UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


___________________




FORM
10-KSB/A


________________________________




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




For the
fiscal year ended December 31, 2006




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




For the
transition period from         
to




Commission
file number: 0-50912




INTERNATIONAL
AMERICAN TECHNOLOGIES, INC.


(Exact
Name Of Registrant As Specified In Its Charter)




Nevada
            88-0225318(State
      of Incorporation)
            (I.R.S.
      Employer Identification No.)601 Cien Street, Suite 235 Kemah,
      TX
            77565-3077(Address
      of Principal Executive Offices)
            (ZIP
      Code)




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




Securities
Registered Pursuant to Section 12(g) of The Act: Common Stock,
$0.0001




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  ̈




At
December 31, 2006, the aggregate market value of the 3,723,720 common stock held
by non-affiliates of the Registrant was approximately $1,303,302. At December
31, 2006, the Registrant had 36,135,000 shares of common stock
outstanding.




Issuer's
revenues for its most recent fiscal year: $6,467,393.




Indicate
whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes   ̈ No x




Indicate
whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes  ̈ No x





EXPLANATORY NOTE




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









TABLEOF CONTENTS




Item
            
            Description
            
            PagePART
      IITEM
      1.
            
            DESCRIPTION OF
      BUSINESS
            
            
            3ITEM
      2.
            
            DESCRIPTION OF
      PROPERTY
            
            
            18ITEM
      3.
            
            LEGAL
      PROCEEDINGS
            
            
            19ITEM
      4.
            
            SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS
            
            
            19PART
      IIITEM
      5.
            
            MARKET FOR
      REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS
            
            
            20ITEM
      6.
            
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATION
            
            
            21ITEM
      7.
            
            FINANCIAL
      STATEMENTS
            
            
            24ITEM
      8.
            
            CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            
            
            24ITEM
      8.A
            
            CONTROLS AND
      PROCEDURES
            
            
            24ITEM
      8.B
            
            OTHER
      INFORMATION
            
            
            25PART
      IIIITEM
      9.
            
            DIRECTORS AND
      EXECUTIVE OFFICERS OF THE REGISTRANT, COMPLIANCE WITH SECTION
      16(A)
            
            
            26ITEM
      10.
            
            EXECUTIVE
      COMPENSATION
            
            
            27ITEM
      11.
            
            SECURITY OWNERSHIP
      OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            
            
            27ITEM
      12.
            
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
            
            
            28ITEM
      13.
            
            EXHIBITS AND
      REPORTS ON FORM 8-K
            
            
            28ITEM
      14.
            
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES
            
            
            28










Cautionary
Statement regarding Forward-Looking Statements






This
Annual Report on Form 10-KSB of International American Technologies, Inc.
(hereinafter the "Company", the "Registrant" or "IMTG") includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Registrant has based these forward-looking statements on its current
expectations and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions
about the Registrant that may cause its actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "would,"
"expect," "plan," "anticipate," "believe," "estimate," "continue," or the
negative of such terms or other similar expressions. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
described in this Annual Report on Form 10-KSB and in the Registrant's other
Securities and Exchange Commission filings. Should one or more of these risks or
uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may vary in material respects from those projected in the
forward-looking statements. For a more detailed discussion of the foregoing
risks and uncertainties, see "Risk Factors".






PART
I






ITEM 1. DESCRIPTION
OF BUSINESSBack to Table of Contents






International
American Technologies, Inc.






International
American Technologies, Inc., a Nevada corporation, is publicly traded on the
OTCBB: Symbol "IMTG". The Company was incorporated on August 18, 1986 and is a
45.1% owned subsidiary of American International Industries, Inc., OTCBB: AMIN.
AMIN consolidates IMTG even though its ownership is less than 51%, because the
Company exercises its right to occupy two of the three board of director seats.
Since IMTG is incurring losses and there is no minority interest, AMIN
recognizes 100% of IMTG’s losses. AMIN’s ownership percentage (original
ownership 81.6% and subsequent reduction) is based on the acquisition of the 49%
minority interest of Hammonds Technical Services, Inc., Hammonds Fuel Additives,
Inc., and Hammonds Water Treatment Systems, Inc. (sometimes hereinafter the
"Hammonds Companies" or "Hammonds") in exchange for 16,000,000 shares of IMTG
common stock. AMIN’s ownership percentage will diminish when Vision Capital
converts their preferred shares into common and if Vision Capital chooses to
exercise their warrants.






Description
of Hammonds Business






Some of
the statements contained in this current report of International American
Technologies Inc., (hereinafter the "Company", "IMTG", "We" or the "Registrant"
discuss future expectations, contain projections of our operations or financial
condition or state other forward-looking information. On February 28, 2005, the
Registrant entered into a Stock Purchase Agreement (the "Agreement") to acquire
51% of the capital stock of Hammonds Technical Services, Inc., a privately-owned
Texas corporation ("Hammonds") in consideration for the Registrant or its
parent, American International Industries, Inc., providing: (i) $998,300 in cash
to Hammonds for working capital; (ii) a secured revolving long-term line of
credit in the amount of $2,000,000; and (iii) the Registrant's parent, American
International Industries, Inc., issuing 145,000 restricted shares of common
stock to the Registrant in consideration for a $1,450,000 promissory note. These
restricted shares were exchanged for two minority equity interests in Hammonds
owned by third parties, which minority interest were canceled. Pursuant to the
Agreement, which closed on April 28, 2005, Hammonds became a subsidiary of the
Registrant.






On August
1, 2006 The Company acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. by issuing 16,000,000 restricted shares or 44.4% of IMTG common
stock at a conversion rate of $.25 a share. The additional cost of $4,000,000
has been allocated to patents, trademarks, and sole source contract and is being
amortized in a manner equivalent to the amortization used on the intangible
assets acquired in the initial purchase of 51% of the company.






On August
8, 2006, the Company entered into a Series A Convertible Preferred Stock
Purchase Agreement with Vision Opportunity Fund Limited, an institution investor
("VOMF"), pursuant to which the Company issued and sold to VOMF for
consideration of $1,500,000 or $1.80 per share a total of 833,333 shares of a
newly authorized series A convertible preferred stock ("Series A Preferred
Stock"), each share convertible into ten shares of the Company’s common stock.
In connection with the issuance and sale of Series A Preferred Stock, the
Company issued to VOMF Series A Warrant and Series B Warrants, each exercisable
to purchase up to 8,333,333 additional shares of common stock at a price of
$0.18 per share. The Series A Warrants expire 5 years from the date of issuance.
The Series B Warrants initially expired 1 year from the date of issuance, which
expiration date was extended, in connection with the Company entering into
Series B Convertible Preferred Stock Purchase Agreement described below, to 2
years from the date of issuance.






On
September 29, 2006, the Company entered into a Series B Convertible Preferred
Stock Purchase Agreement with VOMF pursuant to which the Company issued and sold
to VOMF for consideration of $1,500,000 or $1.80 per share a total of 833,333
shares of a newly authorized series B convertible preferred stock ("Series B
Preferred Stock"), each share convertible into ten shares of the Company’s
common stock. In connection with the issuance and sale of Series B Preferred
Stock, the Company issued to VOMF Series C Warrant exercisable to purchase up to
8,333,333 additional shares of common stock at a price of $0.50 per share. The
Series C Warrants expire 5 years from the date of issuance.






The above
private financing transactions are sometimes hereinafter referred to as the
August 2006 and September 2006 Private Financing Transactions.






Subsequent
to December 31, 2006, and in connection with the agreement of VOMF to exercise
up to 4,000,000 Series C Warrants in March 2007, the Company reduced the
exercise price from $0.50 per share to $0.18 per share through December 31,
2007, following which the exercise price reverts to $0.50 per share. On March
27, 2007, VOMF exercised 3,970,400 Series C Warrants at a price of $0.18 per
share with gross proceeds of $714,672 to the Company.






Revenue
and expenses of Hammonds are included in the Company’s consolidated statements
of operations from May 1, 2005 through the year ended December 31,
2006.






General
Background of Hammonds






Hammonds
Technical Services, Inc. and Hammonds Fuel Additives, Inc. were separate
privately-owned companies. In connection with the February 28, 2005 acquisition
by the Company, Hammonds Fuel Additives was merged into Hammonds Technical
Services. On April 2005 and January 2006, respectively, Hammonds Fuel Additives
and Hammonds Water Treatment Systems, respectively, were reincorporated as
separate entities from Hammonds Technical Services, and all three entities are
wholly-owned subsidiaries of the Company. Hammonds manufactures engineered
products and chemicals that serve multiple segments of the fuels distribution,
water treatment and utility vehicle industries. Hammonds' products are marketed
by a worldwide network of distributors, manufacturers representatives and
original equipment manufacturers. Hammonds was founded in 1982 by Carl Hammonds
and provides the following diverse products and services:






Water Treatment for
Municipal and Industrial Use. Hammonds manufactures under several U.S.
and foreign patents calcium hypochlorite tablet and granular systems which
provide water disinfection for a wide range of potable and waste water
applications. Greater focus is being placed on water disinfection and safety
issues associated with disinfection. Some municipalities are being required to
meet added water quality systems. Smaller municipalities ordinarily do not have
the technical or financial resources required to design build and operate
systems that will meet the new water quality criteria. In August 2006, Hammonds
Water Treatment Systems, Inc. received an order for calcium hypochlorite for
$764,500. This order supplied Hammonds’ water treatment products to the poultry
processing industry and is utilized by systems that include Hammonds proprietary
tablet feeders. This order reflects continued growth in demand for solid
disinfection used in the food processing, waste treatment and potable water
treating industries. During 2006, Hammonds had over $2,000,000 in chemical sales
to the municipal and food processing industries.






Fuel Handling Equipment
Market. Hammonds manufactures a wide variety of fluid injector systems
which are injection pumps that are driven and controlled by the flow of product.
They utilize a fluid driven motor that furnishes both power and control to the
injector. Requiring no external power, these injectors provide accurate
proportionate-to-flow injection of up to eight different additives, separately
or simultaneously. With primary applications in fuel distribution, Hammonds'
fluid powered injectors are marketed to the general aviation industry and the
U.S. military for application in fuel system icing inhibitors, corrosion
inhibitors, conductivity and thermal stability additives. Hammonds' fuel
handling equipment provides this market with an advanced means of blending
additives and chemicals. In May 2006, KBR received delivery of six 4T-4A 800 MIL
multiple additive systems for use in Iraq.






Current
active projects total a unit requirement of approximately 925 of these injectors
over the next five years with a current value in excess of $24 million. Hammonds
delivered five JP-8 fuel additive carts in June 2006 to its Middle Eastern
representative for use by the Egyptian Air Force. These fuel additive carts will
be used to service military aircraft in Egypt as well as transient military
aircraft from other countries including the United States. In August 2006,
Hammonds received a major order for its fluid powered additive systems used in
production of JP-8 + 100 military specification fuel for aircraft being serviced
in the Middle East. The initial $576,000 order for equipment will be delivered
during the first quarter of 2007, with the total project exceeding $2,304,000.
Hammonds received a purchase order in January 2007 for a complex fuel handling
system, including fuel additive systems for the Al Dhafra Air Base in the United
Arab Emirates (UAE). Hammonds projects that it will recognize $960,000 in
revenues during the first quarter of 2007 and is expected to recognize a total
of approximately $2,000,000 related to this project for the 2007 fiscal
year.






Cimmaron
International Corporation, an industrial exporter, is marketing the
Hammonds-Cimmaron pre-packaged fuel additive dispensing systems to new, as well
as expanded aviation projects currently underway in the Middle East. In addition
to the Al Dhafra Air Base order, these same systems are expected to be specified
at a new UAE Air Base in Al-Minhad, having an estimated value exceeding
$1,824,000. Hammonds believes that its truck-mounted injectors are the
technology of choice for major U.S. marketers of jet fuel in providing custom
blending at the end of the hose for not only jet fuel, but a wide range of
products including diesel, LPGN (propane), home heating oil, and bio-diesel. In
January, 2005, Hammonds began a long-term program to install dye injection
systems in over eight hundred Canadian and U.S. stationary and truck mounted
diesel delivery installations.






Fuel Additives.
Hammonds' fuel additive division produces and markets motor and aviation fuel
additives, with Biobor® JF as its primary product, serving the aviation,
stand-by power and marine fuel markets. Biobor® JF is one of only two biocides
approved for use in aviation fuels, but it has also been tested and approved as
a preservative for manufactured wood products such as engineered trusses,
windows and sheet building materials. The expanding use of these manufactured
wood products should provide a new expanded market for Biobor® JF since products
such as arsenic have been removed from the list of approved wood
preservatives.






Industrial Utility Vehicle
Market. In late 2006, Hammonds started production of an entirely new type
of industrial utility vehicle called the "omni directional vehicle" or "ODV".
Hammonds believes that ODV utility vehicles will establish a new standard for
industrial utility vehicles based on vehicle safety and performance. The ODVs'
target markets include the: aviation industry, which is undergoing
reorganization and expansion into regional jet service; fork lifts, which are a
fundamental industrial tool and represent the largest segment of industrial
vehicle demand; utility tractors, vehicles used for earth and snow handling;
freight trailer "mules", which are modified tractors used to move trailers at
major terminals; and ODVs for security/law enforcement, which can provide high
visibility and radial vision in a very limited space for use at airports, ports
and bridges, among other high risk locations. Hammonds has produced several
prototypes of its new ODV product line at its plant in Houston, TX. Hammonds
intends to enter into license agreements with other manufacturers to produce a
range of ODVs based on its patented technology. During the fourth quarter of
2005 Hammonds received initial stocking orders for the ODV from distributors as
well as scheduled purchase orders for delivery during 2007. In February 2006,
Hammonds announced the appointment of Mark C. Pope Associates, Inc. (MCP) as a
distributor for the ODV to represent Hammonds as an Aviation Ground Support
Distributor in Georgia, Mississippi, Tennessee, North Carolina, South Carolina,
Alabama, Florida and Nevada. MCP ordered 4 ODV mobile demonstration units to
initially cover their territory. MCP took delivery of their first ODV in May
2006 at the annual AS3 convention, which premiers ground support equipment for
the aviation industry. Since that time, MCP received their second demonstration
unit and has been encouraged by the response gained as they demonstrate the
equipment to various aviation and industrial users. Following industry response
and MCP’s experience with the vehicle, MCP elected to add the Snow Management
and Industrial classifications to their distributorship agreement in five
states. MCP issued a blanket purchase order in August 2006, covering various
models of the ODV, including 45 tow tractors, 5 snow plows, 2 Command Stations,
and multiple attachments that compliment ODV tractors. This represents net sales
in excess of $2,100,000 to the Company. In the 4th quarter
of 2006, Hammonds shipped seven of its Model G-30 ODV tractors to be used as
material positioning equipment at Robins Air Force Base in Warner Robins,
Georgia. While this was a one-time order, Hammonds is expecting many
opportunities for add-ons. Also, other groups within Warner Robbins now have
interest in ODVs. Hammonds intends to offer munitions loaders and aircraft
tractor spotting dolly equipment to the U.S. Navy in 2007-2008.






Hammonds
has a backlog of approximately $5,645,000 for its additive and injector systems,
omni directional vehicles and water treatment solutions.






Description
of Hammonds Products and Services






Water Treatment Technology
Systems






Calcium
Hypochlorite Tablet Systems: Manufactured by Hammonds under several United
States and foreign patents, Hammonds industrial and municipal tablet systems
provide water disinfection for a wide range of potable and waste water
applications. Hammonds pioneered engineered tablet systems and believes that it
is well established in the markets for solid chemical disinfection.






Granulated
and Powder Blenders: This equipment, for which Hammonds has several patents, is
used to blend and inject a variety of hydroscopic materials into pressurized
fluid lines. Hammonds believes that this equipment offers competitive features
related to its packaging system, removal of environmental contamination,
personnel safety, preservation of product quality and accurate feed rates.
Hammonds' dry products blender equipment can primarily be used in municipal and
industrial waste water treatments, food processing, refining and paper
manufacture.






Fuel Handling Equipment
Systems






Fluid
Powered Injectors: Hammonds' injector systems are injection pumps that are
driven and controlled by the flow of product. They utilize a fluid driven motor
that furnishes both power and control to the injector. Requiring no external
power, these injectors provide accurate proportionate-to-flow injection of up to
eight different additives, separately or simultaneously. With primary
applications in fuel distribution, Hammonds' fluid powered injectors are chosen
for aviation fuels for application in fuel system icing inhibitors, corrosion
inhibitors, conductivity and thermal stability additives.






"Smart"
Electronic Injectors: This technology combines fluid powered technology with
electronic process controls for use in data analysis and performance
verification of Hammonds' fuel handling systems. Introduced to the aviation
industry by Hammonds, these innovative systems have given Hammonds a strong
market position and Hammonds expects to maintain a competitive position in this
growing market.






Hypodermic
Pump: Hammonds believes that this new technology will play a dominant role in a
wide range of chemical metering applications. Hammonds believes that this is the
first entirely new fluid handling technology introduced in over twenty-five
years. Its hypodermic pump is could contribute significant revenues to Hammonds'
line of fluid handling products once the new pump is placed into
production.






In-Tank
Vehicle Additive System: The In-Tank system automatically dispenses additives
into vehicle tanks as they are filled with fuel. This system functions without
power or controls while a variety of performance additives can be blended as the
vehicle moves from fuel stop to fuel stop. Hammonds expects that higher energy
costs and growing demand for alternative blended fuels will continue to increase
demand for Hammonds' proprietary technology.






