American International Industries (AMIN) 10-Q 2007 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

FORM 10-Q
_________________________

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

For the quarterly period ended March 31, 2007

OR

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

For the transition period from                to               

Commission File No.: 0-25223

AMERICAN INTERNATIONAL INDUSTRIES, INC.
(Exact Name Of Registrant As Specified In Its Charter)

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

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

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

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

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

At March 31, 2007, the Registrant had 5,467,602 shares of common stock issued.

TABLE OF CONTENTS

Item	Description	Page
	PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.	20
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS	22
ITEM 4.	CONTROLS AND PROCEDURES.	23
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	23
ITEM 1A.	RISK FACTORS	23
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3.	DEFAULT UPON SENIOR SECURITIES.	23
ITEM 4.	SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS.	23
ITEM 5.	OTHER INFORMATION.	23
ITEM 6.	EXHIBITS	24

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS Back to Table of Contents

Condensed Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2007 (Unaudited) and December 31, 2006 (Audited)	4
Unaudited Consolidated Statements of Operations - Three ended March 31, 2007 and 2006	5
Unaudited Consolidated Statement of Cash Flows - Three months ended March 31, 2007 and 2006	6
Notes to Unaudited Condensed Consolidated Financial Statements	7

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets Back to Table of Contents
March 31, 2007 and December 31, 2006
		March 31, 2007		December 31, 2006
		(Unaudited)		(Audited)
Assets
Current assets:
Cash and cash equivalents	$	3,651,902	$	3,275,803
Certificate of deposit		6,025,000		6,139,000
Trading securities		858,772		724,255
Accounts receivable, less allowance for doubtful accounts
of $232,307 at March 31, 2007 and December 31, 2006		4,060,006		5,221,072
Current portion of notes receivable		714,166		1,021,593
Accounts and notes receivable from related parties		235,000		235,000
Inventories		6,071,404		5,303,418
Real estate acquired for resale		225,000		225,000
Drilling rigs held for sale		187,611		187,611
Prepaid expenses and other current assets		532,589		320,498
Total current assets		22,561,450		22,653,250
Long-term notes receivable, less current portion		4,068,322		4,043,322
Investment in Whittingdon Oil & Gas		6,000		6,000
Property and equipment, net of accumulated depreciation and amortization		3,298,393		3,141,867
Goodwill, less accumulated amortization of
$205,295 at March 31, 2007 and December 31, 2006		674,539		674,539
Patents and trademarks, net of amortization		5,877,105		6,038,870
Other assets		221,633		39,083
Total assets	$	36,707,442	$	36,596,931
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	3,568,058	$	3,667,108
Margin loans from financial institutions		356,558		341,058
Short-term notes payable		1,141,767		917,301
Current installments of long-term debt		102,994		102,580
Total current liabilities		5,169,377		5,028,047
Long-term debt, less current installments		7,324,135		6,945,282
Deferred tax liability		503,200		503,200
Minority interest		1,606,431		1,558,395
Total liabilities		14,603,143		14,034,924
Stockholders' equity:
Preferred stock, $0.001par value, 1,000,000 authorized: none issued
Common stock, $0.001 par value. Authorized 10,000,000 shares:
5,467,602 shares issued and 5,449,402 shares outstanding at March 31, 2007;
5,340,852 shares issued and 5,335,452 shares outstanding at December 31, 2006		5,468		5,341
Additional paid-in capital		37,480,368		36,033,743
Accumulated deficit		(15,276,066)		(13,938,166)
Common stock issuance obligation		-		508,620
		22,209,770		22,609,538
Less treasury stock, at cost (18,200 shares at March 31, 2007
and 5,400 shares at December 31, 2006)		(105,471)		(47,531)
Total stockholders' equity		22,104,299		22,562,007
Total liabilities and stockholders' equity		36,707,442	$	36,596,931
The accompanying notes are an integral part of these consolidated financial statements

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations Back to Table of Contents
Three months ended March 31, 2007 and 2006 (Unaudited)
		Three Months Ended		Three Months Ended
		March 31, 2007		March 31, 2006
Revenues	$	6,612,570	$	6,859,882
Costs and expenses:
Cost of sales		4,603,524		4,316,213
Selling, general and administrative		3,453,868		2,861,872
Total operating expenses		8,057,392		7,178,085
Operating loss		(1,444,822)		(318,203)
Other income (expenses):
Interest and dividend income		160,689		60,238
Realized losses on investments		(598,705)		-
Unrealized gain (losses) on trading securities		642,919		(9,549)
Interest expense		(219,812)		(170,274)
Other income (expense)		214,867		(6,445)
Total other income (expenses)		199,958		(126,030)
Net loss from operations before income taxes and minority interest		(1,244,864)		(444,233)
Minority interest		(48,036)		(239,430)
Net loss	$	(1,292,900)	$	(683,663)
Preferred dividends		(45,000)		-
Net loss applicable to common shareholders		(1,337,900)		(683,663)
Net loss applicable to common shareholders:
Basic	$	(0.24)	$	(0.16)
Weighted average common shares:
Basic		5,460,951		4,346,933
The accompanying notes are an integral part of these consolidated financial statements

