policies applied in the preparation of the
        accompanying financial statements follows.
  **Basis
        of Presentation**
  The
        accompanying unaudited condensed consolidated financial statements as of
        January
        31, 2007 and for the three month and six month periods ended January, 2007
        and
        2006 have been prepared by the Company pursuant to the rules and regulations
        of
        the Securities and Exchange Commission, including Form 10-QSB and Regulation
        S-B. The information furnished herein reflects all adjustments (consisting
        of
        normal recurring accruals and adjustments), which are, in the opinion of
        management, necessary to fairly present the operating results for the respective
        periods. Certain information and footnote disclosures normally present in
        annual
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States of America have been omitted pursuant to such
        rules and regulations. The Company believes that the disclosures provided
        are
        adequate to make the information presented not misleading. These financial
        statements should be read in conjunction with the audited consolidated financial
        statements and explanatory notes for the year ended July 31, 2006 as disclosed
        in the company's 10-KSB for that year as filed with the SEC, as it may be
        amended.
  5
 **AMERICAN
          TECHNOLOGIES GROUP, INC.**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
 
 January
          31, 2007 and 2006
  The
        results of the three months and six months ended January 31, 2007 are not
        necessarily indicative of the results to be expected for the pending full
        year
        ending July 31, 2007.
  **Restatement**
 The
          financial statements for the three and six months ended January 31, 2006
          have
          been restated as a result of the discount attributed to our September 2005
          convertible debt financings. The reduction resulted from the recalculation
          of
          the fair value of warrants issued with the debt. We previously valued the
          warrants at full fair value. In accordance with EITF 00-27, we have now
          valued
          the warrants based on relative fair value. As a result, the warrant value
          was
          reduced by $5,177,064. Due to the reduction in the warrant value, we have
          now
          recorded a beneficial conversion feature in the amount of $2,173,455. The
          net
          effect of these adjustments is to reduce the discount by
          $3,003,609.
  Because
          of the reduction in the discount, interest expense for the three and six
          month
          periods ended January 31, 2006 was reduced by $252,358 and $400,481,
          respectively.
  We
          have
          additionally corrected the weighted average shares outstanding for the
          three and
          six month periods ended January 31, 2006 to include option shares deemed
          outstanding due to the nominal consideration associated with their potential
          exercise.
  The
          effects of the above adjustments are summarized as follows:
  Three
                      Months
                  
                  Six
                      MonthsJanuary
                      31, 2006
                  
                  January
                      31, 2006Net
                      loss - as reported
                  
                  
                  (2,189,207
                  )
                  
                  (13,648,535
                  )Net
                      loss - as restated
                  
                  
                  (1,936,849
                  )
                  
                  (13,248,054
                  )Net
                      loss per common share - as reported
                  
                  
                  (2,192,207
                  )
                  
                  (13,803,335
                  )Net
                      loss per common share - as restated
                  
                  
                  (1,939,849
                  )
                  
                  (13,402,854
                  )Loss
                      per common share - as reported
                  
                  
                  (0.79
                  )
                  
                  (6.54
                  )Loss
                      per common share - as restated
                  
                  
                  (0.52
                  )
                  
                  (4.73
                  )Weighted
                      average shares outstanding - as reported
                  
                  
                  2,788,783
                  
                  
                  2,086,947Weighted
                      average shares outstanding - as restated
                  
                  
                  3,723,783
                  
                  
                  2,833,931
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Basis
        of Consolidation**
 
 Our
        consolidated financial statements and the accompanying notes, which are prepared
        in accordance with U.S. generally accepted accounting principles (“GAAP”),
        include American Technologies Group, Inc. and all subsidiaries. We consolidate
        all majority-owned and controlled subsidiaries as well as variable interest
        entities in which we are the primary beneficiary as defined by Financial
        Accounting Standards Board (“FASB”) Interpretation No. 46R,
“Consolidation of Variable Interest Entities, an interpretation of ARB
        No. 51.”  We did not participate in any variable interest entities for
        the period presented.
 
 The
        accompanying financial statements present on a consolidated basis the accounts
        of the Company and its wholly owned subsidiaries. All significant intercompany
        accounts and transactions have been eliminated in consolidation.
 
 **Revenue
        Recognition**
 
 For
        financial reporting purposes the major constructions contracts completed
        by
        North Texas, profits are recognized using the percentage of completion method.
        Under this method, revenues are recognized based on the percentage of costs
        incurred to date to estimated total cost for each contract. Revisions in
        estimated contract profits are made in the period in which circumstances
        requiring the revisions become known. These estimates are subject to change
        in
        the near-term and could significantly impact the financial statements. Provision
        for estimated losses on uncompleted contracts is made in the period in which
        such losses are determined. Contract costs include all direct material and
        labor
        costs and those indirect costs related to contract performance, such as indirect
        labor, supplies, tools and repairs. Selling, general and administrative costs
        are charged to expense as incurred.
 