LPGN and
Natural Gas Blending: Hammonds has a line of injector systems that enable new
chemicals to be added to ordinary LPGN and natural gas, which will replace
acetylene as fuel in manufacturing processes. Consumers of high volumes of
natural gas or acetylene gas are the target markets for this line of injector
systems.






Fuel
Polishing: Hammonds distributes fuel handling systems designed to "polish"
contaminated fuel in various vehicle tanks. Offered for rent and for sale, these
units are distributed to industrial fuel and marine equipment dealers throughout
the United States.






As a
result of Hammonds' introduction of data acquisition and transaction data
trails, Hammonds believes that its additive systems will continue to utilize the
latest in solid state controls. Hammonds has developed and has commenced
production of the second generation of injector systems and believes that these
new additive systems should enable Hammonds to maintain its competitive market
position in this growing market into the next decade.






Additives for General Fuels
and Commercial Aviation Fuels






Additives
are the only means by which the performance of fuels can be enhanced. Higher
levels of sophistication in aviation and ground based equipment will continue to
demand additives that can expand performance. Hammonds supplies additives for
aviation, diesel, gasoline, LPGN and natural gas powered vehicles and
equipment.






Biobor®
JF Fuel Biocide: In 1991, Hammonds purchased Biobor® JF, a fuel biocide approved
for control of microbial growth in hydrocarbon fuels. Biobor® JF was developed
by U.S. Borax in conjunction with major oil companies and the aviation industry
as a means of controlling dangerous corrosion and contamination of aviation fuel
as a result of hydrocarbon utilizing micro organisms. For over forty years,
Biobor® JF has enjoyed the unique status as the only biocide approved for use in
aviation fuels. Biobor® JF has continued to command the majority of the aviation
market. Also widely used in diesel and heavy fuels of all grades, Biobor® JF is
exclusively used by manufacturers such as Boeing, Dessault, Airbus, Lockheed,
Cessna, Gulfstream, Learjet, General Dynamics, Pratt & Whitney, Rolls Royce,
GE, Cummins,General Motors, Ford,
Caterpillar, DaimlerChrysler and John Deere.






Performance
Additives: Hammonds sells performance additives including detergents, pourpoint
depressants, cetane improvers, lubricity agents and fuel system icing
inhibitors. These products are purchased in bulk from manufacturers such as GE
and Union Carbide and are carefully selected to provide a well-rounded family of
products that compliment the commercial and marine industry, aviation, railroad
and off-road equipment market. All such products have trademarked names owned by
Hammonds.






Fuel
Quality Materials:Hammonds offers fuel
test kits and materials used inquality control, filter
media, water absorption materials and related accessories utilized extensively
by aviation, off-road, commercial transportation, marine and railroad
industries.






Omni Directional
Vehicles






Hammonds
Omni Directional Vehicle (ODV) is based on a round chassis that is driven by two
individually powered wheels located at the center axis of the circle. Caster
wheels either in the rear of the vehicle at a fixed point, or on a transport
tool carriage that moves about the circumference of the chassis, balances the
vehicle and allows it to move in any radial direction from a given point
regardless of the position of the "front" of the vehicle.Since it is possible to
rotate a full360
degrees without moving off its original position, it can change direction by
simply rotating to the desired direction, and then begin moving forward or in
reverse.






Working
in conjunction with the ODV's ability to move precisely in any direction, a
radial hitch moves freely about the entire circumference of the vehicle. The
radial hitch provides a connection point to which a wide range of implements and
tools can be attached including tow bars for aircraft, plows and buckets for
materials excavation, forks for materials handling and accessories such as
rotary broom, sweepers, vacuums and spreaders.






Hammonds
believes that its newly-developed line of ODVs has createdan
entirely new class of industrial vehicles presenting Hammonds with an
opportunity to reshape the way multiple industries move equipment and
materials.






The ODV
utilizes the most current closed loop hydrostatic technology. Integral dynamic
and parking brakes, dual speed wheel motors and digitally controlled pumps
utilize sophisticated controls that offer engineering a wide range of options in
delivering features to the customer. Electric power will play a dominant role in
future propulsion of industrial vehicles and Hammonds' ODVs are ideally suited
to electric power. With plans to provide munitions loaders for the Joint Strike
Force aircraft as well as current aircraft in theU.S. inventory,
Hammonds believes that the sophistication level of its ODV will grow and enable
it to meet the precise handling requirements in multiple targeted
industries.






Markets
Hammonds Operates In






Water Treatment
Market






Demand
for Clean Water. It is estimated three percent of the world's water is fresh
water, most of which is in the form of ice and snow. It is further estimated
that approximately 0.6 percent of all of the world's water is used by humans for
various purposes, including agricultural uses. Only some of this water can be
used again, after purification treatment. About 70 percent of all fresh water is
used for irrigation, and most of this cannot be recycled. In the U.S. about 30
percent of all irrigation water is groundwater pumped from the High Plains
aquifer. Approximately 20% of the fresh water goes to industrial uses, leaving
only about 10% for domestic drinking, cooking, and sanitation.






Accordingly,
the purification and treatment of municipal drinking water and wastewater is a
worldwide concern. The water treatment market is highly fragmented, consisting
of many companies involved in various capacities, including companies that
design fully integrated systems for processing millions of gallons of water for
municipal, industrial, and commercial applications. Demand for water treatment
has continued to grow due to economic expansion, population growth, scarcity of
usable potable water, concerns about water quality and regulatory requirements.
Drinking water, regardless of its source, may contain contaminants that can
affect the health of consumers.






Although
municipal agencies and water utilities in the United States are required to
provide drinking water which complies with the U.S. Safe Drinking Water Act, the
water supplied to homes and businesses from municipalities and utilities may
contain high levels of bacteria, toxins and parasites, as well as high levels of
chlorine used to eliminate contaminants. The importance of effective water
treatment is critical from a health concerns standpoint due to the fact that
impure water can impair consumers' confidence in food products, and discharge
violations can result in significant fines and penalties from regulatory
agencies.






Existing Water Treatment
Systems. In a typical water treatment facility, the first step adds to
the raw incoming water a substance which causes tiny, sticky particles (called
"floc") to form - these attract dirt and other particles suspended in the water.
This process of coagulation results in the heavy particles of dirt and floc
clumping together and falling to the bottom. These heavier particles form
sediment which is siphoned off, leaving the clearer water, which passes on to
filtration. The most common filtration method is known as "slow sand" or
sand-anthracite, in which the water flows into large shallow beds and passes
down through layers of sand, gravel and charcoal. The final process is
disinfection, which is intended to kill bacteria or other microorganisms left in
the water and leave a residual to keep the water safe through the delivery pipes
to the customer. Chlorine is the most commonly employed disinfectant, although
chloramine, ozone, and ultraviolet (UV) are also used. Hammonds manufactures
under several U.S. and foreign patents tableted calcium hypochlorite systems
which provide water disinfection for a wide range of potable and waste water
applications. Today's trend in water treatment filtration, due to the higher
demands for water and the reduction in clean or relatively clean source waters,
is to clarify and heavily filter all municipal water supplies. The smaller
municipalities will also be required to meet the added water quality goals of
the larger systems and will require the infrastructure to do so. Smaller
municipalities ordinarily do not have the technical or financial resources
required to design build and operate systems that will meet the new water
quality criteria.






Fuel Handling Equipment
Market






Hammonds
manufactures a wide variety of fluid injector systems which are injection pumps
that are driven and controlled by the flow of product. They utilize a fluid
driven motor that furnishes both power and control to the injector. Requiring no
external power, these injectors provide accurate proportionate-to-flow injection
of up to eight different additives, separately or simultaneously. In addition to
aviation fuel, Hammonds offers cutting edge technology in wild stream blending
systems used in bio-diesel delivery. With primary applications in fuel
distribution, Hammonds' fluid powered injectors marketed to the general aviation
industry and the U.S. military for application in fuel system icing inhibitors,
corrosion inhibitors, conductivity and thermal stability additives. Hammonds'
fuel handling equipment provides this market with an advanced means of blendings
additives and chemicals.






Fuel Additives
Market






Fuel
additives are the only means by which the performance of fuels can be enhanced.
Hammonds believes that higher levels of demand by the aviation and ground based
equipment industry will continue to grow, with increased levels of performance
from fuel additives. Hammonds manufactures and/or markets additives for
aviation, diesel, gasoline, LPGN and natural gas powered vehicles and equipment.
Governments worldwide are legislating specifications regarding the fuel itself
and engine design. Today's advanced fuel engines are far cleaner than the
engines of prior decades. Unfortunately, even today's engines are not clean
enough to meet current stricter air pollution regulations. Diesel fuel engines
can become ultra-clean. Meeting the environmental challenges will require
extensive research on clean-fuel technology. Research in this area is currently
being sponsored by government agencies, major engine companies, truck and plane
manufacturers, automobile makers, catalyst producers and, for fuels, oil
refining companies and their technology suppliers. Large Fortune 500 companies,
as well as small, emerging technology companies are investing hundreds of
millions of dollars in research and development worldwide on clean-fuel
technologies. Hammonds supplies systems to inject additives in the mining,
marine and drilling industries.






Hammonds
manufactures its Biobor® JF fuel additive for sale to the general and military
aviation industries. Biobor® JF provides a means of controlling dangerous
corrosion and contamination of aviation fuel as a result of hydrocarbon
utilizing micro organisms. Biobor® JF is one of only two biocides approved for
use in aviation fuels. Currently, only two manufactures are approved and Biobor®
JF has continued to command the majority of the aviation market. Also widely
used indiesel and
heavy fuels of all grades, Biobor® JF is used by manufacturers such as Boeing,
Dessault, Airbus, Lockheed, Cessna, Gulfstream, Learjet, General Dynamics, Pratt
& Whitney, Rolls Royce, GE, Cummins,General Motors, Ford,
Caterpillar, DaimlerChrysler and John Deere.






Hammonds
also markets performance additives including detergents, pourpoint depressants,
cetane improvers, lubricity agents and fuel system icing inhibitors. These
products are purchased in bulk from manufacturers such as Shell and Union
Carbide and are carefully selected to provide a well rounded family of products
that compliment the commercial and marine industry, aviation, railroad and
off-road equipment market. All such products have trademarked names owned by
Hammonds.Hammonds
offers fuel test kits and materials used inquality control, filter
media, water absorption materials and related accessories utilized extensively
by aviation, off-road, commercial transportation, marine and railroad
industries.






Industrial Utility Vehicle
(ODV) Market






Aviation:
It is estimated that the aviation industry will require approximately 100,000
ground support vehicles during the next five years. Hammonds believes that the
aviation industry is undergoing electrification and expansion into regional jet
service in addition to now facing a depleted and worn fleet as a result of world
political and economical conditions over the past three years.






Fork
lifts: This fundamental industrial tool represents the largest segment of
industrial vehicle demand with an annual production of of more than 160,000
units during the past year. Hammonds believes that the technology and advanced
engineering features of its ODV represents an advance in the fork lift industry.
The industry spends in excess of 4.6 billion dollars annually on new
equipment.






Utility
Tractors: Skid steer utility vehicles used for earth and snow handling compose
an annual unit production of over 16,000 units. A large percentage of these
tractors are used for snow management as well as general excavation and bulk
material handling, and the ODV is being marketed to this industry.






Freight
Trailer "Mules": Modified tractors are used to move trailers at major terminals
as they are loaded for transport. Two major manufacturers dominate this market
delivering approximately 3,000 units per year. Hammonds believes that it will
also be able to successfully compete for this market.






Security/Law
Enforcement: National security has generated a unique opportunity for the ODV
since it can provide high visibility and radial vision in a very limited space.
Requirements at airports, port, bridges and other high risk locations are
demanding now methods of patrol and observation.






Each of
the major classifications of equipment can be segmented into several categories.
A fundamentalbenefit of the ODV is
the diversity of the markets and industries it is capable of serving. In each
segment of each major classification, Hammonds believes that there are distinct
market boundaries providing a broad base of opportunity for the ODV product
line.






Hammonds
Business Strategy






Since its
inception, Hammonds has been a leader in providing new technology. Hammonds
continues to expand its scope as a leader in serving the fuels, water treatment
and utility vehicle industries. It also believes that it will experience growth
in sales of water treatment products, the addition of new pumping and dispensing
technologies, and expansion of fuel additive applications and production. With
its development of the Omni Directional Vehicle in addition to its other
products and services, Hammonds continues to experience revenue growth with an
expanding line of products and services for multiple markets, sectors and
industries.






Hammonds
believes that future growth and profitability are attainable through careful
management of corporate assets including:




• Diverse
background in design, manufacturing and sales of materials handling
equipment;


•
Leadership in aviation fuels treatment for both commercial and military
uses;


• Strong
marketing alliances with major industries and organizations including Arch
Chemical, CSX Railroad, Exxon/Mobil, BP Aviation, Chevron(Texaco), Tomco,
KopCoat, U.S. Army, U.S. Air Force, Defense Energy Supply and Lockheed
Martin;


•
Introduction and continued development of the ODV, providing significant growth
potential;


•
Continued development of an extensive network of distributors and original
equipment manufacturers;


•
Patented, proprietary technology in markets with high growth
potential;


• High
profile visibility with broad based industries such as aviation, petroleum
distribution, water treatment and utility vehicles; and


• Ability
to secure additional debt or equity financing at terms and conditions
satisfactory to the Registrant.






Competition






The
markets in which Hammonds operates are highly competitive. We compete in several
of our products and services lines against many companies in fragmented, highly
competitive markets and we have fewer resources than some of those companies.
Our business competes in the areas of water treatment technology, fuel handling
equipment, fuel additives and industrial utility vehicles principally on the
basis of the following factors: product quality and specifications (water
treatment technology and fuel additives); customized design and technical
qualifications (fuel handling equipment and industrial utility vehicles);
reputation, technical expertise and reliable service (fuel additives and fuel
handling equipment). Competitive pressures and other factors could cause us
additional difficulties in acquiring market share or could result in decreases
in prices, either of which could have a material adverse effect on our financial
position and results of operations.






Hammonds
faces competition in the water treatment technology market from competitors
offering similar equipment. Hammonds technology competes mainly against
methodologies that continue to evolve as environmental and economic issues force
the water treatment industry to continuously seek new and more effective ways to
purify a diminishing supply of usable water. Hammonds holds multiple patents
marketable in a variety of current and emerging disinfection methods including
solid tablet, granular and liquid chlorine. Hammonds main competitors are PPG
Industries and Arch Chemical, both of which companies market a packaged water
treatment system and have far greater financial and other resources than the
Registrant.






Among our
competitors are some of the world's largest chemical and water treatment
companies and major integrated companies that have their own raw material
resources and far greater financial resources. Hammonds will compete with
numerous well-established water treatment providers, fuel additive and chemical
products companies, fuel handling equipment companies and industrial vehicle
manufacturing and marketing companies, many of which possess substantially
greater experience, financial, marketing, personnel and other resources than
Hammonds.






Hammonds
believes that it is one of the only fuel handling equipment manufacturers
presently offering new proprietary designs. Other providers, Hammonds believes,
sell new versions of systems based upon designs that were developed thirty and
forty years ago. Price is a powerful incentive in this industry, however, and
performance with low installation costs will continue to drive customer demands.
Hammonds believes that Gammon Technical Services and Lubrizol are its main
competitors in its fuel handling equipment business. There are a number of small
competitors that use non-proprietary technology. Hammonds' fuel handling
products are focused on unique market segments. Hammonds believes that its
injectors are most successful in markets where electrical power and or metering
equipment is not available. Hammonds has been a sole-source vendor for the
United States Air Force and Army since 1985.






In the
fuel additive market, Hammonds developed additive blending, introducing a fluid
powered system that has been widely accepted in military and general aviation.
The U.S. military has accepted the Hammonds' injectors as its "sole source" for
rapid deployment combat and terminal pipeline injection. This has provided
Hammonds with contracts for these products and it believes a competitive
advantage compared to other equipment manufacturers that cannot meet the
required specifications.






Biobor®
is a fuel biocide marketed to the aviation, off-road vehicle and stand-by power
generation industries and is registered by the United States Environmental
Protection Agency as a fuel biocide. (EPA 65217-1). Biobor® is one of only two
biocides approved for use in aviation jet fuel. Competition for the jet fuel
market is limited to Kathon FP, a product of Rohm and Haas. Kathon FP is not
approved for use in some parts of the United States. Biobor® has no geographical
limitations and is used throughout the world as a primary choice by operators of
turbine fuel aircraft. There are a host of other manufacturers producing fuel
biocides for diesel and other hydrocarbon based fuels, with Angus Chemical being
one of the largest.






Hammonds'
Biobor® JF fuel biocide is approved for control of microbial growth in
hydrocarbon fuels. The Biobor® JF product, a fuel additive, is widely recognized
as a standard for control of fuel-born microbial growth and has been widely
accepted in the aviation, marine and power generation industries. Hammonds has
established a very competitive position with the Biobor® JF product, selling to
such major customers as Boeing, Dessault, Airbus, Lockheed, Cessna, Gulfstream,
Learjet, General Dynamics, Pratt & Whitney, Rolls Royce, GE, Cummins,
General Motors, Ford, Caterpillar, DaimlerChrysler and John Deere. Hammonds does
not believe that any other product is as accepted in the market as its Biobor®
JR. While Biobor® JF is one of only two biocides approved for use in aviation
fuels, it has also been tested and approved as a preservative for manufactured
wood products such as engineered trusses, windows and sheet building materials.
The expanding use of these manufactured wood products should provide a new
expanded market for Biobor® JF since products such as arsenic have been removed
from the list of approved wood preservatives. Hammonds believes that it enjoys
strong market position in the aviation fuel additive market. Several other
competitors have entered this market with limited success. There is considerable
competition in the field of fuel biocides.