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Back to Table of Contents
Three months ended March 31, 2007 and 2006 (Unaudited)
		Three Months Ended		Three Months Ended
		March 31, 2007		March 31, 2006
Cash flows from operating activities:
Net loss	$	(1,292,900)	$	(683,663)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		277,549		229,664
Common shares issued for services		172,775		210,739
Compensation - stock warrants		70,685		-
Realized (gains) losses on the sale of trading securities		598,705		-
Unrealized (gain) losses on the sale of trading securities		(642,919)		9,549
Stock returned in lawsuit settlement		(39,600)		-
Minority interest		48,036		239,430
(Increase) decrease of operating assets, net of acquisitions and dispositions:
Accounts receivable		1,161,066		632,007
Trading securities		(90,303)		120,902
Inventories		(767,986)		(551,180)
Prepaid expenses and other current assets		(212,092)		(234,547)
Other assets		(182,549)		33,249
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses		(144,050)		(26,601)
Net cash used in operating activities		(1,043,583)		(20,451)
Cash flows from investing activities:
Purchase of property and equipment		(267,470)		(330,339)
Patents and trademarks		(4,840)		-
Issuance of note receivable		(25,000)		-
Investment in certificate of deposit		(3,100,000)		-
Redemption of certificate of deposit		3,214,000		1,000,000
Note receivable		307,427		184,974
Net cash provided by investing activities		124,117		854,635
Cash flows from financing activities:
Addition to (repayment of) short-term borrowings from related parties		-		(46,663)
Net borrowings under line-of-credit agreements		324,218		-
Net repayment under line-of-credit agreements		-		(199,999)
Proceeds from short-term debt		300,000		-
Proceeds from long-term debt		264,946		23,319
Margin loans		15,501		-
Proceeds from issuance of common stock of subsidiary		694,672		-
Principal payments on short-term debt		(257,664)		-
Principal payments on long-term debt		(27,768)		(193,802)
Acquisition on treasury stock		(18,340)		-
Net cash provided by (used in)  financing activities		1,295,565		(417,145)
Net increase (decrease) in cash and cash equivalents		376,099		417,039
Cash and cash equivalents at beginning of year		3,275,803		2,709,105
Cash and cash equivalents at end of year	$	3,651,902	$	3,126,144
Supplemental schedule of cash flow information:
Interest paid	$	219,812	$	91,249
The accompanying notes are an integral part of these consolidated financial statements

American International Industries, Inc. Back to Table of Contents
Notes to Unaudited Condensed Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Organization, Ownership and Business

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Northeastern Plastics, Inc., and Brenham Oil & Gas, Inc., and its majority owned subsidiaries, Delta Seaboard Well Services, Inc. and International American Technologies, Inc. In accordance with FIN46(r), the Company consolidates IMTG although its ownership is less than 51%, because the Company controls the IMTG Board of Directors by having designated two of the three members of IMTG's Board of Directors. Since Hammonds is incurring losses and there is no minority interest, the Company recognizes 100% of Hammond’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 certificates of deposits with banks with an original maturity of three months or less, that the Company intends to convert.

Accounts Receivable

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

Allowance for Doubtful Accounts

The Company extends credit to customers and other parties in the normal course of business. The Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, the Company makes judgments regarding its customers' ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. When the Company determines that a customer may not be able to make required payments, the Company increases the allowance through a charge to income in the period in which that determination is made.

Inventories

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

Freight and Shipment Policy

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

Investment Securities

The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities for which the Company does not have the intent or ability to hold to maturity and equity securities not classified as trading securities are classified as available-for-sale. The cost of investments sold is determined on the specific identification or the first-in, first-out method. Trading securities are reported at fair value with unrealized gains and losses recognized in earnings, and available-for-sale securities are also reported at fair value but unrealized gains and losses are shown in the caption "unrealized gains (losses) on shares available-for-sale" included in stockholders' equity. Management determines fair value of its investments based on quoted market prices at each balance sheet date.

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

Long-lived assets include:

Property, Plant and equipment – Assets acquired in the normal course of business are recorded at original cost and may be adjusted for any additional significant improvements after purchase. We depreciate the cost evenly over the assets’ estimated useful lives. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, with any resultant gain or loss being recognized as a component of other income or expense. As required by SFAS No. 141, IMTG has recorded the acquisition of Hammonds using the purchase method of accounting with the purchase price allocated to the acquired assets and liabilities based on their respective estimated fair values at the acquisition date. For more information on the acquisition of Hammonds, see note 2.

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

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

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

Acquired Assets		Amount	Life
Machinery & Equipment	$	408,162	2-10 years
Patents		1,621,500	5-17 lives
Trade Marks		465,199	10 years
Sole Source Contract		464,039	7 years
	$	2,958,900

SFAS No. 142 eliminated the amortization of goodwill, and requires annual impairment testing of goodwill and introduces the concept of indefinite life intangible assets. The Company adopted SFAS No. 142 effective January 1, 2002.

On August 1, 2006, IMTG 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 $0.25 a share. The additional cost of $4,000,000 has been allocated to patents, trademarks, and sole source contract and is being amortized in a manner equivalent to the amortization used on the intangible assets acquired in the initial purchase of 51% of the company.

March 31, 2007 and December 31, 2006 balances for long-lived assets are detailed in later footnotes: Property and Equipment (note 7) and Intangible Assets (note 8).

Revenue Recognition

Revenue is recognized when the earning process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. 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 Per Share

The basic net earnings per common share is computed by dividing the net earnings by the weighted average number of shares outstanding during a period. Diluted net earnings per common share is computed by dividing the net earnings, adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 2006 and 2005, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net earnings (loss) per common share. These securities include options to purchase shares of common stock.

Advertising Costs

The cost of advertising is expensed as incurred.

Management's Estimates and Assumptions

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

Stock-Based Compensation

The Company grants shares of stock to non-employees for goods and services and in conjunction with certain agreements. These grants are accounted for under FASB Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant date fair values.

Fair Value of Financial Instruments

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

New Standards Implemented

In 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
- - SFAS No. 159: The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115
- - FIN No. 48: Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109

Management has reviewed these new standards and believes that they have no impact on the financial statements of the Company at this time; however, they may apply in the future.

(2) Acquisition of Hammonds Technical Services, Inc.

Effective April 28, 2005, the Company's subsidiary, International American Technologies, Inc. ("IMTG"), 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 IMTG 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 IMTG in consideration for a $1,450,000 promissory note. 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.

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, IMTG has recorded the acquisition using the purchase method of accounting with the purchase price allocated to the acquired assets and liabilities based on their respective estimated fair values at the acquisition date. The purchase price of $2,455,700 had been allocated at follows:

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

Revenues and expenses are included in IMTG’s statement of operations from May 1, 2005 through March 31, 2007.

(3) Trading Securities

Investments in marketable securities primarily include shares of common stock in various companies. The investments are considered trading securities, and accordingly any changes in market value are reflected in the consolidated statement of operations. At March 31, 2007 and 2006, the Company has unrealized trading gains of $642,919 and losses of $9,549, respectively, related to securities held on those dates. These unrealized losses are included in the consolidated statements of operations for the respective years. The Company recorded realized losses of $598,705 and realized gains / losses of $-0- on the sales of trading securities for the quarters ended March 31, 2007 and 2006. The Company sold 180,500 ONH shares for proceeds of $103,954 in February 2007. Through December 31, 2006, the Company had an unrealized loss on these shares of $633,227. The realized loss from the sale of the shares in 2007 was $585,228. The net income effect of the sale of these shares is a gain of $47,999 in 2007.