 On
        contracts where costs and estimated earnings are in excess of billings, the
        excess is treated as a current asset. Where billings are in excess of costs
        and
        estimated earnings, the excess is treated as a current liability.
  6
 **AMERICAN
          TECHNOLOGIES GROUP, INC.**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
  January
          31, 2007 and 2006
  These
        amounts are reflected in the accompanying balance sheet as follows:
  **January 31,**
                **2007**Costs
                  and estimated earnings onuncompleted
                  contracts in excess of billings
              
              $
              258,929Billings
                  on uncompleted contracts inexcess
                  of costs and estimated earnings
              
              
              (1,465,332
              )$
              (1,206,403
              )
 
 Whitco
        revenues and product costs are recognized as their products are shipped to
        their
        customers. Whitco’s product lines, while requiring similar manufacturing
        processes, such as welding and forming metal assemblies, as North Texas,
        are
        primarily catalog specified products with much shorter lead and production
        times.
 
 **Use
        of Estimates**
 
 In
        the
        normal course of preparing financial statements in conformity with accounting
        principles generally accepted in the United States of America, management
        is
        required to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Significant estimates made by management
        include the collectibility of accounts receivable, the realizability of
        inventories, the amounts due under accounts payable, the valuation allowance
        of
        deferred tax assets and the fair value of our equity instruments. Actual
        results
        could differ from those estimates.
 
 **Basic
        and Diluted Income (Loss) Per Share**
 
 Basic
        and
        diluted loss per common share is based upon the weighted average number of
        common shares outstanding during the fiscal year computed under the provisions
        of SFAS No. 128, Earnings Per Share. Common share equivalents were not
        considered as they would be anti-dilutive and had no impact on loss per share
        for any periods presented. The number of shares outstanding in the computation
        of loss per share is comprised of the following:
 
 **Three
                  months ended**
              
              **Six
                  months ended**January
                  31, 2007
              
              January
                  31, 2006
              
              January
                  31, 2007
              
              January
                  31, 2006Common
                  shares outstanding
              
              
              10,395,766
              
              
              2,788,783
              
              
              10,395,766
              
              
              2,086,947Options
                  shares deemed outstanding
              
              
              4,685,000
              
              
              935,000
              
              
              4,685,000
              
              
              746,984Total
                  shares outstanding for computation
              
              
              15,080,766
              
              
              3,723,783
              
              
              15,080,766
              
              
              2,833,931
 
 **Reclassifications**
 
 Certain
        reclassifications have been made in prior year's financial statements to
        conform
        to classifications used in the current year.
  7
 **AMERICAN
          TECHNOLOGIES GROUP, INC.**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
 January
          31, 2007 and 2006
  **NOTE
        3 - FINANCIAL CONDITION AND GOING CONCERN**
 
 To
        date,
        ATG has been unable to generate significant cash flows from our business
        operations. As a result, we have funded our operations through investor
        financing, including sales of common stock and the exercise of warrants and
        options. The Company has also used debt to fund its operations. Until such
        time
        as we are able to generate significant cash flows from operations through
        increased sales of our products, we will be required to continue our reliance
        on
        investor financing and debt to fund our operations.
 
 Our
        financial statements have been presented on the basis that we are a going
        concern, which contemplates the realization of assets and the satisfaction
        of
        liabilities in the normal course of business. As
        shown
        in the consolidated financial statements, during the three months and six
        months
        ended January 31, 2007, we incurred a net loss of $792,314 and $2,038,621
        and
        negative operating cash flow of $1,584,213. Since its inception, the Company
        has
        incurred significant operating losses totaling approximately $77 million.
        These
        factors, among others, raise substantial doubt about our ability to continue
        as
        a going concern .
 
 The
        financial statements do not include any adjustments relating to the
        recoverability and classification of recorded asset amounts or the amounts
        and
        classification of liabilities that might be necessary should we be unable
        to
        continue as a going concern. Our continuation as a going concern is dependent
        upon its ability to generate sufficient cash flow to meet our obligations
        on a
        timely basis, to obtain additional financing, and ultimately to attain
        successful operations. Management is continuing its efforts to obtain additional
        funds so that we can meet our obligations and sustain operations. Management
        continues to focus on improving our results of operations by increasing sales
        and decreasing our cost structure to improve cash flows from
        operations.
  **NOTE
        4 - ACQUISITIONS**
 