The
aviation industry has begun to move from engine driven to electric powered
equipment. Rechargeable battery powered vehicles promise more efficiency, less
maintenance and cleaner air. A majority of new equipment in the aviation
industry is based on electric power. Airlines are eagerly seeking new products
and ideas. Competition is significant because much of the competitors' equipment
is virtually similar. However, Hammonds believes that its ODV has better
features and can move faster, safer, smoother and with easier use and
operation.






Many of
our competitors have achieved significant national brand name and product
recognition and engage in extensive promotional programs. Moreover, certain of
our products and services use technology that is widely available. Accordingly,
barriers to entry, apart from capital availability, may be low in certain
product segments of our business, and the entrance of new competitors into the
industry may reduce our ability to capture improving profit margins in
circumstances where capacity utilization in the industry is increasing.
Hammonds' ability to compete successfully will depend on our success at
penetrating each targeted market with our products and services, market
acceptance of its products and services, our ability to license and develop new
and improved products, and our ability to develop and maintain distribution
networks. There can be no assurance that Hammonds will be able to compete
successfully, that its products will continue to meet with customer approval,
that competitors will not develop and market products that are similar or
superior to our products or that Hammonds will be able to successfully enhance
its products or services.






Production
Facilities






Hammonds
leases a 106,000 square foot manufacturing and office facility on approximately
13 acres of land located in Houston, TX. The Houston, TX facility is leased from
an unaffiliated third party at an annual rental of $420,000 and has sufficient
production capacity to meet the Company's anticipated needs for product for the
foreseeable future.






Materials
and Principal Suppliers






Hammonds'
additive systems are assembled using fabricated parts from Hammonds' facility
and machined parts manufactured in our in-house machine shop. Light sheet metal
working equipment was added to our fabrication capacity in 2005. Hammonds
performance additives, including detergents, pourpoint depressants, cetane
improver, lubricity agents and fuel systems icing inhibitors, are produced by
Hammonds from products that are purchased in bulk from manufacturers such as GE
and Union Carbide.






The ODV
utilizes three main propulsion components: wheel drives, hydrostatic pumps and
the engine or electric motor that powers the system. A broad range of
manufacturers offer equipment of this type making sourcing of primary components
selective and competitive.






Dependence
on Major Customers






Hammonds
depends on several major customers including Arch Chemical, CSX Railroad,
Exxon/Mobil, BP Aviation, Chevron/Texaco, Tomco, KopCoat, Defense Energy Supply
and Lockheed Martin. In addition, Hammonds has been a long time supplier to all
branches of the United States Military with on-going contracts to supply
equipment to the U.S. Army. If any of these major industrial or governmental
agencies terminated its relationship with Hammonds, whether as the result of
technological advances by competitors, or otherwise, the business operations and
financial condition of the Registrant could be adversely effected.






Patents,
Trademarks And Licenses and Other Intellectual Property






Hammonds'
products are covered by various United States patents and patents pending. At
present, Hammonds owns over 25 patents covering various fuel additive systems,
water treating equipment and Omni Directional Vehicles. There are an additional
12 patents in pending status.






Employees






As of
December 31, 2006, Hammonds had 48 full time employees including Carl Hammonds.
No employees are covered by a collective bargaining agreement. Hammonds’
management considers relations with its employees to be
satisfactory.






Environmental
Laws and Regulations






Hammonds
is required to comply with the rules and regulations promulgated by the U.S.
Environmental Protection Agency (EPA), pursuant to the Environmental Protection
Act. The original EPA registration for Biobor® JF included extensive testing in
order to establish any potential adverse effects on personnel or the
environment. The use of certain chemicals and other substances is subject to
extensive and frequently changing federal, state, provincial and local laws and
substantial regulation under these laws by governmental agencies, including the
EPA, the Occupational Health and Safety Administration, various state agencies
and county and local authorities acting in conjunction with federal and state
authorities. Among other things, these regulatory bodies impose requirements to
control air, soil and water pollution, to protect against occupational exposure
to chemicals, including health and safety risks, and to require notification or
reporting of the storage, use and release of certain hazardous chemicals and
substances. Hammonds provides all required label warnings and instructions for
the handling of its fuel additive products. Hammonds believes that it is in
substantial compliance with all laws and regulations governing its material
business operations and has obtained all required licenses and permits for the
operation of its business. There can be no assurance that Hammonds in the future
will be able to comply with, or continue to comply with, all current or future
government regulations in every jurisdiction in which it will conduct its
material business operations without substantial cost or interruption of its
operations, or that any present or future federal, state, provincial or local
environmental protection regulations may not restrict Hammonds' present and
possible future activities. In the event that Hammonds is unable to comply with
such requirements, Hammonds could be subject to substantial sanctions, including
restrictions on its business operations, monetary liability and criminal
sanctions, any of which could have a material adverse effect upon Hammonds'
business. However, Hammonds' believes that it is in full compliance with all
present environmental rules and regulations and that it should be able to remain
in compliance in the future.






Risk
Factors






Investing
in our common stock will provide an investor with an equity ownership interest.
Shareholders will be subject to risks inherent in our business. The performance
of our shares will reflect the performance of our business relative to, among
other things, general economic and industry conditions, market conditions and
competition. The value of the investment may increase or decrease and could
result in a loss. An investor should carefully consider the following factors as
well as other information contained in this annual report on Form
10-KSB.






This
annual report on Form 10-KSB also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of many factors,
including the risk factors described below and the other factors described
elsewhere in this Form 10-KSB.






RISK
FACTORS RELATED TO OUR BUSINESS






Dependence Upon Affiliate
for Funding






In order
to successfully grow Hammonds business and its plan to increase market share for
Hammonds' products and services, we have been dependent upon the funding from
our parent, American International Industries, Inc. (OTCBB:AMIN), which loan at
December 31, 2006 was $1,931,056, and our parent's ability to secure and
maintain our existing $2,000,000 revolving credit line from a financial
institution. During 2006, Hammonds obtained additional financing of
approximately $2,728,000 in connection with the Company's August and September
2006 Private Financing Transactions involving the sale of its Series A and
Series B Preferred Stock.






If
additional debt and/or equity financing is required in 2007, we believe that
such financing will be available from our parent and private investors at terms
and conditions acceptable to the Company. In addition, as part of the August and
September 2006 Private Financing Transactions, we issued VOMF, an institutional
investor, 24,999,999 warrants. In March 2007, VOMF exercised 3,970,400 Series C
Warrants at a price of $0.18 per share with gross proceeds of $714,672 to the
Company. If all of the remaining warrants are exercised in their entirety would
generate an additional $5,891,994 in gross proceeds before fees and expenses.
However, there can be no assurance that all or a significant portion of the
warrants will be exercised or that unforeseen events, such as the length of time
necessary to generate market acceptance of the ODVs, any unexpected material
increased development costs, and the general economy in the markets where
Hammonds operates, may result in an inability to secure necessary additional
financing at satisfactory terms and conditions, if at all.






We may experience adverse
impacts on our results of operations as a result of adopting new accounting
standards or interpretations.






Our
implementation of and compliance with changes in accounting rules, including new
accounting rules and interpretations, could adversely affect our operating
results or cause unanticipated fluctuations in our operating results in future
periods. For example, we are required by the Sarbanes-Oxley Act of 2002 to file
annual reports and quarterly reports disclosing the effectiveness of our
internal controls and procedures. Although we believe our internal controls are
operating effectively, and we have committed internal resources to ensure
compliance, we cannot guarantee that we will not have any material weaknesses as
reported by our auditors and such determination could materially adversely
affect our business or significantly increase our costs in order to establish
effective controls and procedures.






Competition






While we
believe that we are competitive and have an established presence in our water
treatment technology systems, fuel handling equipment systems, additives for
general fuels and commercial aviation fuels business sectors, we may face
significant competition in our efforts to market and sell our new ODV. Further
we could face competition from our customers, if they determine to produce and
use the products we presently sell in our water treatment technology systems,
fuel handling equipment systems, additives for general fuels and commercial
aviation fuels business sectors. Many of our customers are well-established and
possess far greater financial, technical, human and other resources than does
the Registrant.






We will
compete against many companies in fragmented, highly competitive markets and we
have fewer resources than some of those companies. Our business sectors compete
principally on the basis of the following factors: product quality and
specifications (water treatment technology and fuel additives); customized
design and technical qualifications (fuel handling equipment and industrial
utility vehicles); and reputation, technical expertise and reliable service
(fuel additives and fuel handling equipment). Competitive pressures, including
those described above, and other factors could cause us additional difficulties
in acquiring and maintaining market share or could result in decreases in
prices, either of which could have a material adverse effect on our financial
position and results of operations. From time to time, the intensity of
competition results in price discounting in a particular industry or region.
Such price discounting puts pressure on margins and can negatively impact our
ability to generate an operating profit.






Development efforts for our
new ODV product line are dependent upon factors outside of our control, and upon
successful completion of development and market acceptance






We have
devoted significant financial and other resources to the development of our new
Omni Directional Vehicle (ODV). We are dependent upon the ability of the third
party manufacturers and subcontractors of the ODV components and complete units
and for them to to successfully complete manufacturing of the units in a timely
manner, with the features that are required, in order for us to be able to
commercially exploit our development. Hammonds believes that the patented new
design can be utilized in connection with forklifts, freight terminal tractors,
security vehicles, industrial highways mowers and a full range of aviation
ground handling vehicles. Hammonds has produced several prototypes of its ODV
products at its plant in Houston, TX and has entered into license agreements
with several major manufacturers to produce a range of vehicles based on its ODV
patented technology. While Hammonds has been successful in generating initial
ODV stocking orders and has scheduled delivery of at least 2 ODVs per month for
the next 12 months, there can be no assurance that Hammonds will be able to
successfully manufacture and sell a sufficient number of ODV units to generate
significant revenues and profits.






In each
of the target markets for Hammonds' ODV we will face competition from older
and more established companies and will be dependent on gaining market approval
for our new ODV technology. We must compete for the present market for
traditional forklifts, freight terminal tractors, security vehicles, industrial
highway mowers and a full range of aviation ground handling vehicles and gain
market acceptance for our uniquely designed ODV. If we are successful in
generating demand for our ODV, we will be dependent upon third party
manufacturers to produce on a timely basis necessary ODV components with the
quality and quantity that will be required.






We rely heavily on
commodities in the manufacturing of our equipment and price fluctuations can
have a material and adverse affect on the cost structure of our
business






We are
exposed to fluctuations in market prices for various commodities in the
production of our fuel additive and water treatment products. The rising price
of steel also can have an impact on the cost of production of our ODVs. At this
time, we are unable to predict the potential impact of future increases in
commodity costs on the cost of our products, or our ability, if any, to increase
the selling price of our products to cover such costs. We have not established
arrangements to hedge commodity prices and, where possible, to limit near-term
exposure to fluctuations in raw material prices. As a result, the cost to
manufacture our products may rise at a time when we are unable to increase the
selling price of such products.






Our business is subject to
environmental regulations; failure to comply could result in substantial
penalties






We are
regulated by various national and local environmental laws governing our use of
substances and control of emissions in all our operations. Compliance with these
laws could have a material impact on our capital expenditures, earnings, or
competitive position. Our failure or inability to comply with the applicable
laws and regulations could result in monetary or other penalties, resulting in
unanticipated expenditures or restrictions on our ability to
operate.






We are dependent on
third-party distributors for our ODV sales, which could reduce our ability to
gain marketplace acceptance






We have
begun efforts to build the Hammonds ODV brand through direct sales and through
distribution networks and major supply agreements with other companies. Several
distributors have elected to carry initial stocking inventories of our ODV and
some have scheduled for delivery ODVs on a monthly basis. We are dependent upon
our distributors' success in generating customer orders for the stocking
inventory they have purchased, in continued scheduled orders for future
shipment, as we as increasing development of our third party distribution
network. In addition, distributors may elect to make special ODV orders with
specific components and features based upon their various customers'
requirements. This could result in continued adjustment to inventories based on
their assessments of future needs. Such adjustments can impact our results
either positively or negatively.






A disruption or termination
of our relationships with certain suppliers could have a material adverse effect
on our operations






Certain
of the components included in our products, including our fuel handling
equipment, our fluid injector systems and our new ODV equipment, are obtained
from a limited number of suppliers. Disruption or termination of supplier
relationships could have a material adverse effect on our operations. We believe
that alternative sources could be obtained, if necessary, but the inability in a
timely manner to obtain sufficient quantities of necessary components or the
need to develop alternative sources, if and as required in the future, could
result in delays or reductions in product shipments which in turn could have an
adverse effect on our operating results and customer relationships.






Actual results could differ
from the estimates and assumptions that we use to prepare our financial
statements






To
prepare financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions, as of the
date of the financial statements, which affect the reported values of assets,
liabilities, revenues and expenses and disclosures of contingent assets and
liabilities. Areas requiring significant estimates by our management
include:






-
contract costs and profits and revenue recognition;


-
provisions for uncollectible receivables and recoveries of costs from
subcontractors, vendors and others;


-
provisions for income taxes and related valuation allowances;


-
recoverability of other intangibles and related estimated lives;


-
accruals for estimated liabilities;


- timing
of the introduction of new products and services and market acceptance of the
same






We are subject to the risks
associated with being a government contractor






We are a
provider of products and services to governmental agencies, including municipal
water agencies, waste treatment, and our fuel additive and injector services for
the U.S. military. We are therefore exposed to risks associated with government
contracting, including reductions in government spending, canceled or delayed
appropriations specific to our contracts or projects, heightened competition and
modified or terminated contracts. Legislatures typically appropriate funds for a
given program on a year-by-year basis, even though contract performance may take
more than one year and are not always guaranteed. As a result, at the beginning
of a contract or project, the related contract or project may be only partially
funded, and additional funding is normally committed only as appropriations are
made in each subsequent year. These appropriations, and the timing of payment of
appropriated amounts, may be influenced by, among other things, the state of the
economy, competing priorities, curtailments in the use of government contracting
firms, budget constraints, the timing and amount of tax receipts and the overall
level of government expenditures.






Our dependence on major
customers could adversely affect us






Hammonds
has been dependent upon its ability to market its products and services to major
industrial and governmental agencies such as Arch Chemical, CSX Railroad,
Exxon/Mobil, BP Aviation, Chevron/Texaco, Tomco, KopCoat, U.S. Army, U.S. Air
Force, Defense Energy Supply and Lockheed Martin. If any of these major
industrial or governmental agencies terminated its relationship with Hammonds,
whether as the result of technological advances by competitors, or otherwise,
the business operations and financial condition of the Registrant could be
adversely effected.






Our failure to attract and
retain qualified personnel, including key officers, could have an adverse effect
on us






Our
ability to attract and retain qualified engineers, and other professional
personnel in accordance with our needs is an important factor in determining our
future success. The market for these professionals is competitive, and there can
be no assurance that we will be successful in our efforts to attract and retain
needed professionals. In addition, our ability to be successful depends in part
on our ability to attract and retain skilled laborers in our manufacturing and
service business. Demand for these workers can be high at times and the supply
can be extremely limited at times. Our success is also highly dependent upon the
continued services of our key officer, Carl Hammonds and the loss of Mr.
Hammonds could adversely effect us. The Company has "key" man life insurance on
the life of Mr. Hammonds in an amount that it deems sufficient.






Risks inherent in
establishing a new market






There can
be no assurance that we will be successful in marketing our ODV, which is a new
technology aimed at a highly competitive industry for industrial utility
vehicles. The market for new products can be very difficult to establish. There
are competitors with long-established products, accepted technology and superior
financial resources for marketing such products. If the market for our ODV
product line takes longer to develop than anticipated, this would have an
adverse affect on revenues and potential profitability. While we believe the ODV
represents an important innovation in industrial utility vehicles, we cannot
ensure our targeted customers will purchase a significant number of units or
that we will be able to establish a nationwide and international network of
distributors. If the market develops more slowly than anticipated we may require
additional financing and no assurances can be made that additional funding will
be available at acceptable terms and conditions.






We may need additional
capital to fund our negative cash flow from operations through debt or
equity






Based
upon our present available cash and credit line, we require additional funding
through debt and/or equity financing to cover our costs of operations and the
costs of completing development of the ODV line. We expect to fund our general
operations and marketing activities for fiscal 2006 with the funding provided or
arranged for us by our corporate parent, American International Industries or
through the sale of equity. However, unexpected expenses or increases in costs
may arise. There is no assurance we can raise the additional capital in a timely
manner as and if needed. As additional funds are required it may be expected
that we sell additional securities or seek increased credit lines or new debt
financing, but there can be no assurance that such financing will be at terms
satisfactory to us.






Potential risks associated
with rapid technological changes






Rapid
technological changes could adversely affect our business. The market for our
products and technology in particular is characterized by rapid changes.
Evolving industry standards and changing customer needs gives rise to a very
competitive marketplace for new technology. If we are unable to meet or stay
ahead of new technologies being developed and to changes in industry standards,
our business could be adversely affected.