(4) Inventories

Inventories consisted of the following:

		March 31, 2007		December 31, 2006
Part and materials	$	1,545,737	$	1,332,446
Work in process		284,630		232,451
Finished goods		4,501,521		4,034,699
Less reserve		(260,484)		(296,178)
	$	6,071,404	$	5,303,418

(5) Real Estate Transactions

The Company continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou and Galveston Bay in Galveston County, Texas. The book value for this property is $225,000. The property's appraised value is substantially more than the book value. In November 2005, the Company signed a contract for sale of the property for a cash consideration of $16,000,000 with Lakeland Partners III. In January 2007, Lakeland assigned all of its interest in the contract to Westfield Forest, L.P. Westfield is a recognized developer of waterfront properties in the Houston, Texas area. No revenue has been recognized for this transaction because the development of the property requires permits from certain governmental agencies, which the developer believes they can obtain timely. The projected closing of the transaction is scheduled for sometime in 2007.

(6) Long-term Notes Receivable

Long-term notes receivable at March 31, 2007 consisted of the following:

		March 31, 2007		December 31, 2006
Net note receivable from sale of real estate, principal payment due on or before July 30, 2008	$	3,020,044	$	3,020,044
Sale of machinery and equipment, principal payment due on or before December 1, 2008		164,200		439,200
Sale of former subsidiary, Marald, Inc., principal and interest due monthly through June 5, 2012		183,147		190,310
Sale of former subsidiary, Marald, Inc., principal due October 5, 2007		200,000		200,000
Sale of refinery to settle lawsuit, principal and interest due on June 1 and December 1, through June 1, 2010		875,000		875,000
Sale of drilling rig, principal and interest due monthly through December 31, 2009		299,736		325,000
Other		40,361		15,361
Notes receivable		4,782,488		5,064,915
Less current portion		714,166		1,021,593
Notes receivable, less current portion	$	4,068,322	$	4,043,322

(7) Property and Equipment

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

	Years		March 31, 2007		December 31, 2006
Land		$	892,945	$	817,595
Building and improvements	20		1,049,862		1,009,001
Machinery and equipment	7-15		2,965,086		2,910,871
Office equipment and furniture	7		712,149		701,682
Automobiles	5		811,404		724,827
			6,431,446		6,163,976
Less accumulated depreciation and amortization			(3,133,053)		(3,022,109)
Net property and equipment		$	(3,298,393)	$	3,141,867

(8) Intangible Assets

Intangible assets at March 31, 2007 consisted of the following:

	As of March 31, 2007
		Gross Carrying Amount		Accumulated Amortization	Average Weighted Lives
Goodwill	$	879,834	$	205,295	N/A
Patents	$	4,473,620	$	563,170	12 years
Trademarks		1,149,199		134,763	10 years
Sole Source Contract		1,144,039		191,820	7 years
Patents, Trademarks, and Sole Source Contract	$	6,766,858	$	889,753	11 years

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

	As of December 31, 2006
		Gross Carrying Amount		Accumulated Amortization	Average Weighted Lives
Goodwill	$	879,834	$	205,295	N/A
Patents	$	4,468,780	$	466,154	12 years
Trademarks		1,149,199		106,033	10 years
Sole Source Contract		1,144,039		150,961	7 years
Patents, Trademarks, and Sole Source Contract	$	6,762,018	$	723,148	11 years

Aggregate Amortization Expense
For year ending December 31, 2007	$	654,906
For year ending December 31, 2008	$	638,979
For year ending December 31, 2009	$	638,979
For year ending December 31, 2010	$	638,979
For year ending December 31, 2011	$	638,979

The Company’s patents, trademarks, and sole source contract resulted from 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 March  31, 2007
		Gross Carrying Amount		Accumulated Amortization	Average Weighted Lives
Patents	$	1,806,387	$	414,187	12 years
Trademarks		465,199		89,163	10 years
Sole Source Contract		464,039		127,058	7 years
Patents, Trademarks and Sole Source Contracts	$	2,735,625	$	630,408	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 price of $0.25 a share. The additional cost of $4,000,000 has been allocated to patents, trademarks, and sole source contract for the additive injection system and is being amortized in a manner equivalent to the amortization used on the intangible assets acquired in the initial purchase of 51% of the company. Additionally, the Company acquired patents totaling $26,393 in 2006 and $4,840 during the quarter ended March 31, 2007. The following table contains a summary of the intangible assets acquired in 2006 and during the quarter ended March 31, 2007:

	As of March 31, 2007
		Gross Carrying Amount		Accumulated Amortization	Average Weighted Lives
Patents	$	2,667,233	$	148,983	12 years
Trademarks		684,000		45,600	10 years
Sole Source Contract		680,000		64,762	7 years
Patents, Trademarks and Sole Source Contracts	$	4,031,233	$	259,345	11 years

(9) Short-term Notes Payable To Banks

		March 31, 2007		December 31, 2006
Note payable to a bank, which allows the Company to borrow up to $5,000,000, interest due monthly at the prime rate, principal payment April 30, 2008, secured by assets of the Company's subsidiaries	$	714,000	$	531,871
Note payable to a bank with interest at 7.25%, interest payments due monthly, with a principal balance due on September 15, 2007		300,000		-
Note payable with interest at 10.75%, interest payments due quarterly, with a principal balance due on December 10, 2007		90,459		90,459
Insurance note payable with interest at 7.36%, principal and interest due in monthly payments of $27,255.05 through April 1, 2007		27,255		109,020
Note payable to former owner of equity interest in Hammonds payable on July 20, 2005 with accrued interest at prime plus 4%		-		173,300
Other notes with various terms		10,053		12,651
	$	1,141,767	$	917,301

Each of the Company’s subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from the Company.