 On
        September 7, 2005, the Company, through a newly formed wholly owned subsidiary,
        Omaha Holdings Corp. ("Omaha"), entered into a Share Purchase Agreement
        ("Agreement") with the stockholders of North Texas Steel Company, Inc. ("North
        Texas"), a privately-held company. Effective with the Agreement, all previously
        outstanding common stock owned by North Texas's shareholders was exchanged
        for
        $11,000,000 in cash. The Company also incurred costs directly attributable
        to
        the acquisition of $1,593,370. The transaction is accounted for using the
        purchase method of accounting in accordance with SFAS No.141, “Business
        Combinations.” The results of operations for North Texas have been included in
        the condensed consolidated statements of operations since the date of
        acquisition.
 On
        April
        25, 2006, the Company, through a newly formed wholly owned subsidiary, Whitco
        Poles, Inc., acquired certain assets of Whitco Company, L.P. The Company
        issued
        3,750,000 common stock purchase warrants, valued at $1,875,000. The transaction
        is accounted for using the purchase method of accounting in accordance with
        SFAS
        No.141, “Business Combinations.” The results of operations for the assets
        acquired have been included in the condensed consolidated statements of
        operations since the date of acquisition.
  Pro
        forma
        unaudited financial information for the three and six months ended January
        31,
        2006, assuming that the acquisitions had occurred as of August 1, 2005 is
        as
        follows:
 
 **Three
                  months ended**
              
              **Six
                  months ended****January
                  31, 2006**
              
              **January
                  31, 2006**Revenues
              
              $
              9,142,516
              
              $
              22,648,223Net
                  (Loss) income
              
              
              (2,346,940
              )
              
              (13,609,518
              )(Loss)
                  income per share
              
              $
              (0.63
              )
              $
              (4.80
              )
 
 8
 **AMERICAN
          TECHNOLOGIES GROUP, INC.**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
  January
          31, 2007 and 2006
 The
        unaudited pro forma amounts are not necessarily indicative of the results
        that
        would have occurred if the acquisitions of North Texas and Whitco had been
        completed on the date indicated.
 
 **NOTE 5
        - CONCENTRATIONS**
 
 Financial
        instruments which potentially subject us to concentrations of credit risk
        consist principally of cash, cash investments and accounts
        receivable.
 
 We
        maintain our cash and cash equivalents in bank deposit accounts which, at
        times,
        exceed federally insured limits. The Company has not experienced any losses
        in
        these accounts. ATG believes it is not exposed to any significant credit
        risk on
        cash and cash equivalents.
 
 Concentration
        of credit risk with respect to accounts receivable is limited due to the
        geographic distribution of the entities comprising the Company's customer
        base.
        The Company's revenues earned on contracts for the six months ended January
        31,
        2007 included an aggregate of 57% from one customer. The same customer accounts
        for 62% of our accounts receivable at January 31, 2007.
 
 **NOTE 6
        - CONVERTIBLE DEBENTURES AND OTHER NOTES PAYABLE**
  **Laurus,
        GMF, and GSSF Defaults and Waiver of Defaults**
 
 Pursuant
        to the terms of ourregistration rights agreements with Laurus, GSSF, and
        GMF, we
        are obligated to file a registration statement registering the resale of
        shares
        of the Company's common stock issuable upon conversion of the convertible
        notes,
        exercise of the warrant and exercise of the options issued in connection
        with
        the Laurus and Gryphon financings and the Whitco transactions. Pursuant to
        the
        original terms of registration rights agreements, if the registration statement
        was not filed by October 31, 2005 or declared effective by January 7, 2006,
        or
        if the registration was suspended other than as permitted we were obligated
        to
        pay Laurus certain fees and the obligations pursuant to the Laurus and Gryphon
        financings described above may be deemed to be in default. We did not file
        the
        registration statement until January 31, 2007 and the registration statement
        has
        not yet been declared effective. This failure constituted an “event of default”
pursuant our agreements with Gryphon, GMF, an GSSF.
 
 On
        October 31, 2006 we filed a Notification of Late Filing on Form 12-b(25)
        stating
        that we would not file our Annual Report on Form 10-KSB for the fiscal year
        ended July 31, 2006 by the October 30, 2006 filing deadline, but that we
        would
        undertake to complete such filing by November 14, 2006, fifteen days from
        the
        original October 30, 2006 filing deadline. We did not complete the filing
        within
        the timeline specified and such failure constituted an “event of default”
pursuant to our agreements with Gryphon, GMF, and GSSF.
  9
 **AMERICAN
          TECHNOLOGIES GROUP, INC.**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (UNAUDITED)
  January
          31, 2007 and 2006
  In
        connection with the security agreements we entered into in September 2005
        with
        Laurus, GMF, and GSSF we executed a stock pledge agreement granting them
        a
        interest in the common stock of our subsidiaries all of our and our
        subsidiaries' goods, inventory, contractual rights and general intangibles,
        receivables, documents, instruments, chattel paper, and intellectual property.
        The security agreement and stock pledge agreement state that if an "event
        of
        default" occurs under any agreement with Laurus, GSSF and GMF, that they
        have
        the right to take possession of the collateral, to operate our business using
        the collateral, and have the right to assign, sell, lease or otherwise dispose
        of and deliver all or any part of the collateral, at public or private sale
        or
        otherwise to satisfy our obligations under these agreements. Our failure
        to
        timely file the Form 10-KSB and our failure to file a registration statement
        as
        described above each separately constituted an event of default under the
        security agreements.
 