Changes
in technology, competitively imposed process standards and regulatory
requirements influence the demand for many of our products and services. To grow
and remain competitive, we need to anticipate changes in technological and
regulatory standards. We need to continue to introduce new and enhanced products
on a timely basis. We may not achieve these goals and some of our products may
become obsolete. New products often face lack of market acceptance, development
delays or operational failure. Stricter governmental regulations also may affect
acceptance of new products. Our various patents may not provide substantial
protection from competition or be of commercial benefit to us. We may not be
able to enforce our rights under trademarks or patents against third parties.
Some international jurisdictions may not protect these kinds of rights to the
same extent that they are protected under U.S. law. If a third party
successfully challenges our trademarks or patents, it may affect our competitive
and financial position.






Environmental factors and
changes in laws and regulations could increase our costs and liabilities and
affect the demand for our products and services.






In
addition to the environmental risks described above relating to our water
treatment business and other operations, we are subject to environmental laws
and regulations, including those concerning:






-
emissions into the air;


-
discharges into waterways;


- soil
and water pollution;


-
occupational health and safety.






Environmental laws and
regulations generally impose limitations and standards for regulated materials
and require us to obtain a permit and comply with various other
requirements






The
improper characterization, handling, or disposal of regulated materials or any
other failure to comply with federal, state and local environmental laws and
regulations or associated environmental permits may result in the assessment of
administrative, civil, and criminal penalties, the imposition of investigatory
or remedial obligations, or the issuance of injunctions that could restrict or
prevent our ability to perform.






The
environmental health and safety laws and regulations to which we are subject are
constantly changing, and it is impossible to predict the effect of any future
changes to these laws and regulations on us. We do not yet know the full extent,
if any, of environmental liabilities associated with many of our contracts or
projects. We cannot assure that our operations will continue to comply with
future laws and regulations will not significantly adversely affect
us.






The level
of enforcement of these laws and regulations also affects the demand for many of
our services. Proposed changes in regulations and the perception that
enforcement of current environmental laws has been reduced has decreased the
demand for some services, as customers have anticipated and adjusted to the
potential changes. Future changes could result in increased or decreased demand
for some of our services. The ultimate impact of the proposed changes will
depend upon a number of factors, including the overall strength of the economy
and customers' views on the cost-effectiveness of remedies available under the
changed regulations. If proposed or enacted changes materially reduce demand for
our environmental services, our results of operations could be adversely
affected.






Dependent upon our ability
to manage our growth.






Hammonds
anticipates continued rapid growth in the future, based upon in 2005 sales and
new orders, especially if its marketing efforts for its new ODV are successful.
In such event we will require effective management and increased financial and
other resources. This growth, if achieved, will place significant strains on the
Company's financial, managerial and other resources. Failure to effectively
manage growth could have a materially adverse effect on the Company's business
and results of operations.






Limited patent and
proprietary information protection






Hammonds
believes that its patents for its various products and systems, including the
new ODV, and the proprietary processes used in production of its products and
equipment systems, does not infringe on the patents and proprietary rights of
others. In the event that Hammonds' products infringe the patent or proprietary
rights of others, we may be required to modify our process or obtain a license.
There can be no assurance that we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all. The failure to do so would have
a material adverse effect on the Company's business. In addition, there can be
no assurance that the Company will have the financial or other resources
necessary to prosecute or defend a patent infringement or proprietary rights
action. Moreover, if any of the Company's products infringe patents or
proprietary rights of others, the Company could, under certain circumstances,
become liable for damages, which could have a material adverse effect on the
Company. Hammonds relies on its own patents and proprietary know-how and
confidential information and employs various methods to protect the processes,
concepts, ideas and documentation associated with its proprietary rights.
However, such patents and methods may not afford complete protection and there
can be no assurance that others will not independently develop such processes,
concepts, ideas and documentation or otherwise challenge the Company's patents.
Although the Company requires all of its employees to sign non-disclosure,
non-competition and inventions agreements, there can be no assurance that such
agreements will be enforceable or will provide meaningful protection to the
Company. There can be no assurance that the Company will be able to adequately
protect its patents and trade secrets or that other companies will not acquire
information that the Company considers proprietary. Moreover, there can be no
assurance that other companies will not independently develop know-how
comparable to or superior to that of the Company.






RISK FACTORS RELATED TO
MARKET OF OUR COMMON STOCK






Market prices of our equity
securities can fluctuate significantly






The
market prices of our common stock may change significantly in response to
various factors and events beyond our control, including the
following:






- the
other risk factors described in this Form 10-KSB;


-
changing demand for our products and services and ability to develop and
generate sufficient revenues;


- any
delay in our ability to generate operating revenue or net income;


- general
conditions in markets we operate in;


- general
conditions in the securities markets;


-
issuance of a significant number of shares, whether for compensation under
employee stock options, conversion of debt, potential acquisitions, additional
financing or otherwise.






There is only a limited
trading market for our common stock






Our
Common Stock is subject to quotation on the NASD Bulletin Board. There has only
been limited trading activity in our common stock. There can be no assurance
that a more active trading market will commence in our securities as a result of
the increasing operations of Hammonds. Further, in the event that an active
trading market commences, there can be no assurance as to the level of any
market price of our shares of Common Stock, whether any trading market will
provide liquidity to investors, or whether any trading market will be
sustained.






The outstanding warrants may
adversely affect us in the future and cause dilution to existing
shareholders






There are
currently 21,029,599 Series A, B and C Warrants outstanding after the exercise
of the 3,970,400 Series C Warrants in March 2007, all of which Warrants are
owned by VOMF. The Series A and Series C Warrants expire in 2011 and the Series
B Warrants expire in 2008. The exercise price of the Series A and B Warrants is
$0.18 per share and the exercise price of the remaining 4,362,933 Series C
Warrants is $.50 per share, subject to adjustment in certain circumstances.
Exercise of the Warrants will cause dilution in the interests of other
shareholders as a result of the additional shares of common stock that would be
issued upon such exercise. In addition, sales of the shares of our common stock
issuable upon exercise of the Warrants could have a depressive effect on the
price of our common stock, particularly if there is not a coinciding increase in
demand by purchasers of our common stock. Further, the terms on which we may
obtain additional financing during the period any of the Warrants remain
outstanding may be adversely affected by the existence of these Warrants as
well.






State blue sky registration;
potential limitations on resale of our securities






Our
common stock, the class of the Company’s securities that is registered under the
Exchange Act, has not been registered for resale under the Securities Act of
1933 or the "blue sky" laws of any state. The holders of such shares and persons
who desire to purchase them in any trading market that might develop in the
future, should be aware that there may be significant state blue-sky law
restrictions upon the ability of investors to resell our securities.
Accordingly, investors should consider the secondary market for the Company's
securities to be a limited one.






It is the
intention of the management to seek coverage and publication of information
regarding the Company in an accepted publication which permits a manual
exemption. This manual exemption permits a security to be distributed in a
particular state without being registered if the Company issuing the security
has a listing for that security in a securities manual recognized by the state.
However, it is not enough for the security to be listed in a recognized manual.
The listing entry must contain (1) the names of issuers, officers, and
directors, (2) an issuer's balance sheet, and (3) a profit and loss statement
for either the fiscal year preceding the balance sheet or for the most recent
fiscal year of operations. Furthermore, the manual exemption is a nonissuer
exemption restricted to secondary trading transactions, making it unavailable
for issuers selling newly issued securities.






Most of
the accepted manuals are those published in Standard and Poor's, Moody's
Investor Service, Fitch's Investment Service, and Best's Insurance Reports, and
many states expressly recognize these manuals. A smaller number of states
declare that they "recognize securities manuals" but do not specify the
recognized manuals. The following states do not have any provisions and
therefore do not expressly recognize the manual exemption: Alabama, Georgia,
Illinois, Kentucky, Louisiana, Montana, South Dakota, Tennessee, Vermont and
Wisconsin.






Dividends unlikely on our
common stock






We do not
expect to pay dividends for the foreseeable future. Further, the August and
September 2006 Private Financing Transactions with VOMF provide that no cash
dividends may be paid on our common stock unless and until all accrued dividends
on the Series A and Series B Preferred Stock have been paid. The payment of
dividends, if any, will be contingent upon our future revenues and earnings,
capital requirements and general financial condition. The payment of any
dividends will be within the discretion of our board of directors. It is our
intention to retain all earnings for use in the business operations of Hammonds
and accordingly, we do not anticipate that the Company will declare any
dividends in the foreseeable future.






Possible issuance of
additional securities






Our
Articles of Incorporation authorize the issuance of 195,000,000 shares of common
stock, par value $0.0001 and 5,000,000 shares of preferred stock, par value
$0.0001. At December 31, 2006, we had 36,135,000 shares of common stock issued
and 1,666,666 preferred shares issued. On March 26, 2007, we issued 3,970,400
shares in connection with the exercise by VOMF of Series C Warrants at $0.18 per
share. We may issue additional shares of common stock in connection with any
future acquisitions of operating businesses or assets or to raise additional
funding. To the extent that additional shares of common stock are issued, our
shareholders would experience dilution of their respective ownership interests
in the Company. The issuance of additional shares of common stock may adversely
affect the market price of our common stock and could impair our ability to
raise capital through the sale of our equity securities.






If the
833,333 shares of Series A Preferred Stock and 833,333 shares of Series B
Preferred Stock issued to VOMF are converted into shares of common stock and all
of the Series A and B as well as the remaining Series C Warrants are exercised
in their entirety, we would be required to issue an additional 37,696,265 shares
of common stock.






Compliance with Penny Stock
Rules






Our
securities will initially be considered a "penny stock" as defined in the
Exchange Act and the rules thereunder, since the price of our shares of common
stock is less than $5. Unless our common stock is otherwise excluded from the
definition of "penny stock," the penny stock rules apply with respect to that
particular security. The penny stock rules require a broker-dealer prior to a
transaction in penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its sales person in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that the broker-dealer, not otherwise
exempt from such rules, must make a special written determination that the penny
stock is suitable for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure rules have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. So long as the common stock is subject to the
penny stock rules, it may become more difficult to sell such securities. Such
requirements, if applicable, could additionally limit the level of trading
activity for our common stock and could make it more difficult for investors to
sell our common stock.






Shares eligible for future
sale






As of
December 31, 2006, the Registrant had 36,135,000 shares of common stock issued
and outstanding, 32,446,280 shares are "restricted" as that term is defined
under the Securities Act, and in the future may be sold in compliance with Rule
144 under the Securities Act. Rule 144 generally provides that a person holding
restricted securities for a period of one year may sell every three months in
brokerage transactions and/or market-maker transactions an amount equal to the
greater of one (1%) percent of (a) the Company's issued and outstanding common
stock or (b) the average weekly trading volume of the common stock during the
four calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitation by a person
who has not been an affiliate of the Company during the three months preceding
the sale and who has satisfied a two-year holding period. However, all of the
current shareholders of the Company owning 5% or more of the issued and
outstanding common stock are subject to Rule 144 limitations on
selling.






ITEM 2.DESCRIPTION
OF PROPERTIESBack to Table of Contents






The
Registrant's corporate office is located at the offices of American
International Industries, Inc., 601 Cien Street, Suite 235, Kemah, TX 77565,
which space is provided to us on a rent-free basis. These facilities
consist of approximately 1,300 square feet of executive office space and are
leased by American International Industries from an unaffiliated third party.
The Registrant believes that the office facilities are sufficient for the
foreseeable future and this arrangement will remain until we find a new business
opportunity or consummate a business combination.






Hammonds'
facilities are located on approximately 13 acres of land in Houston, TX and
include a 106,000 square foot industrial manufacturing, production, warehousing
and distribution plant that also serves as Hammonds' territorial sales office.
The real property and plant are leased to Hammonds by an unaffiliated third
party at a monthly rental of $35,000. This facility has sufficient production
capacity to meet the Company's anticipated needs for product for the foreseeable
future.






In
addition, Hammonds maintains an executive office facility in Harris County,
Houston, TX.






ITEM 3.LEGAL
PROCEEDINGBack to Table of Contents






The
Registrant's officers and directors are not aware of any threatened or pending
litigation to which the Registrant is a party or which any of its property is
the subject and which would have any material, adverse effect on the
Registrant.






ITEM
4.SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERSBack to Table of Contents






During
the year ended December 31, 2006, no matters were submitted to a vote of our
security holders.









PART
II






ITEM 5. MARKET FOR
REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERBack to Table of Contents






Market
Information






Our
common stock is currently quoted under the symbol IMTG on the NASD Bulletin
Board, an NASD-sponsored and operated inter-dealer automated quotation system
for equity securities not included on The NASDAQ Stock Market. Quotation of the
Company's securities on the NASD Bulletin Board limits the liquidity and price
of the Company's common stock more than if the Company's shares of common stock
were listed on The NASDAQ Stock Market or a national exchange. For the periods
indicated, the following table sets forth the high and low bid prices per share
of common stock. The below prices represent inter-dealer quotations without
retail markup, markdown, or commission and may not necessarily represent actual
transactions.




Fiscal
      2007
            
            Fiscal
      2006
            
            Fiscal
      2005High
            
            Low
            
            High
            
            Low
            
            High
            
            LowFirst
      Quarter ended March 31
            
            $
            0.35
            
            $
            0.20
            
            $
            0.60
            
            $
            0.35
            
            $
            0.28
            
            $
            0.23Second
      Quarter ended June 30
            
            $
            ---
            
            $
            ---
            
            $
            0.45
            
            $
            0.30
            
            $
            0.46
            
            $
            0.20Third
      Quarter ended September 30
            
            $
            ---
            
            $
            ---
            
            $
            0.55
            
            $
            0.25
            
            $
            0.85
            
            $
            0.35Fourth
      Quarter ended December 31
            
            $
            ---
            
            $
            ---
            
            $
            0.44
            
            $
            0.20
            
            $
            0.65
            
            $
            0.31




As of
December 31, 2006, our shares of common stock were held by approximately 186
stockholders of record. The transfer agent of our common stock is Colonial Stock
Transfer, Salt Lake City, UT.






Dividends






Holders
of common stock are entitled to dividends when, as, and if declared by the Board
of Directors, out of funds legally available therefore. We have never declared
cash dividends on its common stock and our Board of Directors does not
anticipate paying cash dividends in the foreseeable future as it intends to
retain future earnings to finance the growth of our businesses. There are no
restrictions in our articles of incorporation or bylaws that restrict us from
declaring dividends. However, the August and September 2006 Private Financing
Transactions provide that no cash dividends may be paid on our common stock
unless and until all accrued dividends on the Series A and Series B Preferred
Stock have been paid.






Securities
Authorized for Issuance Under Equity Compensation Plans






No equity
compensation plan or agreements under which our common stock is authorized for
issuance has been adopted during the fiscal year ended December 31,
2006.






Sale
of Unregistered Securities






During
fiscal year ended December 31, 2005, the Registrant issued: 100,000 restricted
shares to Gary D. Woerz as compensation valued at $3,000; 25,000 restricted
shares to Rebekah Laird-Ruthstrom for services valued at $750; and 10,000
restricted shares to a consultant for services valued at $300. The Company
believes that the issuances of these restricted shares was exempt from
registration pursuant to Section 4(2) of the Act as privately negotiated,
isolated, non-recurring transactions not involving any public solicitation.
Appropriate restrictive legends are affixed to the stock certificates issued in
such transactions.






On August
1, 2006 Mr. Carl L. Hammonds converted his 49% ownership of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. into 16,000,000 restricted shares or 44.4% of IMTG common stock at
a conversion rate of $0.25 a share.






In connection with the August and
September 2006 Private Financing Transactions, the Company issued to VOMF, an
accredited institutional investor, 833,333 shares of Series A Preferred Stock
and 833,333 shares of Series B Preferred Stock both of which are convertible
into common stock at a ratio of ten shares of common stock for each share of
preferred stock. The Company also issued 8,333,333 Series A, B and C Warrants
exercisable to purchase a total of 24,999,999 shares of common stock. The
transaction was a privately negotiated transaction not involving any public
solicitation and the Company relied upon the exemptions provided in Section 4(2)
of the Act and Rule 506 under Regulation D. On March 27, 2007, VOMF exercised
3,970,400 Series C Warrants and was issued 3,970,400 restricted shares of common
stock at an exercise price of $0.18 per share or gross proceeds of $714,672 to
the Company.






ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONSBack to Table of Contents






The
following discussion should be read in conjunction with our financial statements
and the related notes appearing elsewhere in this annual report. The following
discussion contains forward-looking statements reflecting our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to those discussed below and elsewhere
in this report, particularly in the section entitled "Risk Factors" beginning on
page 14 of this annual report.






General






The
Registrant is a 45.1% owned subsidiary of American International Industries,
Inc., OTCBB: AMIN. AMIN consolidates IMTG even though its ownership is less than
51%, because the Company exercises its right to occupy two of the three board of
director seats. Since IMTG is incurring losses and there is no minority
interest, AMIN recognizes 100% of IMTG’s losses.






On April
28, 2005, the Registrant acquired 51% of its operating subsidiary, Hammonds
Technical Services, Inc. On August 1, 2006 The Company acquired the 49% minority
interest of Hammonds Technical Services, Inc., Hammonds Fuel Additives, Inc.,
and Hammonds Water Treatment Systems, Inc. by issuing 16,000,000 restricted
shares or 44.4% of IMTG common stock at a conversion rate of $.25 a share. The
additional cost of $4,000,000 has been allocated to patents, trademarks, and
sole source contract and is being amortized in a manner equivalent to the
amortization used on the intangible assets acquired in the initial purchase of
51% of the company.