(10) Long-term Debt

Long-term debt consisted of the following:

		March 31, 2007		December 31, 2006
Note payable to a bank, interest due monthly at prime plus 1%, principal payment due August 26, 2008, secured by a Deed of Trust on the Company’s property	$	1,000,000	$	1,000,000
Note payable to bank, which allows the Company to borrow up to $2,000,000, interest due monthly at prime plus 1%, principal payment due August 26, 2008, secured by assets of the Company's subsidiary		1,992,189		1,992,189
Note payable to a bank, which allows the Company to borrow up to $2,000,000, due in monthly payments of interest only, with interest at prime floating rate, with the principal balance due in June 2009, secured by subsidiary's property		1,611,631		1,469,542
Note payable to bank due in monthly installments of principal and interest through July 2025 with interest at prime floating rate secured by property		426,018		426,508
Note payable to a bank, due in monthly installments of $6,170, including interest at 6.6% through May 2018, secured by property		579,248		588,106
Note payable to a bank, due in monthly installments of interest only at prime plus 1%, with a principal balance due on August 26, 2008		400,000		400,000
Note payable to a bank, due in quarterly installments of interest only at 7.5%, with a principal balance due on January 19, 2008		1,000,000		1,000,000
Note payable to a bank, due in monthly installments of principal and interest of $2,119.65 through April 3, 2011		85,272		89,354
Note payable to a bank, with interest at 9.25%, due in monthly installments of principal and interest of $4,050 through February 26, 2012, secured by assets of the Company’s subsidiary		241,193		-
Other notes with various terms		91,578		82,163
		7,427,129		7,047,862
Less current portion		(102,994)		(102,580)
	$	7,324,135	$	6,945,282

Each of the Company’s subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from the Company.

Principal repayment provisions of long-term debt are as follows at March 31, 2007:

2007	$	102,994
2008		4,514,902
2009		1,721,959
2010		527,742
2011		94,180
Thereafter		465,352
Total	$	7,427,129

(11) Related Party Notes Payable and Accounts Receivable

Transactions related to accounts receivable from related parties arise from compensation arrangements, expense allowances and other similar items conducted in the ordinary course of business.

(12) Capital Stock and Stock Options

The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.001 par value per share of which no shares are presently outstanding. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, redemption rights and sinking fund provisions.

The Company is authorized to issue up to 10,000,000 shares of Common Stock, of which 720,000 are reserved for issuance pursuant to the exercise of warrants pursuant to an employment agreement with the Company’s Chairman, CEO. On March 30, 2007, the Company issued 144,000 stock warrants to the Company’s Chairman, CEO, with an exercise price of $7.00 per share, expiring in 2 years, at a cost of $70,685 to the Company.

The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2007 as follows:

	March 31, 2007
Dividend yield	0.00%
Expected volatility	38.68
Risk free interest	6.25%
Expected lives	2 years

A summary of the status of the Company's stock options to employees as of March 31, 2007, and changes during the periods ending on those dates is presented below:

	Shares		Weighted Average Exercise Price March 31, 2007
Outstanding at beginning of period	-	$	N/A
Granted	144,000		7.00
Exercised	-		N/A
Canceled	-		N/A
Outstanding and exercisable at end of period	144,000	$	7.00
Weighted average fair value of options
granted during the period	144,000		0.49

The following table summarizes information about fixed stock options to employees outstanding at March 31, 2007:

	Exercise Price	Number Outstanding and Exercisable at March 31, 2007
$	7.00	144,000

(13) Preferred Stock of Subsidiary

On August 8, 2006, the Company’s subsidiary, 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 $0.18 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 $0.18 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 $0.50 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.

The Company has made no allocation to recognize the values of the Series A, B, and C warrants. The entire proceeds have been allocated to Series A and B Preferred Stock. The fair value of the warrants cannot be reasonably estimated separately from the value of the shares of preferred stock.

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 $2,728,000 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. The Company has made no allocation to recognize the value of the Series A, B, and C warrants. The entire proceeds have been allocated to Series A and B Preferred Stock. The fair value of the warrants cannot be reasonably estimated separately from the value of the preferred stock. 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.

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.

In connection with the agreement of VOMF dated March 26, 2007, to exercise 4,000,000 Series C Warrants, IMTG 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 IMTG.

(14) Concentration of Credit Risk

The Company maintains its cash in commercial accounts at major financial institutions. Although the financial institutions are considered creditworthy, at March 31, 2007, the Company's cash balances exceeded the limits ($100,000) covered by the Federal Deposit Insurance Corporation. The terms of these deposits are on demand to minimize risk. The Company has not incurred losses related to these deposits.

Trade accounts receivable subject the Company to the potential for credit risk with customers in the retail and distribution sectors. To reduce credit risk, the Company performs ongoing evaluations of its customer’s financial condition but generally does not require collateral. The Company had two customers on a consolidated basis that accounted for more than ten (10%) percent of the Company's revenues on a consolidated basis. (Customer A - 15% and Customer B - 11%).

(15) Income Taxes

The following table sets forth a reconciliation of the statutory federal income tax for March 31, 2007 and March 31, 2006.

		March 31, 2007		March 31, 2006
Income (loss) before taxes	$	(1,292,900)	$	(683,663)
Income tax benefit expense at statutory rate	$	(439,586)	$	(232,445)
Unrealized loss on securities		(218,592)		3,247
Permanent differences		84,600		84,600
Minority expense		16,332		81,406
Inventory reserve		(101,487)		78,788
Other		(22,925)		74,314
Increase (decrease) in valuation allowance		681,658		(89,910)
Tax benefit	$	-	$	-

The tax effects of the temporary differences between financial statement income and taxable income are recognized as deferred tax asset and liabilities as of March 31, 2007 is set forth below.

		March 31, 2007
Deferred tax assets:
Net operating loss	$	1,150,681
Total deferred tax asset		1,150,681
Valuation allowance		(1,150,681)
Net deferred asset	$	-

		March 31, 2007
Deferred tax liability:
Fixed asset temporary difference	$	138,775
Intangible asset temporary difference		364,425
Deferred tax liability	$	503,200

The Company has an estimated net operating loss carryforward in excess of $10,900,000, which expires from 2024 to 2025. The loss may be limited under Internal Revenue Code Section 382.