 Due
        to
        the above described defaults, on September 12, 2006 we obtained waiver and
        extension agreements from Laurus, GSSF, and GMF. The extensions and waivers
        waive any defaults that have occurred related to our failure to file a
        registration statement by October 31, 2005 by extending the date to file
        such
        registration statement to January 31, 2007, with such registration statement
        to
        be declared effective by April 15, 2007. As noted above, we have filed the
        registration statement, but it has not yet been declared effective. Laurus,
        GMF
        and GSSF also agreed to waive any claims for default and damages (including
        claims for liquidated damages pursuant to Section 2 of the Agreements) that
        would have otherwise accrued through the date of the waiver agreement. Further,
        both extensions and waivers waived any claim for default as a result of our
        failure to meet the financial reporting requirements set forth in section
        11 of
        the security agreements provided that we must bring ourselves into compliance
        with such requirements prior to January 15, 2007. Finally, Laurus agreed
        to
        amend the first day that the monthly principal payments under the term Note
        A
        are due to the first business day of March, 2007 and GMF and GSSS agreed
        to
        extend the maturity dates of their convertible term notes in the total amount
        of
        $500,000 payable to GMF and GSSF to September 30, 2007.
 
 Our
        secured term note B with Laurus with a principal amount of $2,000,000
        convertible into up to 6,006,006 shares of common stock matured and was payable
        in full on March 6, 2007. We did not pay the amount due on that date. Rather,
        Laurus has now agreed to extend the Maturity Date of the term B note to May
        7,
        2007. Laurus agreed to such an extension on the condition that we pay a $300,000
        fee for the extension. In addition, as part of the waiver, Laurus has orally
        agreed to extend the time for the effectiveness of the Form SB-2 Registration
        Statement we filed on January 31, 2007 from April 16, 2007 to May 7, 2007.
        Laurus' counsel has provided us with copies of the foregoing waiver and
        extension agreement, and has orally agreed to the terms, but the documents
        have
        not yet been signed by Laurus.
  **NOTE 7-
        SUBSEQUENT EVENTS**
 
 On
        February 28, 2007, the Company accepted the resignation of William N. Plamondon
        III, as Chief Executive Officer and finalized the terms of his departure.
        Pursuant to the Severance and Release Agreement, Mr. Plamondon, and R.I.
        Heller
        Co., LLC and certain other parties who have worked with RI Heller have agreed
        that Mr. Plamondon will serve as CEO through March 1, 2007, that RI Heller
        and
        Mr. Plamondon will transfer, without charge, all shares of common stock of
        the
        Company owned by them (680,000 shares) to the Company, that RI Heller will
        receive $120,000 for Mr. Plamondon's and RI Heller's services (payable in
        12
        monthly installments of $10,000), and that the parties will mutually release
        each other for all claims to the date of the agreement. The Company has recorded
        $120,000 in current liabilities as of January 31, 2007 related to this
        agreement.


10





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





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**




The
      following discussion and analysis should be read in conjunction with our
      financial statements. This discussion should not be construed to imply that
      the
      results discussed herein will necessarily continue into the future, or that
      any
      conclusion reached herein will necessarily be indicative of actual operating
      results in the future.




**SUMMARY
      of RECENT TRANSACTIONS**




**Whitco
      Transaction**





On
      April
      25, 2006, the Company, through a newly formed wholly owned subsidiary, Whitco
      Poles, Inc., acquired certain assets of Whitco Company, L.P. We issued 3,750,000
      common stock purchase warrants, valued at $1,875,000.





**North
      Texas Transaction**





On
      September 7, 2005, through Omaha, our wholly owned subsidiary, we entered into
      the Agreement with the shareholders (the "North Texas Shareholders") of North
      Texas. Under the terms of the agreement, Omaha acquired 100% of the common
      stock
      of North Texas in exchange for the payment of the Purchase Price. North Texas
      is
      engaged in the business of steel fabrication and is based in Fort Worth, Texas.
      We completed the acquisition of North Texas on September 7, 2005. The Purchase
      Price was paid as follows:





·
            $9,150,000
                was paid to the North Texas Shareholders;·
            $1,350,000
                was paid to an account designated pursuant to the terms of the North
                Texas
                Steel/Omaha Holdings Pension Plan Joint Account Agreement dated September
                7, 2005 (the "Pension Plan Agreement"); and·
            $500,000
                was paid to an account designated pursuant to the terms of the North
                Texas
                Steel/Omaha Holdings Indemnity Joint Account Agreement dated September
                7,
                2005 (the "Indemnity Agreement").





Each
      of
      the North Texas Shareholders, in connection with the acquisition, has entered
      into standard non-compete/non-solicitation arrangements.