On August
8, 2006, IMTG entered into a stock purchase agreement with VOMF pursuant to
which IMTG agreed to sell up to 833,333 shares of newly designated IMTG Series A
Convertible Preferred Stock, having an 8% dividend, for consideration of
$1,500,000. On August 8, 2006, IMTG sold VOMF 555,555 shares of Series A
Preferred Stock for consideration of $1,000,000 and on August 23, 2006, IMTG
sold an additional 277,778 shares of Series A Preferred Stock for consideration
of $500,000. In connection with the August 8 and August 23, 2006 private
financing transactions, IMTG issued VOMF a Series A Warrant exercisable to
purchase 8,333,333 shares of IMTG common stock at $0.18 per share, expiring in
five years, and a Series B Warrant exercisable to purchase an additional
8,333,333 shares of IMTG common stock at $0.18 per share, expiring in August
2007.






On
September 30, 2006, IMTG entered into a second stock purchase agreement with
VOMF pursuant to which it sold VOMF 833,333 shares of Series B Preferred Stock,
having identical terms as the Series A stock purchase agreement except for the
dividend rate of 4%, for consideration of $1,500,000 and issued VOMF Series C
Warrants exercisable to purchase 8,333,333 additional shares of common stock at
a price of $.50 per share, expiring in five years. In connection with the Series
B stock purchase agreement, IMTG agreed to extend the expiration dates of the
Series B Warrants issued in the August 2006 private financing transactions from
one year to two years.






Each
share of IMTG Series A and Series B Preferred Stock is convertible into ten
shares of IMTG common stock. The Company’s ownership percentage in IMTG will
decrease when VOMF converts its Series A and Series B Preferred Stock and/or
exercises warrants issued in the August and September 2006 private financing
transactions into shares of IMTG common stock. The Company's IMTG subsidiary
received net proceeds of approximately $2,710,120 from the sale of Series A and
Series B Preferred Stock and will receive gross proceeds of $7,166,666 if all of
the warrants are exercised by VOMF. In connection with the agreement of VOMF to
exercise up to 4,000,000 Series C Warrants the Company agreed to reduce the
exercise price of the Series C Warrants for up to 4,000,000 shares from $0.50 to
$0.18, the same exercise price applicable to the Series A and B Warrants. On
March 27, 2007, VOMF exercised 3,970,400 Series C Warrants at an exercise price
of $0.18 per share and was issued 3,970,400 restricted shares of common
stock.






The
material terms of these preferred stock issuances are included in note 8 to the
consolidated financial statements.






Revenue
and expenses of Hammonds are included in the Company’s consolidated statements
of operations from May 1, 2005 through the year ended December 31,
2006.






Revenues






Gross
revenues for the year ended December 31, 2006 were $6,467,393 compared to
$3,395,151 for the year ended December 31, 2005. During fiscal 2005, Hammonds’
production facility in Houston, TX was forced to close for approximately two
weeks related to Hurricane Katrina. In addition, Hammonds’ production operations
were halted for two weeks in connection with Hammonds’ move from a leased
facility to a facility owned by the Registrant’s parent. The two stoppages
reduced Hammonds revenues from those anticipated. We had inventories of
$1,309,612 at December 31, 2006, consisting primarily of parts and materials in
expectation of increasing demand for our products including Hammonds’ ODV line
during 2007. Subsequent to the year ended December 31, 2006, Hammonds received
orders for: its new line of ODVs; water purification products; and fuel
additives and injectors.






Cost
of Sales






Cost of
sales for the year ended December 31, 2006 was $5,336,529 or 82.5% of revenues
compared to $2,396,950 or 70.6% of revenues for the year ended December 31,
2005. Costs of sales are anticipated to decrease during 2007 related to new,
more efficient equipment and supporting inventories.






General
and administrative expenses






In 2006,
general, selling and administrative expenses totaled $3,311,656 or 51.2% of
revenues compared to $2,104,473 or 61.98% of revenues in 2005. The selling,
general and administrative expenses primarily consist of sales and marketing
expenses, research and development costs and engineering expenses. General and
administrative expenses are expected to increase in 2007 principally due to
additional expenditures related to additional personnel requirements. We expect
our operating expenses to marginally decrease as a percentage of revenues with
increasing sales in 2007.






Operating
Loss






Our
operating loss was $2,180,792 in 2006 compared to $1,106,272 in 2005. Our 2006
operating loss was mainly attributable to increased costs of manufacturing
including manufacturing components and direct and indirect labor costs for the
production of Hammonds’ new line of ODVs, injector systems and water
purification systems, while the loss in 2005 was in part caused by Hammonds’ two
work stoppages and the later than anticipated introduction of the new ODV line.
We expect that our operating loss will decrease with the anticipated growth in
revenues and reduced expenses associated with research and development as a
percentage of revenues.






Other
Income






Other
income for the Company in 2006 includes interest expense of $491,344, interest
and other income of $75,573, and Hammonds participation in the Parent Company’s
gain on the sale of the Rankin Road property of $150,000.






Net
Loss






Our net
loss applicable to common shareholders was $3,797,886 in 2006 and $1,194,652 in
2005.






Liquidity
and Capital Resources






Our
current assets were $3,382,293 at December 31, 2006, consisting mainly of
inventories and accounts receivable, which we expect are fully collectible. In
connection with the 2005 acquisition of Hammonds and Carl Hammonds 49% minority
interest of Hammonds into shares of IMTG common stock in 2006, intangible assets
were valued at $6,038,870 at December 31, 2006. Our total assets at December 31,
2006 were $10,384,397.






We had
current liabilities of $1,627,734 at December 31, 2006, consisting principally
of current installments of long-term debt and accounts payable and accrued
expenses. At December 31, 2006, we had long-term liabilities of $4,898,306
consisting of notes payable to banks of $2,464,050, and a note payable to our
parent, American International Industries, Inc. in the amount of $1,931,056 and
deferred tax liability of $503,200.






During
2006, we had a negative cash flow from operations of $3,044,382 mainly due to
our net loss of $2,446,563, a gain on disposal of assets of $150,000, an
increase in accounts receivable, inventories and prepaid expenses of $908,529, a
decrease in accounts payable and accrued expenses of $180,791, offset by
depreciation and amortization of $627,500. During 2005, we had a negative cash
flow from operations of $1,419,992 mainly due to our net loss of $1,194,652, an
increase in accounts receivable and inventories of $515,747, offset by
depreciation and amortization of $304,946.






We funded
our cash used in operating activities in 2006 through proceeds from the issuance
of preferred stock in the amount of $2,710,120 and long-term borrowings in the
amount of $1,012,231. We made payments of $514,984 on long-term borrowings
during 2006. In 2005, we funded our cash used in operating activities through
proceeds from our long-term line of credit in the amount of $2,131,605 and
through borrowings of $998,300 from our parent. We made payments of $570,223 on
short-term borrowings during 2005.






We
provided cash from investing activities of $186,667 in 2006 compared to using
cash for investing activities of $1,077,914 in 2005. Cash was used to purchase
property and equipment in the amount of $51,841 in 2006 compared to $119,006 in
2005. The cash provided from investing activities includes $150,000 in proceeds
received from the Parent Company for Hammonds participation in the sale of the
Rankin Road property.






There are
no limitations in the Company's articles of incorporation on the Company's
ability to borrow funds or raise funds through the issuance of restricted common
stock. The Company's resources together with the resources of its corporate
parent have facilitated it ability to secure its revolving line of credit and
the Company believes that it has the ability to borrow funds and/or raise
capital through the sale of restricted stock. To the extent that additional debt
financing is utilized, any borrowing will subject us to various risks
traditionally associated with indebtedness, including the risks of interest rate
fluctuations and insufficiency of cash flow to pay principal and
interest.






Related
Party Transactions






The
Company has been and continues to be dependent upon the funding from its parent,
American International Industries, Inc. At December 31, 2006, the Company owed
the parent $1,931,056 (see note 13).






Off-Balance
Sheet Arrangements






As of
December 31, 2006 we did not have any off-balance sheet arrangements as defined
in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of
1934.






Contractual
Obligations and Commitments






As of
December 31, 2006, Hammonds leases its 106,000 square foot manufacturing and
office facility in Houston, TX from an unrelated third party at annual rental of
$420,000 (see note 12 to the consolidated financial statements). In addition,
Hammonds pays the Company a management fee of $10,000 per month.






Critical
Accounting Estimates






Our
significant accounting policies are described in note 2 to our consolidated
financial statements for the year ended December 31, 2006. The following
supplements the description of our accounting policies as described in the notes
to our consolidated financial statements.






Hammonds
Technical Services' business involves the manufacturing of several different
lines of equipment and product systems. As a result, Hammonds is subject to
fluctuations in profitability from period to period due to the types and
quantities of equipment and product systems ordered by and delivered to its
customers. Hammonds does not start production activity without firm purchase
orders from customers. Based upon the increasing size of Hammonds' orders,
Hammonds has a backlog of orders and this is expected to permit Hammonds to
achieve economic efficiencies in purchasing inventory and in allocation of its
workforce. Further, with its improving liquidity, achieved following its year
ended December 31, 2006, Hammonds has begun to generate improving economies in
manufacturing.






Hammonds
fuel additive business supplies additives to the industries which provide
purchase orders for the production of additives. Hammonds does not have
additives produced by third-parties until purchase orders are received and
accepted by Hammonds. Hammonds has a backlog in orders for fuel additives of
approximately $150,000 per month which enables Hammonds to produce one month's
production at a time. As Hammonds' fuel additive customers order increasing
quantities of its proprietary Biobor® JF fuel product, we estimate that
backorders will increase, resulting in increases in production and revenues in
future periods.






Hammonds'
Water Treatment Solutions was established after the 2005 fiscal year end to
identify its contribution to the Company. Hammonds Water Treatment Solutions
generates revenues and incurs costs from a third party that supplies Hammonds
purification chemicals. Hammonds projects that revenue from Hammonds Water
Treatment Solutions will exceed $180,000 during the next twelve
months.






Subsequent
to year end December 31, 2005, Hammonds Technical Services, Inc. was separated
into three segments: (i) Hammonds Technical Services, which is the manufacturing
segment for Hammonds product line, including ODVs, injectors and water
purification systems; (ii) Hammonds Fuel Additives, which supplies all of the
fuel additives; and (iii) Hammonds Water Treatment Solutions, the recently
established third segment, which provides the tablets for Hammonds' water
purification systems.






ITEM
7. FINANCIAL STATEMENTSBack to Table of Contents






The
Registrant's audited financial statements for the fiscal years ended December
31, 2006 and December 31, 2005 are attached to this annual report.






Financial Statements






ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSUREBack to
Table of Contents






Not
Applicable.






ITEM
8A.CONTROLS AND PROCEDURESBack to Table of Contents






Evaluation of disclosure controls
and procedures.






Our
management is responsible for establishing and maintaining an adequate level of
internal controls over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial
reporting includes policies and procedures that:






- Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;


- Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and


- Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the consolidated financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with existing policies or procedures may deteriorate.




Evaluation
of disclosure controls and procedures. In connection with the audit of the
Company’s financial statements for the year ended December 31, 2005, the
Company's president/chief financial officer conducted an evaluation regarding
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the
evaluation of these controls and procedures and discussions with our independent
accountants, our president/chief financial officer concluded that our disclosure
controls and procedures were ineffective as of December 31, 2005. The
president/chief financial officer determined that the Company did not maintain
effective controls over the financial reporting process due to an insufficient
complement of personnel with an appropriate level of accounting knowledge,
experience and training in the application of generally accepted accounting
principles commensurate with its financial reporting requirements and the
complexity of the company’s operations and transactions, specifically at the
Company’s operating subsidiary, Hammonds Technical Services, Inc. The Company
did not maintain effective controls to ensure there was adequate analysis,
documentation, reconciliation and review of accounting records and supporting
data and monitoring and oversight of the work performed by completeness of the
consolidated financial statements in accordance with generally accepted
accounting principles. Specifically, the Company did not have effective controls
designed and in place over the consolidation of the financial statements of the
Hammonds subsidiary, including the acquisition, the reconciliation of
inter-company accounts,  inventory and reserves, fixed assets and
depreciation, accrued liabilities and general and administrative expense. In
light of the above, the Company restated its financial statements for the
periods ended June 30 and September 30, 2005.




In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the footnote disclosures.  As a result of our
reexamination, we have restated footnotes (1) Summary of Significant Accounting
Policies and (2) Acquisition of Hammonds Technical Services, Inc. for the year
ended December 31, 2005.
  The
Company’s Chief Executive Officer and Chief Financial Officer have reassessed
our disclosure controls and procedures for the year ended December 31, 2005.
Based on the reassessment, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
therefore not, as of December 31, 2005, effective to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to our management, including our principal
executive and financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.




In
connection with the audit of the Company’s financial statements for the year
ended December 31, 2006, the Company's president/chief financial officer
conducted an evaluation regarding the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Exchange Act. Based upon the evaluation of these controls and procedures and
discussions with our independent accountants, our president/chief financial
officer concluded that our disclosure controls and procedures were effective as
of December 31, 2006.


In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complex issue, we
have restated the financial statements for the year ended December 31,
2006.
  The
Company’s Chief Executive Officer and Chief Financial Officer have reassessed
our disclosure controls and procedures for the year ended December 31, 2006.
Based on the reassessment, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
therefore not, as of December 31, 2006, effective to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to our management, including our principal
executive and financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
  Changes
in internal controls. Subsequent to December 31, 2005, the Company made changes
in our internal control over financial reporting in order to improve such
internal controls over financial reporting. Specifically, the Company has taken
the following steps to address the specific deficiencies in internal disclosure
controls and procedures: (i) the Company’s operating subsidiary has hired a full
time controller who has been directed to implement procedures to correct the
noted deficiencies; (ii) the Company has hired a qualified consultant with
accounting and auditing experiences to perform an internal audit function; and
the Company’s parent has hired a full time CFO to oversee financial and
accounting transactions to include the financial reporting and
disclosure.




ITEM 8B. OTHER
INFORMATIONBack to Table of Contents




None.







PART
III






ITEM
9.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, COMPLIANCE WITH
SECTION 16(A)Back to Table of Contents






At
present, we have one officer and two directors. We may elect one or more
additional directors and appoint additional officers in connection with our
intent to pursue new business opportunities or entering into a business
combination. Our directors are elected to serve until the next annual meeting of
shareholders and until their respective successors will have been elected and
will have qualified. The following table sets forth the name, age and position
held with respect to our present directors and executive officers:




Name
            Age
            PositionsDaniel
      Dror
            66
            Chairman
      of the BoardGary
      D. Woerz
            61
            CEO,
      CFO and Director




Daniel
Dror, Chairman of the Board, has also served as Chief Executive Officer,
President and Chairman of the Board of the Company's parent, American
International Industries, Inc. since September 1997. From 1994 to 1997, Mr. Dror
served as Chairman of the Board and Chief Executive Officer of Microtel
International, Inc., a public company in the telecommunication business. From
1982 until 1993, Mr. Dror served as Chairman of the Board and Chief Executive
Officer of Kleer-Vu Industries, Inc., a public company.






Gary D.
Woerz, CEO, Chief Financial Officer and a director of the Registrant, serves
also as Chief Financial Officer of American International Industries, Inc. From
2000 to 2002, Mr. Woerz served as Chief Financial Officer of Phymetrics, Inc.,
which was a subsidiary of High Voltage Engineering (HVE). Phymetrics was a
multi-divisional manufacturing and laboratory service company. From 1998 to
2000, Mr. Woerz served as Chief Financial Officer of Virtual Founders LLC, San
Jose, CA, whose business involved investment banking and management consulting
services to development stage high technology companies.






Code of
Ethics






The
Registrant has adopted a Code of Ethics that are designed to deter wrongdoing
and to promote honest and ethical conduct, full, fair, accurate, timely and
understandable disclosure in the Registrant's SEC reports and other public
communications. The Code of Ethics promotes compliance with applicable
governmental laws, rules and regulations.






Section
16(a) Compliance






Section
16(a) of the Securities and Exchange Act of 1934 requires the Registrant's
directors and executive officers, and persons who own beneficially more than ten
percent (10%) of the Registrant's Common Stock, to file reports of ownership and
changes of ownership with the Securities and Exchange Commission. Copies of all
filed reports are required to be furnished to the Registrant pursuant to Section
16(a). Based solely on the reports received by the Registrant and on written
representations from reporting persons, the Registrant was informed that its
officers and directors and ten percent (10%) shareholders have not filed reports
required to be filed under Section 16(a).












ITEM
10. EXECUTIVE COMPENSATIONBack to Table of Contents






The
following table contains the executive compensation to the Registrant's
executive officer for the periods set forth below. No executive compensation was
paid during the fiscal years 2006, 2005 and 2004.




Summary
      Compensation TableLong
      TermAnnual
      Compensation
            Compensation
      AwardsOther
            Restricted
            SecuritiesAnnual
            Stock
            Underlying
            All
      OtherSalary
            Bonus
            Compensation
            Award(s)
            Options
            CompensationName and Principal
      Position
            
            Year
            ($)
            ($)
            ($)
            ($)
            ($)
            ($)Gary
      D. Woerz, CEO and CFO (1)
            
            2006
            ---
            ---
            ---
            ---
            ---
            ---2005
            ---
            ---
            ---
            3,000
            ---
            ---2004
            ---
            ---
            ---
            ---
            ---
            ---Carl
      Hammonds, President of Hammonds
            
            2006
            94,7122005
            90,000(1)
      Mr. Woerz received no compensation from the Registrant for serving as
      President and CFO.