The Company has an estimated capital loss carryforward of $109,000.

(16) Earnings Per Share

Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding. Diluted earnings per share, in addition to the weighted average determined for basic loss per share, include common stock equivalents, which would arise from the conversion of the preferred stock to common shares.

		Quarter Ended		Quarter Ended
		March 31, 2007		March 31, 2006
Basic income (loss) per share:
Net income (loss)	$	(1,292,900)	$	(683,663)
Weighted average common shares outstanding		5,460,951		4,346,933
Weighted average common shares outstanding for diluted net income (loss) per share		5,460,961		4,346,933
Net income (loss) per share - basic	$	(0.24)	$	(0.16)
Net income (loss) per share - diluted	$	(0.24)	$	(0.16)

(17) Commitments and Contingencies

Various key officials of the Company have entered into employment agreements with the Company. The CEO of the Company entered into a five-year employment agreement which provides for a monthly salary of $10,000 plus a bonus as determined by the Board of Directors. Also, the agreement provides for the grant of 144,000 warrants per annum with an exercise price of $7.00, beginning March 15, 2007. The president of NPI previously entered into an at-will employment agreement that provides an annual salary of $158,000 plus a bonus based upon operating results of this subsidiary. The employment agreement also grants the president of NPI an option to purchase NPI common stock equal to 5% of NPI's equity at an exercise price of 5% of the total stockholder's equity, if NPI conducts an initial public offering of its common stock during the time of his employment. Delta’s president and vice president entered into an employment agreement that provides for an annual base salary of $150,000 each. The employment agreement for IMTG’s president provides for an annual base salary of $90,000.

As of March 31, 2007, Delta Seaboard Well Service, Inc. is involved in two lawsuits. In the first lawsuit, Fort Apache Energy, Inc. ("Apache") v. Delta Seaboard Well Service, Inc., Apache alleges that Delta breached its contract with Apache and violated the Texas Deceptive Trade and Practices Act. Apache drilled a well which they subsequently decided to plug. Apache contracted with Delta to plug the well. Apache alleges that Delta bid the job with a specified lump sum plugging operation and that Delta went over the bid amount. Apache claims that it never authorized the costs of the extra labor, operation or additional equipment to plug the well. Also, Apache claims that the well is still commercially viable as Delta encountered pressure at the well site during its plugging operations. Apache claims that Delta acted negligently in failing to contact Apache regarding the pressure at the well so as to allow Apache to determine the feasibility of production at the well. Apache claims that it was damaged as a result of the omissions of Delta, and Delta’s actions in force-plugging the well and that its damages are the costs of drilling a new well. Discovery is still ongoing and factual matters are still being investigated and developed in connection with the claims of Apache and the defenses of Delta. Management is vigorously defending this matter. An evaluation of the outcome of this case cannot be made at this time. In the unlikely event that a favorable verdict is received by Apache against Delta, Apache seeks damages which would allow a new well to be drilled at the site. Delta’s expert witness estimates that the cost of unplugging and drilling a new well in the same or similar style of the previous well to be approximately $3.7 million. Apache has estimated the cost to be in excess of $5.6 million. The Company has not recorded any liabilities in connection with this matter because management has determined that this lawsuit is not likely to result in a loss to the Company.

In the second, related lawsuit, Gemini Insurance Company v. Delta Seaboard Well Services, Inc., Delta had a CGL insurance policy with Gemini Insurance Company ("Gemini") for 2003, naming Delta as an insured, which policy was in effect at such time as Delta began the plugging operation referenced in the first lawsuit. Delta made a claim under the policy for a defense in the Apache case; however, Gemini has filed suit against Delta seeking a declaratory judgment that it owes no defense under the policy. In connection with such declaration, Delta has filed a counterclaim seeking to have the policy declared applicable as to the claims of Apache against Delta and claims for breach of contract, violations of the Texas Deceptive Trade and Practices Act, violations of the Insurance Code and bad faith on the part of Gemini in refusing coverage. Discovery is still ongoing and factual matters are still being investigated and developed in connection with the claims of Gemini and the defenses of Delta. Management is vigorously defending this matter and asserting its affirmative claims. An evaluation cannot be made at this time in connection with the outcome of the Gemini Litigation.

The Hammonds Companies lease office space under an operating lease which expires in October 2016. Future minimum lease payments under the operating lease are as follows:

Year December 31,		Amount
2007	$	420,000
2008		420,000
2009		420,000
2010		420,000
2011		420,000
Thereafter		2,100,000
	$	4,200,000

Delta leases space under a commercial lease which expires in June 2009. Future minimum lease payments are as follows:

Year December 31,		Amount
2007	$	36,061
2008		36,061
2009		18,030
	$	90,152

(18) Related Party Transactions

The stock grants to related parties mentioned below were accounted for under FASB Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant date fair values.

During the first quarter of 2007, the Company issued 108,350 shares of common stock to officers for services representing $530,505 of cost to the Company, of which $500,780 was expensed in 2006.

In the first quarter of 2007, the Company issued 12,600 shares of common stock to Daniel Dror II for services representing $60,900 of cost to the Company. Daniel Dror II is the son of the CEO of the Company.

On March 30, 2007, the Company issued 144,000 stock warrants to the Company’s Chairman, CEO, with an exercise price of $7.00 per share, expiring in 2 years, at a cost of $70,685 to the Company. See note 12 for additional valuation information.

The Company has a $10,000 note receivable at December 31, 2006 and March 31, 2007, from Daniel Dror II, the son of the CEO of the Company. In 2005, the Company sold an investment of $50,000 to Daniel Dror II, who agreed to reimburse the Company for this investment through a promissory note. The Company believes this transaction was based on the value that would have been received by an independent third party. No gain or loss was realized by the Company on this transaction. A principal payment of $40,000 plus $7,917 in interest was received by the Company in 2006, leaving a balance of $10,000. The promissory note bears interest at 10% and is due in December 2007.

The Company has a revolving credit note receivable at December 31, 2006 and March 31, 2007, in the amount of $225,000 due from International Diversified Corporation, Ltd. (IDCL), a corporation owned by Elkana Faiwuszewicz, the CEO’s brother. This note bears interest at the prime rate.