**GENERAL
      OVERVIEW**




From
      February 2002 through its acquisition of North Texas in September 2005, the
      Company largely had ceased its historical operations and incurred nominal
      operating expenses, primarily related to the maintenance of its corporate
      existence.




The
      following analysis of the consolidated results of operations
      includes the Company and its wholly-owned subsidiaries Omaha
      Holdings Corporation and North Texas Steel and Whitco Poles.





**Critical
      Accounting Policies**




The
      preparation of our financial statements in conformity with accounting principles
      generally accepted in the United States requires us to make estimates and
      judgments that affect our reported assets, liabilities, revenues, and expenses,
      and the disclosure of contingent assets and liabilities. We base our estimates
      and judgments on historical experience and on various others assumptions we
      believe to be reasonable under the circumstances. Future events, however, may
      differ markedly from our current expectations and assumptions. While there
      are a
      number of significant accounting policies affecting our consolidated financial
      statements; we believe the following critical accounting policies involve the
      most complex, difficult and subjective estimates and judgments:




11




**Revenue
      Recognition**




Significant
      portions of North Texas' revenues are derived from construction and service
      projects. Revenues from fixed-price, cost-plus-fee, time and material and
      unit-price contracts are recognized using the percentage-of-completion method
      of
      accounting which recognizes income as work on a contract progresses. Recognition
      of revenues and profits generally are related to costs incurred in providing
      the
      services required under the contract. Earned revenue is the amount of cost
      incurred on the contract in the period plus the proportional amount of gross
      profit earned during the same period. This method is used because management
      considers total cost to be the best available measure of completion of
      construction contracts in progress. Provisions for estimated losses on
      construction contracts in progress are made in their entirety in the period
      in
      which such losses are determined without reference to the percentage complete.
      Changes in job performance, job conditions and estimated profitability,
      including those arising from contract penalty provisions and final contract
      settlements, may result in revisions to revenue and costs, and are recognized
      in
      the period in which the revisions are determined. Claims for additional revenue
      are not recognized until the period in which such claims are allowed. Direct
      contract costs include all direct labor, direct materials and some estimating
      costs and shop and equipment costs. General and administrative costs are charged
      to expense as incurred. Revenue from discontinued operations was recognized
      when
      persuasive evidence of an arrangement existed, the price was fixed, title had
      transferred, collection of resulting receivables was probable, no customer
      acceptance requirements existed and there were no remaining significant
      obligations.




Whitco
      revenues and product costs are recognized as
      their products are shipped to their customers. Whitco's product lines, while
      requiring similar manufacturing processes, such as welding and formal metal
      assemblies, as North Texas, are primarily catalog specific products with much
      shorter lead and production times.




**Allowance
      For Doubtful Accounts**




We
      are
      required to estimate the collectibility of our trade receivables. A considerable
      amount of judgment is required in assessing the realization of these receivables
      including the current creditworthiness of each customer and related aging of
      the
      past due balances. In order to assess the collectibility of these receivables,
      we perform ongoing credit evaluations of our customers' financial condition.
      Through these evaluations we may become aware of a situation where a customer
      may not be able to meet its financial obligations due to deterioration of its
      financial viability, credit ratings or bankruptcy. The reserve requirements
      are
      based on the best facts available to us and are reevaluated and adjusted as
      additional information is received. Our reserves are also based on amounts
      determined by using percentages applied to certain aged receivable categories.
      These percentages are determined by a variety of factors including, but are
      not
      limited to, current economic trends, historical payment and bad debt write-off
      experience. We are not able to predict changes in the financial condition of
      our
      customers and if circumstances related to our customers deteriorate, our
      estimates of the recoverability of our receivables could be materially affected
      and we may be required to record additional allowances. Alternatively, if we
      provided more allowances than are ultimately required, we may reverse a portion
      of such provisions in future periods based on our actual collection
      experience




**Comparison
      of the Quarter Ended January 31, 2006 to the Quarter Ended January 31,
      2007**





**Results
      of Operations**





**Revenues**





Revenues
      for the quarter ended January 31, 2007 resulted from operations of North Texas
      Steel and Whitco Poles. The Company’s revenues for the three months ended
      January 31, 2007 were approximately $8,715,000 and were approximately $6,314,000
      for the three months ended January 31, 2006.  A
      primary
      reason for the increase in revenue was the inclusion of Whitco’s revenue in the
      2007 quarter as well as improved market conditions. Whitco was not acquired
      until April of 2006. Whitco sales for the quarter ended January 31, 2007 were
      approximately $959,000.