In April
2005, Mr. Carl Hammonds entered into a five-year employment agreement with
Hammonds Technical Services to serve as Hammonds President. The employment
agreement provides for an annual base salary of $90,000. In the event of
termination by the Company without "Good Cause," or the Mr. Hammonds resigns
from his employment for "Good Reason," Mr. Hammonds is entitled to severance pay
in an amount equal to either $90,000, or the present value of the salary and
bonus payments due over the remainder of the employment term, whichever is
greater. Mr. Hammonds is not entitled to severance pay in the event the
agreement is terminated as a result of his death or disability, voluntary
resignation without "Good Reason," or his termination for "Good Cause." The
agreement contains a covenant not to compete within sixty (60) miles of the
Company’s operations for the period covered by the employment agreement and for
one year following the termination of the agreement.






ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENTBack to Table of Contents






The
following table sets forth information regarding the beneficial ownership of our
common stock as of December 31, 2006. The information in this table provides the
ownership information for: each person known by us to be the beneficial owner of
more than 5% of our common stock; each of our directors; each of our executive
officers; and our executive officers and directors as a group. Beneficial
ownership has been determined in accordance with the rules and regulations of
the SEC and includes voting or investment power with respect to the shares.
Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to the number of shares indicated as
beneficially owned by them.




Name
      of Beneficial Owner
            
            Common
      Stock Beneficially Owned (1)
            Percentage
      of Common Stock  Owned (1)American
      International Industries, Inc.
            
            16,311,280
            45.10%601
      Cien Street, Suite 235Kemah,
      TX 77565Carl
      Hammonds, CEO of Hammonds
            
            16,000,000
            44.30%910
      Rankin RoadHouston,
      TX 77073Gary
      D. Woerz, President, CFO and Director
            
            100,000
            0.30%601
      Cien Street, Suite 235Kemah,
      TX 77565Daniel
      Dror, Chairman of the Board
            
            0
            0.00%601
      Cien Street, 235Kemah,
      TX 77565Directors
      and Officers (2 person) (2)
            
            16,411,280
            45.41%




(1)
Applicable percentage ownership is based on 36,135,000 shares of common stock
outstanding as of December 31, 2006. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
December 31, 2006 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.






(2)
Includes shares owned by the Registrant's parent American International
Industries, Inc.






ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSBack to Table of Contents




During
the last two fiscal years, to the knowledge of the Registrant, there was no
person who had or has a direct or indirect material interest in any transaction
or proposed transaction to which the Registrant was or is a
party. Transactions in this context relate to any transaction
which exceeds $60,000. During 2006, the Registrant borrowed $87,468 from
its parent, American International Industries, Inc., which funds were used by
Hammonds for working capital.






ITEM
13. EXHIBITS AND REPORTS ON FORM 8-KBack to Table of Contents






(a) The
following documents are filed as exhibits to this report on Form 10-KSB or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing that included such
document.




Exhibit
      No.
            Description3(i)
            Articles
      of Incorporation, as amended, attached to the Registrant's Form 10-SB/12g
      filed on August 24, 2004.3(i)1
            Certificate
      of Amendment to the Articles of Incorporation, attached to the
      Registrant's Form 8-K filed on March 10, 2005.3(ii)
            Bylaws,
      attached to the Registrant's Form 10-SB/12g filed on August 24,
      2004.17
            Letter
      on director resignation, attached to the Registrant's Form 8-K filed on
      December 29, 2004.10.1
            Stock
      Purchase Agreement between Registrant and Hammonds Technical Services,
      Inc., attached to the Registrant's Form 8-K filed on March 10,
      200531.1
            Certification
      of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 2002, filed herewith.31.2
            Certification
      of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 2002, filed herewith.32.1
            Certification
      of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 2002, filed herewith.32.2
            Certification
      of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 2002, filed herewith.99.1
            Amended
      Form 8-K filed on March 18, 2008, attached
  hereto.




(b) Reports
on Form 8-K Filed During the Last Quarter of the Fiscal Year Covered by this
Report:






The
Registrant filed a Form 8-K on October 23, 2006 with disclosure under Item 4.02,
"Non-reliance on previously issued financial statements or a related audit
report or completed interim review."






ITEM
14.PRINCIPAL ACCOUNTING FEES AND SERVICESBack to Table of Contents






Independent
Public Accountants






The
Registrant's Board of Directors has appointed John A. Braden & Co., P.C. On
January 1, 2007, John A. Braden & Co., PC merged with GLO CPAs, LLP, which
firm has issued its report on our consolidated financial statements for the year
ended December 31, 2006. Our financial statements for the fiscal year ended
December 31, 2005 were audited by Thomas Leger & Co., L.L.P.






Principal
Accounting Fees






The
following table presents the fees for professional audit services rendered by
John A. Braden & Co., P.C. and Thomas Leger & Co., L.L.P. for the audit
of the Registrant's annual financial statements for the years ended December 30,
2006 and 2005, and fees billed for other services rendered by John A. Braden
& Co., P.C. and Thomas Leger & Co., L.L.P. during those
years.




Year EndedDecember
      31,  2006
            
            
            December
      31, 2005Audit
      fees (1)
            
            $
            13,007
            
            
            $
            100,000Audit-related
      fees (2)
            
            
            4,125
            
            
            
            --Tax
      fees (3)
            
            
            --
            
            
            
            --All
      other fees
            
            
            375
            
            
            
            --(1)
      Audit fees consist of audit and review services, consents and review of
      documents filed with the SEC.(2)
      Audit-related fees consist of assistance and discussion concerning
      financial accounting and reporting standards and other accounting
      issues.(3)
      Tax fees consist of preparation of federal and state tax returns, review
      of quarterly estimated tax payments, and consultation concerning tax
      compliance issues.






SIGNATURES






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






/s/ DANIEL
DROR


CEO AND CHAIRMAN


Dated: March 18, 2008




/s/ SHERRY L.
COUTURIER


CFO


Dated: March 18, 2008












FinancialStatements Back to Table of Contents




Report of Independent
      Registered Public Accounting Firm
            31Report of Independent
      Registered Public Accounting Firm
            32Financial
      Statements:Balance Sheets -
      December 31, 2006 and 2005
            33Statements of
      Operations - Years ended December 31, 2006 and
    2005
            34Statements of
      Stockholders' Equity (Deficit) - Years ended December 31, 2006 and
      2005
            35Statements of Cash Flows
      - Years ended December 31, 2006 and 2005
            36Notes to Consolidated Financial
      Statements
            38














REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBack to Table of Contents




To the
Stockholders


International
American Technologies, Inc. and Subsidiary


Houston,
Texas






We have
audited the accompanying consolidated balance sheet of International American
Technologies, Inc. and Subsidiary as of December 31, 2006 and the related
consolidated statements of operations, changes in stockholders’ deficit, and
cash flows for the year ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.






We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.






In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects the financial position of International American
Technologies, Inc. and Subsidiary as of December 31, 2006, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2006 in conformity with accounting principles generally accepted in the United
States of America.






As stated
in footnote (8) stockholders' equity has been restated to properly reflect
accounting for warrants and beneficial conversion features which are included in
the issuance of preferred stock and dividends deemded to have been paid in
connection with the transaction.






/s/ GLO
CPAs LLP


March 23,
2007, except for footnote 8 which is July 13, 2007.


Houston,
Texas









REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBack to Table of Contents






To the
Stockholders


International
American Technologies, Inc. and Subsidiary


Houston,
Texas






We have
audited the accompanying consolidated statements of operations, changes in
stockholders’ deficit, and cash flows for the year ended December 31, 2005 of
International American Technologies, Inc. and Subsidiary. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.






We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.






In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects the consolidated results of their operations and their
cash flows for the year ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.






/s/
Thomas Leger & Co., L.L.P.


Thomas
Leger & Co., L.L.P.


April 17,
2006


Houston,
Texas













INTERNATIONAL
      AMERICAN TECHNOLOGIES, INC.Consolidated BalanceSheets Back to
      Table of ContentsDecember
      31, 20062006(Restated)AssetsCurrent
      assets:Cash
            
            $
            396,505Accounts
      receivable, net of allowance of doubtful accounts of $99,387 at December
      31, 2006
            
            
            1,328,215Current portion of notes receivable
            
            
            229,418Inventories
            
            
            1,309,612Prepaid expenses
            
            
            118,543Total current assets
            
            
            3,382,293Long-term
      notes receivable
            
            
            160,892Property
      and equipment, net
            
            
            782,032Intangible
      assets, net
            
            
            6,038,870Other
      assets
            
            
            20,310Total assets
            
            $
            10,384,397Liabilities and Stockholders' Equity
      (Deficit)Current
      liabilities:Accounts payable and accrued expenses
            
            $
            1,333,831Short-term note payable
            
            
            276,410Current installments of long-term debt
            
            
            17,493Total current liabilities
            
            
            1,627,734Long-term
      debt, less current installments
            
            
            2,464,050Due
      to American International Industries, Inc.
            
            
            1,931,056Deferred
      tax liability
            
            
            503,200Total liabilities
            
            
            6,526,040Stockholders'
      equity (deficit):Preferred stock, $0.0001par value, authorized 5,000,000
      shares:1,666,666 issued and outstanding
            
            
            167Additional paid-in capital - preferred stock
            
            
            1,290,731Additional paid-in capital - beneficial conversion
            
            
            1,290,898Additional paid-in capital - warrants
            
            
            1,419,222Common stock, $0.0001 par value, authorized 195,000,000
      shares:36,135,000 shares issued and outstanding at December 31,
    2006
            
            
            3,614Additional paid-in capital
            
            
            4,967,778Accumulated deficit
            
            
            (5,114,053
            )Total stockholders' equity (deficit)
            
            
            3,858,357Total liabilities and stockholders' equity (deficit)
            
            $
            10,384,397See
      accompanying notes to consolidated financial statements.





INTERNATIONAL
      AMERICAN TECHNOLOGIES, INC.ConsolidatedStatements of Operations Back to
      Table of ContentsYears
      ended December 31, 2006 and 20052006
            
            
            2005(Restated)Revenues
            
            $
            6,467,393
            
            
            $
            3,395,151Costs
      and expenses:Cost of sales
            
            
            5,336,529
            
            
            
            2,396,950Selling, general and administrative
            
            
            3,311,656
            
            
            
            2,104,473Total operating expenses
            
            
            8,648,185
            
            
            
            4,501,423Operating
      loss
            
            
            (2,180,792
            )
            
            
            (1,106,272
            )Other
      income (expenses):Gain (loss) on sale of assets
            
            
            150,000
            
            
            
            -Interest income
            
            
            76,665
            
            
            
            18,237Interest expense
            
            
            (461,344
            )
            
            
            (106,617
            )Other expenses
            
            
            (1,092
            )
            
            
            -Total other income (expenses)
            
            
            (265,771
            )
            
            
            (88,380
            )Net
      loss
            
            
            (2,446,563
            )
            
            
            (1,194,652
            )Preferred
      dividends
            
            
            (1,351,323
            )
            
            
            -Net loss before income tax
            
            
            (3,797,886
            )
            
            
            (1,194,652
            )Provision
      for income tax
            
            
            -
            
            
            
            -Net loss applicable to common shareholders
            
            $
            (3,797,886
            )
            
            $
            (1,194,652
            )Net
      loss per common share - basic and diluted
            
            $
            (0.14
            )
            
            $
            (0.06
            )Weighted
      average common shares - basic and diluted
            
            
            26,841,849
            
            
            
            20,111,000See
      accompanying notes to consolidated financial statements





AMERICAN
      INTERNATIONAL TECHNOLOGIES, INC.ConsolidatedStatements of Stockholders' Equity(Deficit)Back to
      Table of ContentsFor
      the years ended December 31, 2006 and 2005(Restated)Additional
            
            
            
            
            
            
            
            
            Additional
            
            
            
            
            
            TotalPreferred
      Stock
            
            
            paid-in
            
            
            Common
      Stock
            
            
            paid-in
            
            
            Accumulated
            
            
            stockholders'shares
            
            
            amount
            
            
            Capital
            
            
            shares
            
            
            amount
            
            
            capital
            
            
            deficit
            
            
            equityBalance,
      December 31, 2004
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            20,000,000
            
            
            $
            2,000
            
            
            $
            951,642
            
            
            $
            (121,515
            )
            
            $
            832,127Issuance of common stock for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,000
            
            
            
            14
            
            
            
            17,736
            
            
            
            -
            
            
            
            17,750Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,194,652
            )
            
            
            (1,194,652
            )Balance,
      December 31, 2005
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            20,135,000
            
            
            $
            2,014
            
            
            $
            969,378
            
            
            $
            (1,316,167
            )
            
            $
            (344,775
            )Issuance of preferred stock
            
            
            1,666,666
            
            
            
            167
            
            
            
            4,000,851
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,001,018Issuance of common stock for49% ownership in Hammonds
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            16,000,000
            
            
            
            1,600
            
            
            
            3,998,400
            
            
            
            -
            
            
            
            4,000,000Net loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,446,563
            )
            
            
            (2,446,563
            )Preferred
      dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,351,323
            )
            
            
            (1,351,323
            )Balance,
      December 31, 2006
            
            
            1,666,666
            
            
            $
            167
            
            
            $
            4,000,851
            
            
            
            36,135,000
            
            
            $
            3,614
            
            
            $
            4,967,778
            
            
            $
            (5,114,053
            )
            
            $
            3,858,357See
      accompanying notes to consolidated financial statements





INTERNATIONAL
      AMERICAN TECHNOLOGIES, INC.Consolidated
      Statements of Cash FlowsBack to
      Table of ContentsYears
      ended December 31, 2006 and 20052006
            
            
            2005Cash
      flows from operating activities:Net loss
            
            $
            (2,446,563
            )
            
            $
            (1,194,652
            )Adjustments to reconcile net lossto net cash used in operating activities:Depreciation and amortization
            
            
            627,000
            
            
            
            304,946(Gain) loss on disposal of assets
            
            
            (150,000
            )
            
            
            -Issuance of common stock for services
            
            
            -
            
            
            
            17,750Miscellaneous write-off
            
            
            (22,684
            )
            
            
            -(Increase) decrease of operating assets, net of
    acquisitions:Accounts receivable
            
            
            (498,920
            )
            
            
            (319,928
            )Inventories
            
            
            (304,955
            )
            
            
            (195,819
            )Prepaid expenses
            
            
            (104,654
            )
            
            
            -Other
            
            
            (36,685
            )
            
            
            (22,538
            )Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
            
            
            (180,791
            )
            
            
            (9,751
            )Net cash used in operating activities
            
            
            (3,044,382
            )
            
            
            (1,419,992
            )Cash
      flows from investing activities:Purchase of property and equipment
            
            
            (51,841
            )
            
            
            (119,006
            )Patents and trademarks
            
            
            (26,393
            )
            
            
            -Redemption (purchase) of certificate of deposit
            
            
            -
            
            
            
            300,000Proceeds from the sale of property
            
            
            150,000
            
            
            
            -Proceeds from payments on long-term notes receivable
            
            
            27,434
            
            
            
            25,586Amount due from (to) affiliates
            
            
            87,467
            
            
            
            (342,700
            )Purchase of stock in majority-owned subsidiary
            
            
            -
            
            
            
            (998,300
            )Cash acquired in acquisition of majority-owned subsidiary
            
            
            -
            
            
            
            56,506Net cash provided by (used in) investing activities
            
            
            186,667
            
            
            
            (1,077,914
            )Cash
      flows from financing activities:Proceeds from issuance of preferred stock
            
            
            2,710,120
            
            
            
            -Proceeds from long-term borrowing
            
            
            1,012,231
            
            
            
            2,131,605Proceeds from borrowings from related parties
            
            
            -
            
            
            
            998,300Net borrowings under line of credit
            
            
            570
            
            
            
            -Repayment of short-term borrowing
            
            
            (15,592
            )
            
            
            (570,223
            )Repayment of short-term borrowing
            
            
            (514,984
            )
            
            
            -Net cash provided by financing activities
            
            
            3,192,345
            
            
            
            2,559,682Net increase (decrease) in cash
            
            
            334,630
            
            
            
            61,776Cash
      at beginning of year
            
            
            61,875
            
            
            
            99Cash
      at end of year
            
            $
            396,505
            
            
            $
            61,875Supplemental
      schedule of cash flow information:Interest paid
            
            $
            491,344
            
            
            $
            106,617Taxes paid
            
            $
            -
            
            
            $
            -Non-cash
      investing and financing transactions:Issuance of note payable for equipment
            
            
            4,855
            
            
            
            -Issuance of note payable and assumption of liabilitiesfor acquisition of subsidiary
            
            $
            -
            
            
            $
            1,457,400Non-cash
      portion of assets and liabilities received in the acquisition
      ofa majority-owned subsidiary (see Note 2):Current assets
            
            $
            -
            
            
            $
            1,379,433Property and equipment
            
            
            -
            
            
            
            826,765Patents, trademarks and contracts
            
            
            -
            
            
            
            2,724,487Other non-current assets
            
            
            -
            
            
            
            70,085Current liabilities
            
            
            -
            
            
            
            (2,098,376
            )Deferred tax liability
            
            
            -
            
            
            
            (503,200
            )See
      accompanying notes to consolidated financial statements









INTERNATIONAL
AMERICAN TECHNOLOGIES, INC.