(19) Segment Information

We have six reporting segments:

- Hammonds Technical Services - a business engaged in fuel handling equipment for the military and industrial customers, a provider of fuel injection services for the aviation industry, and the designer of a new omni directional vehicle for a wide variety of uses

- Hammonds Fuel Additives – produces and markets motor and aviation fuel additives

- Hammonds Water Treatment – manufactures calcium hypochlorite tablet and granular systems which provide water disinfection for a wide range of potable and waste water applications

- Northeastern Plastics - a supplier of products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets

- Delta Seaboard - an onshore rig-based well servicing contracting company providing service to the oil and gas industry

- Brenham Oil & Gas - owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on the Company's books at $0

- Corporate overhead - the Company's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses

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

The Company's reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were acquired as subsidiaries and the management at the time of the acquisition was retained.

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

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

		March 31, 2007		March 31, 2006
Revenues:
Hammonds Technical Services	$	650,483	$	696,795
Hammonds Fuel Additives		309,008		336,337
Hammonds Water Treatment		659,908		292,037
Northeastern Plastics		2,332,925		1,692,280
Delta Seaboard		2,660,246		3,842,433
	$	6,612,570	$	6,859,882
Income (loss) from operations:
Hammonds Technical Services	$	(761,401)	$	(409,176)
Hammonds Fuel Additives		40,162		(5,951)
Hammonds Water Treatment		20,298		51,629
Northeastern Plastics		(51,295)		(52,782)
Delta Seaboard and Brenham Oil & Gas		81,097		490,471
Corporate		(773,683)		(392,394)
Income (loss) from operations		(1,444,822)		(318,203)
Other income (expenses)		199,958		(126,030)
Net income (loss) before income tax	$	(1,244,864)	$	(444,233)
Identifiable assets:
Hammonds Technical Services	$	8,591,060	$	5,207,539
Hammonds Fuel Additives		335,746		389,679
Hammonds Water Treatment		476,191		135,470
Northeastern Plastics		5,504,317		5,807,121
Delta Seaboard and Brenham Oil & Gas		6,174,608		7,705,619
Corporate		15,625,520		10,287,343
	$	36,707,442	$	29,532,771

(20) Subsequent Events

On April 20, 2007, the Registrant's board of directors elected John W. Stump, III to the board of directors. John W. Stump, III will serve as chairperson of the Registrant's Audit Committee and a member of its newly established Nominating Committee and Compensation Committee.

Mr. Stump will receive a monthly Directors Fee of $1,250 (Twelve Hundred Fifty Dollars), and was awarded 500 registered S-8 shares upon acceptance of the position. Also, Mr. Stump will receive 500 S-8 shares quarterly and will be reimbursed for any travel or other reasonable and ordinary expenses incurred in the conduct of his responsibilities.

John W. Stump, III, had previously served as a Director of the Registrant and was Chairman of the Audit Committee from February 2004 through December 2004. Mr. Stump also served as Chief Financial Officer of the Company from August 1998 through October 2003. Since October 2005, Mr. Stump has been the controller for Lifechek, Inc., a large regional pharmacy chain. Mr. Stump is a Certified Public Accountant and has over twenty-five years of experience in financial and accounting management, SEC compliance and disclosure services for public reporting companies.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION Back to Table of Contents

Forward-Looking Statements; Market Data

As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means American International Industries, Inc., a Nevada corporation, and its subsidiaries. To the extent that we make any forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report, we emphasize that forward-looking statements involve risks and uncertainties and our actual results may differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements in this Quarterly Report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties. Generally, forward-looking statements include phrases with words such as "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.

Overview

American International Industries, Inc., organized under the laws of the State of Nevada in September 1994, is a diversified corporation with interests in industrial companies, oil and gas service companies, and interests in undeveloped real estate in the Galveston Bay, TX area. The Company’s business strategy is to acquire controlling equity interests in undervalued companies in which it takes an active role to improve their growth, by providing its subsidiaries with access to capital, leveraging synergies and its management's expertise. The Company is sometimes referred to as we, us, our, and other such phrases as provided in Regulation F-D (Fair Disclosure).

American International Industries, Inc. is a holding company and has six reporting segments:

• Hammonds Technical Services - a business engaged in fuel handling equipment for military and industrial customers, a provider of fuel injection services for the aviation industry, and the designer of a new omni directional vehicle for a wide variety of uses;
• Hammonds Fuel Additives – produces and markets motor and aviation fuel additives
• Hammonds Water Treatment – manufactures calcium hypochlorite tablet and granular systems which provide water disinfection for a wide range of potable and waste water applications;
• Northeastern Plastics (NPI) - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets;
• Delta Seaboard Well Services (Delta) - a 51% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry;
• Brenham Oil & Gas - owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on the Company's books at $0; and
• Corporate overhead - the Company's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses

Our 40.67% subsidiary, International American Technologies, Inc. (OTCBB: "IMTG), is a public reporting company, which owns 100% of Hammonds Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc. (collectively "Hammonds"). The Company consolidates IMTG although its ownership is less than 51%, because the Company controls IMTG’s Board of Directors by having designated two of the three members of IMTG's Board of Directors and because the Company controls IMTG’s financing. Since Hammonds is incurring losses and there is no minority interest, the Company recognizes 100% of Hammond’s losses.

The historical financial statements of the Company include the acquisitions of acquired companies as of the effective dates of the purchases, and the results of those companies subsequent to closing, as these transactions were accounted for under the purchase method of accounting.

Our long-term strategy is to expand the operations of each of our subsidiaries in their respective fields. The Company provides managerial and financial support to our subsidiaries. As part of our business model, we explore mergers, acquisitions and dispositions of businesses and assets from time to time, based upon the reasonable discretion of management and the value added of each potential transaction.

We encounter substantial competition in each of our subsidiaries product and service areas. Such competition is expected to continue. Depending on the particular market involved, our subsidiaries compete on a variety of factors, such as price, quality, delivery, customer service, performance, product innovation and product recognition. Other competitive factors for certain products include breadth of product line, research and development efforts and technical and managerial capability.