**Cost
      of Sales**





The
      cost
      of sales for the quarter ended January 31, 2007 was approximately
      $7,441,000 and approximately $5,562,000 in 2006. A primary reason for the
      increase was the inclusion Whitco costs of sales in 2007. Whitco cost of sales
      for the quarter ended January 31, 2007 were approximately $895,000.The Company's
      gross margin was approximately $1,274,000 and $752,000 for the three months
      ended January 31, 2007 and 2006, respectively or  14.6
      %
      and 11.9 % of revenue, respectively. Since our acquisition of certain pole
      assets and our start-up of Whitco Poles, Inc. on April 24, 2006, we have
      continued to streamline and improve the pole production process from design
      to
      manufacturing lead time to quality assurance. Whitco Pole revenues in the period
      from April 25, 2006 through July 31, 2006 were $960,174 with start-up losses
      in
      that interval of $476,198. In the quarter ended January 31, 2007 Whitco Pole
      net
      losses were trimmed to $1,857.





The
      cost
      of sales predominantly consists of the cost of labor, raw materials, outsourcing
      costs and absorbed indirect manufacturing costs.




**Selling,
      General and Administrative Expenses**





For
      the
      quarters ended January 31, 2007 and 2006, selling, general and
      administrative expenses were approximately $808,000 and $1,377,000,
      respectively, which consist primarily of administrative expenses. General and
      administrative expenses decreased by approximately $569,000 from 2006. This
      decrease was primarily from reduced legal, accounting, and consulting
      expenses. **** Our
      selling, general and administrative expenses will are and will remain high
      as a
      result of complying with various federal and state regulatory filing
      requirements.




12




**Interest
      Expense**





Interest
      and financing expense results primarily from the acquisition of the North Texas
      operations in a highly leveraged transaction. Interest and finance costs include
      the amortization of debt discount resulting from the non cash cost associated
      with equity instruments issued in connection with the debt and a beneficial
      conversion feature attributable to the debt instruments.




**Comparison
      of the Six Months Ended January 31, 2006 to the Six Months Ended January 31,
      2007**





**Results
      of Operations**




**Restatement**


The
        financial statements for the three and six months ended January 31, 2006
        have
        been restated as a result of the discount attributed to September 2005
        convertible debt financings. The reduction resulted from the recalculation
        of
        the fair value of warrants issued with the debt. We previously valued the
        warrants at full fair value. In accordance with EITF 00-27, we have now valued
        the warrants based on relative fair value. As a result, the warrant value
        was
        reduced by $5,177,064. Due to the reduction in the warrant value, we have
        now
        recorded a beneficial conversion feature in the amount of $2,173,455. The
        net
        effect of these adjustments is to reduce the discount by
        $3,003,609.
  Because
        of the reduction in the discount, interest expense for the three and six
        month
        periods ended January 31, 2006 was reduced by $252,358 and $400,481,
        respectively.
  We
        have
        additionally corrected the weighted average shares outstanding for the three
        and
        six month periods ended January 31, 2006 to include option shares deemed
        outstanding due to the nominal consideration associated with their potential
        exercise.
  The
        effects of the above adjustments are summarized as follows:
  Three
                    Months
                
                Six
                    MonthsJanuary
                    31, 2006
                
                January
                    31, 2006Net
                    loss - as reported
                
                
                (2,189,207
                )
                
                (13,648,535
                )Net
                    loss - as restated
                
                
                (1,936,849
                )
                
                (13,248,054
                )Net
                    loss per common share - as reported
                
                
                (2,192,207
                )
                
                (13,803,335
                )Net
                    loss per common share - as restated
                
                
                (1,939,849
                )
                
                (13,402,854
                )Loss
                    per common share - as reported
                
                
                (0.79
                )
                
                (6.54
                )Loss
                    per common share - as restated
                
                
                (0.52
                )
                
                (4.73
                )Weighted
                    average shares outstanding - as reported
                
                
                2,788,783
                
                
                2,086,947Weighted
                    average shares outstanding - as restated
                
                
                3,723,783
                
                
                2,833,931
 As
        a
        result of this restatement, our forms 10QSB for the periods ending January
        31,
        2006 and April 30, 2006 will need to be amended to reflect such restatement.
        The
        Company is the process of preparing and filing amended forms 10QSB for those
        periods.
  **Revenues**





Revenues
      for the six months ended January 31, 2007 resulted from the operations of North
      Texas Steel and Whitco Poles. The Company’s revenues for the six months ended
      January 31, 2007 were approximately $16,347,000 and were approximately
      $10,306,000 for the six months ended January 31, 2006. A primary reason for
      the
      increase in revenue was the inclusion of Whitco’s revenue in the 2007 period.
      Whitco was not acquired until April of 2006. Whitco sales for the six months
      ended January 31, 2007 were approximately $2,247,000. Also, North Texas revenues
      have been included for the full six months ended January 31, 2007.  In
      the
      2006 period, North Texas revenues were included from the September 7, 2005
      acquisition.





Structural
      orders backlog at January 31, 2007 was approximately $18,000,000 as compared
      to
      a backlog of about $9.4 million on January 31, 2006. Our bidding remains strong.
      We expect the fabricated structural steel market to remain strong for the
      remainder of 2007 and into 2008. There is still concern over extended mill
      rolling lead times and continued increase in mill base pricing and their effects
      on the design and construction community.