Notesto Consolidated Financial Statements


Back to Table of Contents


December
31, 2006 and 2005






(1)
Summary of Significant Accounting Policies (Restated)






Organization,
Ownership and Business






International
American Technologies, Inc., f/k/a Unlimited Coatings Corporation, (the
"Company"), is a 45.1% owned subsidiary of American International Industries,
Inc. (AIII).






In 2005,
the Company acquired, through its parent company, 51% of the capital stock of
Hammonds Technical Services, Inc. On August 1, 2006, The Company acquired the
49% minority interest of Hammonds Technical Services, Inc., Hammonds Fuel
Additives, Inc., and Hammonds Water Treatment Systems, Inc. by issuing
16,000,000 restricted shares or 44.4% of IMTG common stock at a conversion rate
of $.25 a share, valued in accordance with the price of the common stock at the
date of the transaction. As a result of this transaction, the Company owns 100%
of the Hammonds companies.






On August
8, 2006 the Company entered into a stock purchase agreement with Vision
Opportunity Fund Limited from which the Company received $1,500,000 for 833,333
series A convertible preferred shares with warrant A (8,333,333 warrants
exercisable over a period of 5 years at $.18) and warrant B (8,333,333 warrants
exercisable over a period of 2 years at $.18).






On
September 29, 2006 the Company entered into a stock purchase agreement with
Vision Opportunity Fund Limited from which the Company received $1,500,000 for
833,333 series B convertible preferred shares with a warrant C (8,333,333
warrants exercisable over a period of 5 years at $.50).






The
series A and B convertible preferred shares are convertible at 10 to 1 ratio of
common to preferred.






Principles
of Consolidation






The 2006
consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries: Hammond Technical Services, Inc., Hammonds Fuel
Additives, Inc., and Hammonds Water Treatment Systems, Inc. In accordance with
FIN 46(r), American International Industries, Inc., OTCBB: AMIN, consolidates
IMTG even though its ownership is less than 51%, because the Company exercises
its right to occupy two of the three board of director seats. Since IMTG is
incurring losses and there is no minority interest, AMIN recognizes 100% of
IMTG’s losses. All significant intercompany transactions and balances have been
eliminated in consolidation.






Cash
and Cash-Equivalents






The
Company considers cash and cash-equivalents to include cash on hand and demand
deposits with banks with an original maturity of three months or
less.






Accounts
Receivable






Accounts
receivable consist primarily of trade receivables, net of a valuation allowance
for doubtful accounts.






Allowance
for Doubtful Accounts






The
Company extends credit to customers and other parties in the normal course of
business. The Company regularly reviews outstanding receivables and provides for
estimated losses through an allowance for doubtful accounts. In evaluating the
level of established reserves, the Company makes judgments regarding its
customers' ability to make required payments, economic events and other factors.
As the financial condition of these parties change, circumstances develop or
additional information becomes available, adjustments to the allowance for
doubtful accounts may be required.






Inventories






Inventories
are valued at the lower-of-cost or market on a first-in, first-out basis. The
Company assesses the reliability of its inventories based upon specific usage
and future utility. A charge to results of operations is taken when factors that
would result in a need for a reduction in the valuation, such as excess or
obsolete inventory, are noted.






Property,
Plant, Equipment, Depreciation, Amortization and Long Lived Assets






Long-lived
assets include:






Property,
Plant and equipment – These assets are recorded at original cost and may be
adjusted for any additional improvements after purchase. We depreciate the cost
evenly over the assets’ estimated useful lives. Upon retirement or sale, the
cost of the assets disposed of and the related accumulated depreciation are
removed from the accounts, with any resultant gain or loss being recognized as a
component of other income or expense.






Identifiable
intangible assets – These assets are recorded at acquisition cost, intangible
assets with finite lives and are amortized evenly over their estimated useful
lives.






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






During
April, 2005 the Company acquired Hammonds Technical Services, Inc. for a
purchase price of approximately $2,455,700 (See Note 2). The operations of
the Hammonds companies are included in the consolidated statements of operations
from date of acquisition.






Revenue
Recognition






Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured. The Company has no
significant sales returns or allowances.






Income
Taxes






The
Company is a taxable entity and recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.






Earnings
(Loss) Per Share






The basic
net earnings (loss) per common share is computed by dividing the net earnings
(loss) by the weighted average number of shares outstanding during a period.
Diluted net earnings (loss) per common share is computed by dividing the net
earnings (loss), adjusted on an as if converted basis, by the weighted average
number of common shares outstanding plus potential dilutive
securities.






Management's
Estimates and Assumptions






The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.






Fair
Value of Financial Instruments






The
Company estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the Company estimates of fair value are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumption and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The interest rates payable by the Company on its notes payable
approximate market rates. The Company believes that the fair value of its
financial instruments comprising accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.






New
Standards Implemented






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






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






- SFAS
No. 155: Accounting for
Certain Hybrid Financial Instruments


- SFAS
No. 156: Accounting for
Servicing of Financial Assets


- SFAS
No. 157:Fair Value
Measurements


- SFAS
No. 158:Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans






Management
has reviewed these new standards and believes that they have no impact on the
financial statements of the Company.






(2)
Acquisition of Hammonds Technical Services, Inc. (Restated)






Effective
April 28, 2005, the Company entered into a Stock Purchase Agreement ("the
Agreement") to acquire a 51% interest in the capital stock of Hammonds Technical
Services, Inc., a privately owned Texas corporation ("Hammonds") in
consideration for the Company or its parent, American International Industries,
Inc., providing: (i) $998,300 in cash to Hammonds for working capital; (ii) a
secured revolving long-term line of credit in the amount of $2,000,000; and
(iii) the parent issuing 145,000 restricted shares of common stock to the
Company in consideration for a $1,450,000 promissory note. The value of the
stock at $10.00 per share was guaranteed. These shares were exchanged for two
minority equity interests in Hammonds owned by third parties. The total purchase
price to acquire the 51% in Hammonds was $2,455,700 representing cash payments
of $825,000, 145,000 shares of AIII’s restricted common stock valued at
$1,450,000 and the assumption of a note payable to one of the former
shareholders in the amount of $173,300 and liabilities in excess of assets in
the amount of $7,400.






The
Company believes that $10 per share is appropriate to record the valuation of
the 145,000 restricted shares. SFAS No. 141, Paragraph 25, states that “A
business combination agreement may provide for the issuance of additional shares
of a security or the transfer of cash or other consideration contingent on
specified events or transactions in the future.” Further, Paragraph 26, states
that “amounts of contingent consideration that are determinable at the date of
acquisition shall be included in determining the cost of an acquired entity and
recorded at that date.” The sellers of 51% of Hammonds and Mr. Daniel Dror
entered into a stock repurchase agreement as of April 28, 2005, where the
sellers agreed to sell the 145,000 shares to Mr. Daniel Dror for $10.00 per
share through the third anniversary of the effective date of the agreement. This
stock repurchase agreement provides a specific price for a specific period of
time for the repurchase of the 145,000 restricted shares.






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






As
required by SFAS No. 141, the Company has recorded the acquisition using the
purchase method of accounting with the purchase price allocated to the acquired
assets and liabilities based on their respective estimated fair values at the
acquisition date. The purchase price of $2,455,700 had been allocated at
follows:




Hammonds
      Net Book Value
            
            
            Allocation
      of Purchase Price
            
            
            ConsolidatedCurrent
      assets
            
            $
            1,435,939
            
            
            $
            -
            
            
            $
            1,435,939Property
      and equipment
            
            
            418,603
            
            
            
            408,162
            
            
            
            826,765Patents,
      trademarks and contract
            
            
            173,749
            
            
            
            2,550,738
            
            
            
            2,724,487Other
      non-current assets
            
            
            70,085
            
            
            
            -
            
            
            
            70,085Current
      liabilities
            
            
            (2,090,976
            )
            
            
            (7,400
            )
            
            
            (2,098,376
            )Deferred
      tax liability
            
            
            -
            
            
            
            (503,200
            )
            
            
            (503,200
            )$
            7,400
            
            
            $
            2,448,300
            
            
            $
            2,455,700




The
following table contains a summary of the intangible assets
acquired:




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            372,828
            
            12
      yearsTrademarks
            
            
            465,199
            
            
            
            77,533
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            
            
            110,485
            
            7
      years$
            2,735,625
            
            
            $
            560,846
            
            11
      years








Aggregate
      Amortization ExpenseFor
      year ended December 31, 2005
            
            $
            199,362For
      year ended December 31, 2006
            
            $
            361,484For
      year ending December 31, 2007
            
            $
            266,613For
      year ending December 31, 2008
            
            $
            250,646For
      year ending December 31, 2009
            
            $
            250,646For
      year ending December 31, 2010
            
            $
            250,646For
      year ending December 31, 2011
            
            $
            250,646




Revenues
and expenses are included in the Company’s statement of operations from May 1,
2005 through December 31, 2006.






On August
1, 2006, The Company acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. by issuing 16,000,000 restricted shares or 44.4% of IMTG common
stock at a conversion rate of $.25 a share. The additional cost of $4,000,000
has been allocated to patents, trademarks, and sole source contract and is being
amortized in a manner equivalent to the amortization used on the intangible
assets acquired in the initial purchase of 51% of the company. Additionally, the
Company acquired patents totaling $26,393 in 2006. The following table contains
a summary of the intangible assets acquired in 2006:




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            2,661,282
            
            
            $
            93,326
            
            12
      yearsTrademarks
            
            
            684,000
            
            
            
            28,500
            
            10
      yearsSole
      Source Contract
            
            
            680,000
            
            
            
            40,476
            
            7
      years$
            4,026,393
            
            
            $
            162,302
            
            11
      years








Aggregate
      Amortization ExpenseFor
      year ended December 31, 2006
            
            $
            162,302For
      year ending December 31, 2007
            
            $
            387,849For
      year ending December 31, 2008
            
            $
            387,849For
      year ending December 31, 2009
            
            $
            387,849For
      year ending December 31, 2010
            
            $
            387,849For
      year ending December 31, 2011
            
            $
            387,849




December
31, 2006 balances for Intangible Assets are included in note 5.






(3)
Inventory






Inventory
at December 31, 2006 consisted of the following:




2006Finished
      goods
            
            $
            106,000Work
      in process
            
            
            40,680Parts
      and materials
            
            
            1,332,4461,479,126Less:
      Obsolescence reserve
            
            
            (169,514
            )$
            1,309,612




(4)
Property and Equipment






A summary
of property and equipment and related accumulated depreciation and amortization
are as follows:




2006Machinery
      and equipment
            
            $
            894,533Leasehold
      improvements
            
            
            96,796Total
      property and equipment
            
            
            991,329Less:
      Accumulated depreciation and amortization
            
            
            (209,297
            )Net
      property and equipment
            
            $
            782,032




(5)
Intangible Assets






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




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            4,468,780
            
            
            $
            466,154
            
            12
      yearsTrademarks
            
            
            1,149,199
            
            
            
            106,033
            
            10
      yearsSole
      Source Contract
            
            
            1,144,039
            
            
            
            150,961
            
            7
      years$
            6,762,018
            
            
            $
            723,148
            
            11
      years








Aggregate
      Amortization ExpenseFor
      year ended December 31, 2005
            
            $
            199,362For
      year ended December 31, 2006
            
            $
            654,465For
      year ending December 31, 2007
            
            $
            638,495For
      year ending December 31, 2008
            
            $
            638,495For
      year ending December 31, 2009
            
            $
            638,495For
      year ending December 31, 2010
            
            $
            638,495For
      year ending December 31, 2011
            
            $
            638,495




The
Company’s patents, trademarks, and sole source contract resulted from the April
28, 2005 acquisition of 51% of Hammonds Technical Services and from the August
1, 2006 acquisition of the 49% minority interest of the Hammonds
Companies.






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




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            372,828
            
            12
      yearsTrademarks
            
            
            465,199
            
            
            
            77,533
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            
            
            110,485
            
            7
      years$
            2,735,625
            
            
            $
            560,846
            
            11
      years




On August
1, 2006, The Company acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. by issuing 16,000,000 restricted shares or 44.4% of IMTG common
stock at a conversion rate of $.25 a share. The additional cost of $4,000,000
has been allocated to patents, trademarks, and sole source contract and is being
amortized in a manner equivalent to the amortization used on the intangible
assets acquired in the initial purchase of 51% of the company. Additionally, the
Company acquired patents totaling $26,393 in 2006. The following table contains
a summary of the intangible assets acquired in 2006:




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            2,661,282
            
            
            $
            93,326
            
            12
      yearsTrademarks
            
            
            684,000
            
            
            
            28,500
            
            10
      yearsSole
      Source Contract
            
            
            680,000
            
            
            
            40,476
            
            7
      years$
            4,026,393
            
            
            $
            162,302
            
            11
      years




(6) Short-term Notes Payable To
Banks




December
      31, 2006Note
      payable with interest at 10.75%, interest payments due quarterly, with a
      principal balance due on December 10, 2007
            
            $
            90,459Note
      payable to former owner of equity interest in Hammonds payable on July 20,
      2005 with accrued interest at prime plus 4%
            
            
            173,300Other
      notes with various terms
            
            
            12,651$
            276,410




(7)
Long-term Debt






Long-term
debt consisted of the following:




December
      31, 2006Note
      payable to a bank, interest due monthly at prime plus 1%, principal
      payment due August 26, 2008, secured by assets of the Company's
      subsidiary
            
            $
            1,992,189Note
      payable to a bank, due in monthly installments of interest only at prime
      plus 1%, with a principal balance due on August 26, 2008
            
            
            400,000Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
            
            
            89,3542,481,543Less
      current portion
            
            
            (17,493
            )$
            2,464,050




Principal
repayment provisions of long-term debt are as follows at December 31,
2006:




2007
            
            $
            17,4932008
            
            
            2,411,4472009
            
            
            21,2412010
            
            
            23,4072011
            
            
            7,955Total
            
            $
            2,481,543




(8)
Preferred Stock (Restated)






The
Company entered into preferred stock agreements with VOMF, described below, with
the strategic objectives to raise working capital funds, bring in outside
investors, and provide liquidity for the Company’s common shares.






On August
8, 2006, IMTG entered into a stock purchase agreement with VOMF pursuant to
which IMTG agreed to sell up to 833,333 shares of newly designated IMTG Series A
Convertible Preferred Stock, having an 8% dividend, for consideration of
$1,500,000. On August 8, 2006, IMTG sold VOMF 555,555 shares of Series A
Preferred Stock for consideration of $1,000,000 and on August 23, 2006, IMTG
sold an additional 277,778 shares of Series A Preferred Stock for consideration
of $500,000. As part of the VOMF purchase of 555,555 shares of Series A
Preferred Stock on August 8, 2006 and 277,778 shares of Series A Preferred Stock
on August 23, 2006 (the "August 2006 Private Financing Transactions"), we issued
VOMF: (i) Series A Warrants to purchase an additional 8,333,333 shares at $.18
per share, or $1,500,000, expiring with respect to 5,555,555 shares on August 8,
2011, and expiring with respect to 2,777,778 shares on August 23, 2011; and (ii)
Series B Warrants to purchase an additional 8,333,333 shares at $.18 per share,
or $1,500,000, which warrants expire with respect to 5,555,555 shares on August
8, 2007 and with respect to 2,777,778 shares on August 23, 2007.






On
September 30, 2006, IMTG entered into a second stock purchase agreement with
VOMF pursuant to which it sold VOMF 833,333 shares of Series B Preferred Stock,
having identical terms as the Series A stock purchase agreement except for the
dividend rate of 4%, for consideration of $1,500,000. As part of this
transaction (the "September 2006 Private Financing Transaction"), we issued
VOMF: (i) Series C Warrants to purchase an additional 8,333,333 shares of our
common stock at $.50 per share, or $4,166,666, expiring on September 29, 2011;
and (ii) we agreed to extend the expiration dates on the Series B Warrants
issued in the August 2006 Private Financing Transactions from August 2007 to
August 2008.






Each
share of Series A and B Convertible Preferred Stock is convertible into ten
shares of the Company's common stock. The Company received net proceeds of
approximately $2,710,121 from the sale of Series A and Series B Preferred Stock
and will receive gross proceeds of $7,166,666 if all of the warrants are
exercised by VOMF. American International Industries’ ownership interest in IMTG
will decrease when VOMF converts its Series A and Series B Preferred Stock
and/or exercises warrants issued in the VOMF August and September 2006 private
financing transactions into shares of IMTG common stock.






The
Company reviewed the following accounting standards to determine the appropriate
accounting for these issuances:






- SFAS
No. 133: Accounting for
Derivative Instruments and Hedging Activities


- SFAS
No. 150: Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity


- EITF
00-19: Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock


- EITF
98-5: Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios


- EITF
00-27: Application of Issue
No. 98-5 to Certain Convertible Instruments


- EITF
Topic D-98: Classification and
Measurement of Redeemable Securities


- ASR No.
268: Redeemable Preferred
Stocks






We
concluded that all components of these issuances should be classified as equity,
because the only way for the value of the conversion feature and the fair value
of the warrants to be realized is through the issuance of shares. The Company
has sufficient authorized and unissued shares available to settle the contracts
after considering all other commitments that may require the issuance of
stock.