Corporate overhead includes our investment activities including financing current operations and expansion of our current holdings, as well as evaluating the feasibility of entering into additional businesses.

Results of Operations

Three months Ended March 31, 2007 Compared to Three months Ended March 31, 2006.

Net revenues. For the three month period ended March 31, 2007, net revenues were $6,612,570, compared to $6,859,882 for the three month period ended March 31, 2006, or a decrease of $247,312. The decrease in net revenues is due primarily to decreased pipe sales at Delta due to slow industry-wide sales in the first quarter. Delta reported revenues of $2,660,246 for the three months ended March 31, 2007, compared to $3,842,433 for the same period in 2006. This decline was partially offset by increased revenues at NPI during the three months ended March 31, 2007 of $2,332,925 compared to $1,692,280 for the same period in 2006, or an increase of $640,645, principally due to NPI’s license to sell MOTORTREND™ and Good Housekeeping Seal of Approval™ products. In addition, Hammonds revenues increased to $1,619,399 for the three months ended March 31, 2007, compared to $1,325,169 for the same period in 2006, or an increase of $294,230. The decrease in pipe sales of Delta for this quarter is not unusual and demand tends to fluctuate based on price.

Net loss from operations. Our consolidated net loss from operations for the three month period ended March 31, 2007 was $1,444,822, compared to a loss of $318,203 during the same three month period in the prior year. The primary reason for the increase in loss from operations was due to reduced profits from Delta of $409,374, increased losses at Hammonds of $341,314, and increased corporate expenses of $381,289. During the three month period ended March 31, 2007, Delta had net income from operations of $81,097, compared to $490,471 for the same period in 2006, which decline was primarily due to decreased pipe sales during the quarter and lower gross margins on pipe sales. Material prices and pipe rework costs were higher due to increased fuel costs being passed through by Delta’s vendors. Delta expects a strong business environment during the second quarter of the 2007 as a result of the strong energy sector. NPI had a net loss from operations of $51,295 during the three month period ended March 31, 2007, compared to a net loss from operations of $52,782 for the same period in the prior year. NPI's business is seasonal and historically most of NPI’s revenues and income have been generated in the third and fourth quarters. IMTG, our 40.7% owned subsidiary, which owns 100% of Hammonds, reported net losses from operations of $710,561 for the three month period ended March 31, 2007, compared to net losses of $369,247 during the same period in 2006. Hammonds recently purchased $240,000 in capital equipment, including a CNC controlled plasma steel cutting system, a state-of-the-art painting facility, multiple material handling cranes throughout the production area, an automated production saw and a new mill for the machine shop. In addition to tools, Hammonds installed new compressed air systems and expanded plant lighting and power distribution to support additional welding and assembly stations. New production flow testing stands and hydrostatic test stations will be installed by the end of May 2007. When installed and operational, these recent additions to production equipment will contribute significantly to Hammonds production capacity through the implementation of manufacturing and cost saving procedures which will generate increased revenues with greater cost efficiencies and improved margins.

Corporate expenses. Corporate operating expenses increased by $381,289 during the three month period ended March 31, 2007, compared to the same period in the prior year, due to increased compensation costs of $117,000, legal and professional fees of $45,000 related to lawsuit settlements, real estate consulting fees of $54,000, "key" man life insurance of $25,000, and reduced reimbursements for rent and management fees of $140,000. In the 1^st quarter of 2006, corporate operating expenses included offsets for $84,000 in rent charged to Hammonds and a non-affiliated company for the Rankin Road property, which was sold to a third party in December 2006. Hammonds now pays rent directly to the third party owner of the property. The remaining $56,000 in reduced reimbursements represents lower charges to the subsidiaries for management and consulting fees, which are reflected in lower expenses at the subsidiaries.

Other income. Other income was $199,958 for the three month period ended March 31, 2007, compared to other expenses of $126,030 for the same period in the prior year. Interest and dividend income increased by $100,451, primarily due to a significant increase in investment in certificates of deposit and interest on notes receivable. Net realized/unrealized gain on trading securities was $44,214 for the three month period ended March 31, 2007, compared to a loss of $9,549 for the same three month period in the prior year. The Company sold 180,500 ONH shares for proceeds of $103,954 in February 2007. Through December 31, 2006, the Company had an unrealized loss on these shares of $633,227. The realized loss from the sale of the shares in 2007 was $585,228. The net income effect of the sale of these shares is a gain of $47,999 in 2007. Income from lawsuit settlements was $209,600 for the three-month period ended March 31, 2007. Interest expense was $49,538 higher in the first quarter of 2007 than it was in the same period in 2006.

Net loss. Net loss was $1,292,900 in the first quarter of 2007, compared to $683,663 in the same period in 2006.

Liquidity and Capital Resources

Total assets/liabilities. Total assets at March 31, 2007 were $36,707,442, compared to $36,596,931 at December 31, 2006. Total liabilities at March 31, 2007 were $14,603,143, compared to $14,034,924 at December 31, 2006. At March 31, 2007, consolidated working capital was $17,392,073, compared to working capital of $17,625,203 at December 31, 2006. Our consolidated cash position at March 31, 2007 was $3,651,902 compared to $3,275,803 at December 31, 2006.

Cash flow from operations. For the three months ended March 31, 2007, we had negative cash flow from operations of $1,043,583, compared to negative cash flow from operations of $20,451 during the same period in the prior year. This decrease was the result of an increase in our net loss from $683,663 for three months ended March 31, 2006 to $1,292,900 for the three months ended March 31, 2007. Our inventories increased by $767,986 for the three months ended March 31, 2007, compared to an increase of $551,180 during the three months ended March 31, 2006. We reduced accounts receivable during the three months ended March 31, 2007 by $1,161,066 compared to $632,007 during the same three month period in the prior year. Trading securities decreased by $90,303 during the three months ended March 31, 2007. Prepaid expenses increased by $212,092, other assets increased by $182,549, and accounts payable decreased by $144,050 for the three months ended March 31, 2007. Our net loss of $1,292,900 was offset by non-cash compensation of $243,460, depreciation and amortization expenses of $277,549 and minority interest in the amount of $48,036.