**Cost
      of Sales**





The
      cost
      of sales for the six months ended January 31, 2007 was approximately
      $14,035,000 and approximately $9,113,000 in 2006. A primary reason for the
      increase was the inclusion Whitco costs of sales in 2007. Whitco cost of sales
      for the six months ended January 31, 2007 were approximately $1,964,000.The
      Company's gross margin was approximately $2,311,000 and $1,193,000 for the
      six
      months ended January 31, 2007 and 2006, respectively or14.1 % and 11.6 % of
      revenue, respectively..





The
      cost
      of sales predominantly consists of the cost of labor, raw materials, outsourcing
      costs and absorbed indirect manufacturing costs.




**Selling,
      General and Administrative Expenses**





For
      the
      six months ended January 31, 2007 and 2006, selling, general and
      administrative expenses were approximately $1,783,000 and $8,709,000,
      respectively, which consist primarily of administrative expenses. General and
      administrative expenses decreased by approximately $6,926,000 from 2006. This
      decrease was primarily from consulting fees incurred in 2006 **.** Our
      selling, general and administrative expenses are and will remain high as a
      result of complying with various federal and state regulatory filing
      requirements.




**Interest
      Expense**





Interest
      and financing expense results primarily from the acquisition of the North Texas
      operations in a highly leveraged transaction. Interest and finance costs include
      the amortization of debt discount resulting from the non cash cost associated
      with equity instruments issued in connection with the debt and a beneficial
      conversion feature attributable to the debt instruments.





**Liquidity
      and Capital Resources**




As
      of
      January 31, 2007, we had approximately $562,000 in cash and equivalents. While
      in prior periods, we have had sufficient cash on hand to meet our obligations,
      as a result of the recapitalization, we may not have funds to meet our future
      working capital and financing needs. As a result, additional financing will
      be
      required in order to meet our current and projected cash flow deficits from
      operations and development. Although we are seeking financing to support our
      working capital needs, we have no commitments or assurances that it will be
      successful in raising the funds required.





We
      believe that we will be successful in meeting the working capital needs to
      fund
      the current level of operating activities, capital expenditures and debt and
      other obligations through May 6, 2007 when the Laurus convertible term note
      B
      matures. However, if during that period or thereafter, we are not successful
      in
      generating sufficient capital resources and /or successfully refinancing our
      debt on terms acceptable to us, this could have a material adverse effect on
      the
      Company's business, results of operations liquidity and financial
      condition.





13




If
      in the
      future, if we are not capable of generating sufficient revenues from operations
      and its capital resources are insufficient to meet future requirements, we
      may
      have to raise funds to continue our operations.





While
      the
      Company has continued to raise capital to meet its working capital requirements,
      additional financing is required in order to meet future needs. There are no
      assurances the Company will be successful in raising the funds required and
      any
      equity raised would be substantially dilutive to existing
      shareholders.





The
      Company's independent certified public accountants have stated in their report
      included in the Company's July 31, 2006 Form 10-KSB, that the Company has
      incurred operating losses in the last two years, and that the Company is
      dependent upon management's ability to develop profitable operations and to
      restructure its long- and short-term debt obligations to its principal sources
      of capital. These factors among others may raise substantial doubt about the
      Company's ability to continue as a going concern.




**Off-
      Balance Sheet Arrangements**





We
      do not
      maintain off-balance sheet arrangements nor do we participate in non-exchange
      traded contracts requiring fair value accounting treatment.




**Inflation**





The
      effect of inflation on our revenue and operating results was not significant.
      Our operations are located in North America and there are no seasonal aspects
      that would have a material effect on our financial condition or results of
      operations.





**ITEM
      3. CONTROLS AND PROCEDURES**





As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief financial officer, of our
      disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
      15d-15(e) of the Exchange Act). Based upon his evaluation, our chief financial
      officer concluded that our disclosure controls and procedures need improvement
      and were not effective as of January 31, 2007 to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the Commission's rules and forms.  Our management is
      in the process of identifying deficiencies with regard to our disclosure
      controls and procedure and implementing corrective measures, which includes
      the
      establishment of new internal policies related to financial reporting.





14




**Changes
      in Internal Control over Financial Reporting**





As
      required by Rule 13a-15(d), the Company’s Chief Executive and Chief Financial
      Officers, also conducted an evaluation of the Company’s internal controls over
      financial reporting to determine whether any changes occurred during the fourth
      fiscal quarter that have materially affected, or are reasonably likely to
      materially affect, the Company’s internal control over financial reporting.
      During the preparation of the Company’s financial statements as of and for the
      year ended July 31, 2006, the Company has concluded that the current system
      of
      disclosure controls and procedures was not effective because of the internal
      control weaknesses identified below. As a result of this conclusion, the Company
      has initiated the changes in internal control, to the extent possible given
      limitations in financial and manpower resources, also described below. It should
      be noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system will be met. In addition, the design of any control system is based
      in
      part upon certain assumptions about the likelihood of future
      events.