The
proceeds for these issuances are required to be allocated based on the relative
fair values of the securities issued. We valued the warrants using the
Black-Scholes model, using the following assumptions:




Stock
      Price on Date of Issuance
            
            
            Volatility
            
            
            Risk-Free
      Interest RateWarrants
      A – Aug. 8, 2006
            
            $
            0.25
            
            
            
            102.4
            %
            
            
            6.25
            %Warrants
      B – Aug. 8, 2006
            
            $
            0.25
            
            
            
            102.4
            %
            
            
            6.25
            %Warrants
      A – Aug. 23, 2006
            
            $
            0.44
            
            
            
            106.4
            %
            
            
            6.25
            %Warrants
      B – Aug. 23, 2006
            
            $
            0.44
            
            
            
            106.4
            %
            
            
            6.25
            %Warrants
      B – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %Warrants
      B – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %Warrants
      C – Sept. 30, 2006
            
            $
            0.40
            
            
            
            104.45
            %
            
            
            6.25
            %




Volatility
was determined using 26 observations of the closing stock price over the prior
year.






The
Black-Scholes model assumes an active trading market for the underlying
security. It does not price in the impact of potential large trades for a thinly
traded stock. Since the Company’s common stock is thinly traded, realization of
the resulting fair value of the warrants that this model yields is unlikely, due
to the large number of shares involved. Other financial models would yield
different values, but are less accessible and costly to produce.






The
proceeds from the preferred share issuances have been allocated based on the
relative fair values of the securities issued as follows:




Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      A – Aug. 8, 2006
            10
      to 1
            
            $
            1,388,888.75
            
            
            $
            387,499.34Warrants
      A – Aug. 8, 2006
            $0.18
      / 5 years
            
            $
            1,139,517.82
            
            
            $
            317,924.97Warrants
      B – Aug. 8, 2006
            $0.18
      / 1 year
            
            $
            709,497.05
            
            
            $
            197,949.36Totals
            
            
            $
            3,237,903.62
            
            
            $
            903,373.67








Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      A – Aug. 23, 2006
            10
      to 1
            
            $
            1,222,222.32
            
            
            $
            176,643.37Warrants
      A – Aug. 23, 2006
            $0.18
      / 5 years
            
            $
            1,076,403.58
            
            
            $
            155,568.71Warrants
      B – Aug. 23, 2006
            $0.18
      / 1 year
            
            $
            826,663.96
            
            
            $
            119,474.75Totals
            
            
            $
            3,125,289.86
            
            
            $
            451,686.83








Exercise
      Price / Term
            
            Fair
      Value
            
            
            Allocation
      of ProceedsPreferred
      B – Sept. 30, 2006
            10
      to 1
            
            $
            3,333,333.20
            
            
            $
            726,755.40Warrants
      B – Sept. 30, 2006
            $0.18
      / 1 year
            
            $
            (2,118,000.19
            )
            
            $
            (461,780.44
            )Warrants
      B – Sept. 30, 2006
            $0.18
      / 2 years
            
            $
            2,442,305.00
            
            
            $
            532,487.52Warrants
      C – Sept. 30, 2006
            $0.50
      / 5 years
            
            $
            2,557,476.70
            
            
            $
            557,598.02Totals
            
            
            $
            6,215,114.71
            
            
            $
            1,355,060.50




As part
of the Preferred B issuance, the Warrants B with an expiration term of 1 year,
which were issued with the Preferred A stock, were cancelled and Warrants B with
an expiration term of 2 years were issued. The Company accounted for the change
in expiration terms as part of the Preferred B issuance because we regard the
consideration given for this issuance to include the change in expiration
terms.






The
Company has determined that a beneficial conversion feature exists. Based on our
review of the “Emerging Issues Task Force” EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, the amount of proceeds allocated to the Series A and
Series B Convertible Preferred Stock should be assigned to the embedded
conversion feature with a corresponding amount recorded as a “deemed dividend”
to the preferred shareholders. This is based on paragraph 6 of EITF 98-5, which
states that “the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible
instrument.”






We
allocated the following amounts to the embedded conversion feature and recorded
a deemed dividend to the preferred shareholders:




Preferred
      A – August 8, 2006
            
            $
            387,499.34Preferred
      A – August 23, 2006
            
            $
            176,643.37Preferred
      B – September 30, 2006
            
            $
            726,755.40Total
      deemed dividend
            
            $
            1,290,898.11




The
material terms of these issuances are disclosed in the following
paragraphs.






Series A Convertible Preferred
Stock. The principal terms of the Series A Preferred Stock are as
follows:






Voting:
Except with respect to specified transactions that may affect the rights,
preferences, privileges or voting power of the Series A Preferred Stock and
except as otherwise required by Nevada law, the Series A Preferred Stock has no
voting rights. We shall not affect certain specified transactions, which include
authorizing or increasing the authorized or issued amount of any stock ranking
pari passu or senior to the Series A Preferred Stock with respect to the
distribution of assets on liquidation or the dissolution or winding up, without
the affirmative vote or consent of the holders, voting as a class, of at least
75% of the shares of the Series A Preferred Stock outstanding at the time.
Dividends: The holders of Series A Preferred Stock are entitled to receive out
of legally available assets dividends at the rate of 8% per annum, payable
semi-annually on June 30 and December 31. Dividends on the Series A Preferred
Stock are cumulative and are prior and in preference to payment of any dividend
or distribution on any junior stock. So long as any shares of Series A Preferred
Stock are outstanding, we will not declare, pay or set apart for payment any
dividend or make any distribution on any junior stock (other than dividends or
distributions payable in additional shares of junior stock), unless at the time
of such dividend or distribution we shall have paid all accrued and unpaid
dividends on Series A Preferred Stock. Conversion: The holder of Series A
Preferred Stock may, at their option, elect to convert all or any portion of the
shares of the Series A Preferred Stock into a number of shares of common stock
equal to the quotient of (i) the liquidation preference amount ($1.80) of the
shares of Series A Preferred Stock being converted plus any accrued but unpaid
dividends divided by (ii) the conversion price, which initially is $0.18 per
share, subject to certain adjustments. If, within 3 business days of our receipt
of a conversion notice, our transfer agent shall fail to issue to the holder the
proper number of shares of common stock subject to the conversion notice, or
fail to issue a new preferred stock certificate representing the number of
shares of Series A Preferred Stock to which such holder is entitled, we shall be
required to pay additional damages on each business day after such 3rd business
day that such conversion is not timely effected equal to 0.5% of the product of:
(i) the number of shares of common stock not timely issued and, in the event we
failed to timely deliver a preferred stock certificate, the number of shares of
common stock issuable upon conversion of the shares of Series A Preferred Stock
represented by such certificate; and (ii) the closing bid price of our common
stock on the last possible date which we could have timely issued such common
stock and/or such preferred stock certificate. If we fail to pay those
additional damages within 5 business days of the date incurred, then such
payment shall bear interest at the rate of 2.0% per month (pro rated for partial
months) until such payments are made. The conversion price of the Series A
Preferred Stock may be adjusted in the event of (i) common stock split or
reclassification; (ii) capital reorganization; (iii) distribution of dividends;
or (iv) the issuance or sale of additional shares of common stock or
equivalents.






Liquidation.
In the event of the liquidation, dissolution or winding up of our affairs, the
holders of outstanding shares of Series A Preferred Stock shall be entitled
to receive, out of our assets available for distribution to shareholders, an
amount equal to $1.80 per share or the liquidation preference amount of the
Series A Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the common
stock or any other junior stock. If our assets are not sufficient to pay in full
the liquidation preference amount plus any accrued and unpaid dividends payable
to the holders of outstanding shares of the Series A Preferred Stock and any
series of preferred stock or any other class of stock ranking pari passu, as to
rights on liquidation, dissolution or winding up, with the Series A Preferred
Stock, then all of said assets will be distributed among the holders of the
Series A Preferred Stock and the other classes of stock ranking pari passu with
the Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. All distribution payments, shall be in cash, property valued at
its fair market value as determined by an independent appraiser or a combination
thereof.






Series B Convertible Preferred
Stock. The principal terms of the Series B Preferred Stock are identical
to those of the Series A Preferred Stock except that the dividends on the Series
B Preferred Stock shall be at the rate of 4% per annum.






Series A, B and C Warrants.
Each Series A and B Warrant allows holders to purchase one share of common stock
for $0.18, subject to adjustment. Series A Warrants expire five (5) years from
the August 8 and August 23, 2006 dates of issuance and the Series B Warrants
expire two years from the August 2006 dates of issuance. Each Series C Warrant
allows its holder to purchase one share of common stock for $0.50, subject to
adjustment. The Series C Warrants expire five (5) years from the September 30,
2006 date of issuance. In the event that our registration statement is not
effective, as required by the registration rights agreement between the Company
and VOMF, holders would also be permitted to exercise the warrants through a
cashless exercise. using the formula considering the number of shares of Common
Stock to be issued to the holder, the number of shares of Common Stock
purchasable upon exercise of the Warrant, the exercise price of the Warrant and
the closing bid price of our Common Stock. The exercise price of the Warrants
and the number of shares of Common Stock purchasable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events
including recapitalization of our Common Stock, dividends payable in our Common
Stock, and the issuance of rights to purchase additional shares of our Common
Stock or other securities convertible into additional shares of Common Stock.
The Warrants provide that the Company shall not effect the exercise of any
Series A, B or C Warrants, and Warrant holder shall have the right to exercise
Warrants, if, after giving effect to such exercise, such Warrant holder would
beneficially own more than 9.99% of the then outstanding shares of our Common
Stock. Notwithstanding the foregoing, the Warrant holder may, by a sixty-0ne day
notice, request that we waive this 9.9% limitation with regard to any or all
shares of Common Stock issuable upon conversion of the Series A and/or Series B
Preferred Stock, in which event the 9.9% restriction shall be waived with
respect to those shares of Common Stock subject to the waiver
notice.






(9)
Concentration of Credit Risk






Financial
instruments that potentially subject the Companies to credit risk are primarily
accounts receivable – trade and notes receivable. The Company grants credit to
customers throughout the United States. Generally, the Companies do not require
collateral or other security to support customer receivables. Hammonds Fuel
Additives (HFA)had one customer that represented more than 10% of its total
sales. Hammonds Water Treatment Systems (HWT) had one customer that represented
more than 10% of its total sales.




Customer
      A
            HFA
            
            
            12
            %Customer
      A
            HWT
            
            
            58
            %




(10)
Income Taxes






The
following table sets forth a reconciliation of the statutory federal income tax
for the year December 31, 2006. The loss before taxes was $2,446,563 in 2006 and
$1,194,652 in 2005.




December
      31, 2006
            
            
            December
      31, 2005Income
      tax benefit computed at statutory rate for
            
            $
            (831,831
            )
            
            $
            (406,182
            )Permanent
      differences - non deductible expenses
            
            
            
            
            
            
            84,600Increase
      in valuation allowance
            
            
            831,831
            
            
            
            321,582Tax
      benefit
            
            $
            -
            
            
            $
            -




The
Company will not file a consolidated income tax return.






Deferred
Income Taxes






The tax
effects of the temporary differences between financial statement income and
taxable income are recognized as deferred tax asset and liability as of December
31, 2006 is set below.




December
      31, 2006Deferred
      tax assets:
            
            $Net
      operating loss - current period
            
            
            742,825Total
      deferred tax asset
            
            
            742,825Valuation
      allowance
            
            
            (742,825
            )Net
      deferred asset
            
            $
            -








December
      31, 2006Deferred
      tax liability:
            
            $Fixed
      asset temporary difference
            
            
            138,775Intangible
      asset temporary difference
            
            
            364,425Net
      deferred tax liability
            
            $
            503,200




The
Company's parent has various net operating loss carryforwards in excess of
$13,000,000 which expire in 2026. The loss is limited under Internal Revenue
Code Section 382.






(11)
Segment Information






The
Company has three reportable segments: Hammonds Technical Services, Hammonds
Fuel Additives, and Hammonds Water Treatment Systems (collectively "Hammonds"). Hammonds
manufactures engineered products and chemicals that serve multiple segments of
the fuels distribution, water treatment and utility vehicle industries. Hammonds
products are marketed by a worldwide network of distributors, manufacturers
representatives and original equipment manufacturers. The corporate overhead
includes the Company's investment holdings including financing current
operations and expansion of its current holdings as well as evaluating the
feasibility of entering into additional businesses.






The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performances
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses and foreign exchange gains and
losses.






The
Company's reportable segments are strategic business units that offer different
technology and marketing strategies.






The
Company's areas of operations are principally in the United States. No single
foreign country or geographic area is significant to the consolidated financial
statements.






Consolidated
revenues from external customers, operating income/(losses), and identifiable
assets were as follows:




December
      312006
            
            
            2005Revenues:Hammonds
      Technical Services
            
            $
            3,180,163
            
            
            $
            2,583,887Hammonds
      Fuel Additives
            
            
            1,222,506
            
            
            
            811,264Hammonds
      Water Treatment
            
            
            2,064,724
            
            
            
            -$
            6,467,393
            
            
            $
            3,395,151Cost
      of Sales:Hammonds
      Technical Services
            
            $
            2,682,317
            
            
            $
            1,878,500Hammonds
      Fuel Additives
            
            
            804,356
            
            
            
            518,450Hammonds
      Water Treatment
            
            
            1,849,856
            
            
            
            -$
            5,336,529
            
            
            $
            2,396,950





Loss
      from operations:Hammonds
      Technical Services
            
            $
            (2,286,217
            )
            
            $
            (1,076,259
            )Hammonds
      Fuel Additives
            
            
            31,499
            
            
            
            (10,888
            )Hammonds
      Water Treatment
            
            
            112,209
            
            
            
            -Corporate
            
            
            (38,283
            )
            
            
            (19,125
            )$
            (2,180,792
            )
            
            $
            (1,106,272
            )





Identifiable
      assets:Hammonds
      Technical Services
            
            $
            8,969,439
            
            
            $
            2,193,207Hammonds
      Fuel Additives
            
            
            374,313
            
            
            
            3,138,302Hammonds
      Water Treatment
            
            
            590,861
            
            
            
            -Corporate
            
            
            449,784
            
            
            
            418,258$
            10,384,397
            
            
            $
            5,749,767




(12)
Commitments






Hammonds
leases its 106,000 square foot manufacturing and office facility from a third
party under an operating lease which expires in October 2016. Future minimum
lease payments under the operating lease are as follows:




Year
      December 31,
            
            Amount2007
            
            $
            420,0002008
            
            
            420,0002009
            
            
            420,0002010
            
            
            420,0002011
            
            
            420,000Thereafter
            
            
            2,100,000$
            4,200,000




Lease
expenses for the years ended December 2006 and 2005, were $290,400 and $132,701,
respectively.






(13)
Related Party Transactions and Economic Dependence






The
Company has been and continues to be dependent upon the funding from its parent,
American International Industries, Inc. At December 31, 2006, the Company owed
the parent $1,931,056.






(14)
Subsequent Events (Restated)






In the
first quarter of 2007, our parent company settled claims with two parties
associated with the acquisition of Hammonds. Our parent company paid $300,000 to
pay off a short term note payable plus interest and acquire an option to
purchase all the party’s shares of AMIN’s common stock. The other party’s
dividend shares were relinquished and returned to our parent. The settlement of
these lawsuits will not significantly effect the income of the
Company.






Subsequent
to December 31, 2006, and in connection with the agreement of VOMF to exercise
up to 4,000,000 Series C Warrants in March 2007, the Company reduced the
exercise price from $0.50 per share to $0.18 per share through December 31,
2007, following which the exercise price reverts to $0.50 per share. On March
27, 2007, VOMF exercised 3,970,400 Series C Warrants at a price of $0.18 per
share with gross proceeds of $714,672 to the Company. This modification to the
initial agreement requires a comparison of the fair values of the warrants
immediately before and after the modification. As a result of this comparison,
we have calculated a fair value reduction of $193,559.56 for this modification.
Since no additional value was given to the holders of these warrants, no expense
needs to be recognized for the change in exercise price.






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




Stock
      Price on Date of Reduction
            
            
            Volatility
            
            
            Risk-Free
      Interest RateWarrants
      C – March 19, 2007
            
            $
            0.35
            
            
            
            105.33
            %
            
            
            6.25
            %




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




Exercise
      Price / Term
            
            Fair
      ValueWarrants
      C – March 19, 2007
            $0.50
      / 4.53 years
            
            $
            1,018,320.96Warrants
      C – March 19, 2007
            $0.18
      / .79 year
            
            $
            (
      824,761.40
            )Fair
      value reduction
            
            
            $
            193,559.56




(15)
Restatement
 
 In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complicated issue as
explained in note 8 above, we have restated the financial statements as of
December 31, 2006. The differences are summarized below:
 
 Year
      Ended December 31, 2006As
      previously reported
              
              
              Restatement
      adjustments
              
              
              As
      restatedNet
      loss applicable to common shareholders
              
              $
              (2,506,988
              )
              
              $
              (1,290,898
              )
              
              $
              (3,797,886
              )Deemed
      dividend
              
              $
              -
              
              
              $
              (1,290,898
              )
              
              $
              (1,290,898
              )Net
      loss per share applicable to common shareholders – Basic and
      diluted
              
              $
              (0.09
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )Additional
      paid-in capital - preferred stock
              
              $
              -
              
              
              $
              1,290,731
              
              
              $
              1,290,731Additional
      paid-in capital - beneficial conversion
              
              $
              -
              
              
              $
              1,290,898
              
              
              $
              1,290,898Additional
      paid-in capital - warrants
              
              $
              -
              
              
              $
              1,419,222
              
              
              $
              1,419,222Additional
      paid-in capital
              
              $
              7,677,731
              
              
              $
              (2,709,953
              )
              
              $
              4,967,778Accumulated
      deficit
              
              $
              (3,823,155
              )
              
              $
              (1,290,898
              )
              
              $
              (5,114,053
              )