Cash flow from investing activities. Our investing activities provided $124,117 during the three month period ended March 31, 2007, as a result of a net reduction in investment in certificates of deposit of $114,000, receipts of principal payments on notes receivable of $307,427, offset by purchases of property, equipment, and intangible assets of $272,310. This is compared to cash provided by investing activities during the same period in the prior year in the amount of $854,635, as a result of the redemption of a certificate of deposit for $1,000,000, receipts of principal payments on long-term notes of $184,974, offset by purchases of property, equipment and intangible assets of $330,339.

Cash flow from financing activities. During the three months ended March 31, 2007, our financing activities provided $1,295,565 compared to cash used for financing activities of $417,145 during the same period of 2006. During the 2007 period, we received net proceeds from the issuance of common stock of our subsidiary in the amount of $694,672, from short-term borrowings in the amount of $300,000, from long-term debt of $264,946, and from line-of-credit agreements of $324,218. We made payments of $257,664 on short-term notes and principal payments on long-term debt of $27,768 during the three month period ended March 31, 2007.

Real estate. The Company continues to own 287 undeveloped acres of waterfront property on Dickinson Bayou and Galveston Bay in Galveston County, Texas, which is carried at historic cost basis of $225,000. The property's appraised value is substantially more than the book value. In November 2005, the Company signed a contract for sale of the property for cash consideration of $16,000,000 with Lakeland Partners III. In January 2007, Lakeland assigned all of its interest in the contract to Westfield Forest, L.P., a well-recognized developer of waterfront properties in the Houston, Texas area. The development of the property requires permits from certain governmental agencies, which permits, the developer believes, can be obtained in a timely manner.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Back to Table of Contents

Interest Rate Risk. The carrying amounts for cash and cash equivalents, accounts receivable, notes payable and accounts payable and accrued liabilities shown in the Condensed Consolidated Balance Sheets approximate fair value at March 31, 2007, due to the generally short maturities of these items. At March 31, 2007, our investments were primarily in short-term dollar denominated bank deposits with maturities of a few days, or in longer-term deposits where funds can be withdrawn on demand without penalty. We have the ability and expect to hold our investments to maturity.

The Company’s outstanding long-term debt as of March 31, 2007, is at fixed interest rates, prime plus 1%, or prime floating rate. The Company does not believe that a change of 100 basis points in interest rates would have a material effect on the Company’s financial condition.

Equity Investments. We are exposed to equity price risk on our portfolio of trading securities. As of March 31, 2007, our total equity holdings in publicly traded companies were valued at $858,772 compared to $724,255 at December 31, 2006. We believe that it is reasonably possible that the fair values of these securities could adversely change in the near term. We have a policy in place to review our equity holdings on a regular basis. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance, liquidity and management/ownership. The Company seeks to manage exposure to adverse equity returns by maintaining diversified securities portfolios.

The following table represents the potential decrease in fair values of our marketable equity securities that are sensitive to changes in the stock market. Fair value deteriorations of 50%, 35% and 15% were selected for illustrative purposes because none is more likely to occur than another.

	50%	35%	15%
Marketable equity securities	$(429,386)	$(300,570)	$(128,816)

ITEM 4. CONTROLS AND PROCEDURES Back to Table of Contents

Evaluation of disclosure controls and procedures. As of March 31, 2007, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the  Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS Back to Table of Contents

In the first quarter of 2007, IMTG settled two suits brought by two former Hammonds’ shareholders, pursuant to which IMTG paid $300,000 as follows: $173,300 balance on a short-term note payable, plus interest $26,700 and $100,000 for an option to purchase 104,398 shares of one party’s shares of the Company’s common stock at $5.00 per share, and the other party returned to the Company 8,800 shares he received in the Company’s 2006 share dividend. These settlements did not have a significantly effect on the Company’s financial condition.

Delta Seaboard Well Service is a defendant in two lawsuits related to the same matter: (i) Fort Apache Energy, Inc. v. Delta Seaboard Well Service, pending in the 334th Judicial District Court of Harris County, TX, in which Apache alleges that Delta damaged Apache in connection with Delta’s plugging a minimally producing Apache well for which Apache contracted with Delta to plug. Apache is seeking monetary damages equal to the cost of drilling a new well. Delta’s expert estimates that the cost of unplugging and drilling a new well to be approximately $3.7 million while Apache is seeking approximately $5.6 million. Pre-trial discovery is ongoing and the Company believes that it has meritorious defenses to Apache’s claims but cannot predict the outcome at this time; and (ii) Gemini Insurance Company v. Delta Seaboard Well Services, pending in the the 164^th Judicial District Court of Harris County, TX, which action relates to the Apache matter above. Delta was insured under a Gemini CGL insurance policy during the relevant period that Delta was providing well-plugging service to Apache. Delta made a claim with Gemini, its insurance carrier, demanding Gemini provide for Delta’s defense in the Apache case. Gemini has filed an action against Delta seeking a declaratory judgment that it is not obligated to provide a defense and Delta has counterclaimed seeking to have the policy enforced as well as alleging breach of insurance contract, violations of the Texas Deceptive Trade and Practices Act, violations of the Insurance Code and bad faith in refusing coverage. Discovery is pending and management is vigorously defending this matter and pursuing its counterclaims. The Company cannot predict the outcome at this time. In the event that Delta is found liable to Apache for damages in the amount asserted, and Delta does not prevail against Gemini, its insurance carrier, the Company’s financial condition could be adversely effected.

ITEM 1A. RISK FACTORS Back to Table of Contents

There have been no material changes from Risk Factors as previously disclosed in the Registrant’s annual report for the year ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Back to Table of Contents

On January 2, 2007, the Company issued 103,800 shares of restricted stock to the Company’s officers and corporate employees for 2006 bonuses. The shares were issued pursuant to Section 4(2) of the Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES Back to Table of Contents

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Back to Table of Contents

None.

ITEM 5. OTHER INFORMATION Back to Table of Contents

None.

ITEM 6. EXHIBITS Back to Table of Contents

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

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

SIGNATURES

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

/s/ DANIEL DROR
   CEO, PRESIDENT AND CHAIRMAN
   Dated: May 14, 2007

/s/ GARY D. WOERZ
   CHIEF FINANCIAL OFFICER
   Dated: May 14, 2007