**Lack
      of Adequate Accounting Staff**





The
      Company is aware of its staffing needs is taking steps to address its
      understaffed Finance and Accounting team to correct this material weakness.
      The
      Company engaged an independent contractor with extensive CFO-level management
      and SEC reporting experience in public companies. The Company feels additions
      to
      the Company’s Finance and Accounting team will improve the quality of future
      period financial reporting.





**Timely
      Closing of the Books**





Management
      identified a material weakness based on the Company’s delay in closing its
      books. To correct this material weakness, checklists will be developed
      delineating tasks, preparation responsibilities, and review responsibilities
      targeting specific completion dates. The checklist will provide evidentiary
      support of work performed and reviewed. Specific checklist will be developed
      for
      non-quarter end months, quarter end months, and the annual close. These
      checklists are still being developed and will be implemented in the 3rd quarter
      2007 close process and utilized in the preparation of the 3rd quarter 2007
        Form 10-QSB and subsequent period ends.





Pursuant
      to temporary rules of the Securities and Exchange Commission, this annual report
      does not include a report regarding the Company’s internal controls and
      procedures over financial reporting.





**Resignation
      of Principal Executive Officer**





On
      February 28, 2007, the Company accepted the resignation of William N. Plamondon
      III, as Chief Executive Officer and finalized the terms of his departure.
      Pursuant to the Severance and Release Agreement, Mr. Plamondon, and R.I. Heller
      Co., LLC and certain other parties who have worked with RI Heller have agreed
      that Mr. Plamondon will serve as CEO through March 1, 2007, that RI Heller
      and
      Mr. Plamondon will transfer, without charge, all shares of common stock of
      the
      Company owned by them (680,000 shares) to the Company, that RI Heller will
      receive $120,000 for Mr. Plamondon's and RI Heller's services (payable in 12
      monthly installments of $10,000), and that the parties will mutually release
      each other for all claims to the date of the agreement. The Company has recorded
      $120,000 in current liabilities as of January 31, 2007 related to this
      agreement.




On
        March
        25, 2007 our chairman, Dr. Gary Fromm asked Mr. Plamondon for written
        confirmation that he has resigned his position as a member of our board.
        Mr.
        Plamondon confirmed in writing that he has resigned as a member of our board
        effective as of March 1, 2007.


The
      Company has not yet found a replacement for Plamondon and the Company is
      currently operating without a Chief Executive Officer. Until such replacement
      is
      found, we must rely on our only remaining officer, Dr. Gary Fromm, our Chairman
      of the Board and Chief Financial Officer, to fill the role formally filled
      by
      Plamondon. There can be no guaranty that a replacement candidate will be found
      and/or that Dr. Fromm will continue to fulfill the duties formally undertaken
      by
      Plamondon.





15





**PART
      II**





**OTHER
      INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




From
      time
      to time, the Company may become involved in various lawsuits and legal
      proceedings which arise in the ordinary course of business. However, litigation
      is subject to inherent uncertainties, and an adverse result in these or other
      matters may arise from time to time that may harm the Company’s business. The
      Company is currently not aware of nor has any knowledge of any such legal
      proceedings or claims that we believe will have, individually or in the
      aggregate, a   material adverse affect on our business, financial condition
      or operating results.




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**





None.





**ITEM
      3. DEFAULTS ON SENIOR SECURITIES**





Our
      secured convertible term note B with Laurus with a principal amount of
      $2,000,000 convertible into up to 6,006,006 shares of common stock matured
      and
      was payable in full on March 6, 2007. We did not pay the amount due on that
      date. Rather, Laurus has now agreed to extend the Maturity Date of the term
      B
      note to May 7, 2007. Laurus agreed to such an extension on the condition that
      we
      pay a $300,000 fee for the extension. In addition, as part of the waiver, Laurus
      has orally agreed to extend the time for the effectiveness of the Form SB-2
      Registration Statement we filed on January 31, 2007 from April 16, 2007 to
      May
      7, 2007. Laurus' counsel has provided us with copies of the foregoing waiver
      and
      extension agreement, and has orally agreed to the terms, but the documents
      have
      not yet been signed by Laurus.





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





None.





**ITEM
      5. OTHER INFORMATION**





None.




**ITEM
      6. EXHIBITS**





(a)
            Exhibits.





31.1
            Certification
                by Principal Officer & Chief Financial Officer pursuant to
                Sarbanes-Oxley Section 302





32.1
            Certification
                by Principal Officer and Chief Financial Officer pursuant to 18 U.S.
                C.
                Section 1350





16





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


/s/
                Dr. Gary FrommDr.Gary
                Fromm
              CHAIRMANT
                OF THE BOARD &CHIEF FINANCIAL
                OFFICER




DATE:
      03/26/2007


17