UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549


___________________




FORM
10-K


________________________________




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




For the
fiscal year ended December 31, 2007




 ̈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




HAMMONDS
INDUSTRIES, 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 235Kemah,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-K or any amendment to this
Form 10-K.   ̈




At
December 31, 2007, the aggregate market value of the 8,039,120 common stock held
by non-affiliates of the Registrant was approximately $4,099,951. At December
31, 2007, the Registrant had 49,748,257 shares of common stock
outstanding.




Issuer's
revenues for its most recent fiscal year: $10,096,538.




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









TABLEOF CONTENTS




Item
            
            Description
            
            PagePART
      I3ITEM
      1.
            
            DESCRIPTION OF BUSINESS
            
            
            8ITEM
      1A.
            
            RISK FACTORS RELATED TO OUR BUSINESSES
            
            
            13ITEM
      1B.
            
            UNRESOLVED STAFF COMMENTS
            
            
            13ITEM
      2.
            
            DESCRIPTION OF PROPERTY
            
            
            14ITEM
      3.
            
            LEGAL PROCEEDINGS
            
            
            14ITEM
      4.
            
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERSPART
      IIITEM
      5.
            
            MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
      MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
            
            
            15ITEM
      6.
            
            SELECTED FINANCIAL DATA
            
            
            17ITEM
      7.
            
            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
      AND RESULTS OF OPERATION
            
            
            18ITEM
      7A.
            
            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            
            
            21ITEM
      8.
            
            CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA
            
            
            22ITEM
      9.
            
            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
            
            
            44ITEM
      9T.
            
            CONTROLS AND PROCEDURES
            
            
            44ITEM
      9B.
            
            OTHER INFORMATION
            
            
            45PART
      IIIITEM
      10.
            
            DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
            
            
            46ITEM
      11.
            
            EXECUTIVE COMPENSATION
            
            
            48ITEM
      12.
            
            SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED SHAREHOLDER MATTERS
            
            
            50ITEM
      13.
            
            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENCENCE
            
            
            51ITEM
      14.
            
            PRINCIPAL ACCOUNTING FEES AND SERVICES
            
            
            52ITEM
      15.
            
            EXHIBITS, FINANCIAL STATEMENT SCHEDULES
            
            
            52













Cautionary
Statement regarding Forward-Looking Statements






This
Annual Report on Form 10-K of Hammonds Industries, Inc. (hereinafter the
"Company", the "Registrant" or " Hammonds") 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-K 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




ITEM1. DESCRIPTION OF BUSINESS




Hammonds
Industries, Inc.




Hammonds
Industries, Inc., a Nevada corporation, is publicly traded on the OTCBB: Symbol
"HMDI". The Company was incorporated on August 18, 1986 and is a 48.2% owned
subsidiary of American International Industries, Inc., NasdaqCM: AMIN. AMIN
consolidates Hammonds even though its ownership is less than 51%, because the
AMIN appoints the members of Hammonds’ board of directors. Since Hammonds is
incurring losses and the minority interest has no recorded common stock equity
value, AMIN recognizes 100% of Hammonds’ losses. AMIN’s ownership percentage
will be diluted in the event of the conversion by Vision Opportunity Fund
Limited (VOMF) of their shares of Hammonds' Series A, B and C Convertible
Preferred Stock into shares of Hammonds' common stock.  See the
discussion below under "2006 Private Financing Transactions" and "2007 Private
Financing Transactions".




Description
of Hammonds' Organization and Financing Transactions




Some of
the statements contained in this current report of Hammonds Industries Inc.,
(hereinafter the "Company", "Hammonds", "We" or the "Registrant" discuss future
expectations, contain projections of our operations or financial condition or
state other forward-looking information. In 2005, the Company, through its
parent company, acquired 51% of the capital stock of Hammonds Technical
Services, Inc. See Note 2 “Acquisition” below. Hammonds Technical Services, Inc.
and Hammonds Fuel Additives, Inc. were separate privately-owned Texas companies.
In connection with the 2005 acquisition by the Company, Hammonds Fuel
Additives was merged into Hammonds Technical Services. In 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. 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. in consideration for the issuance of 16,000,000
restricted shares of common stock, valued at a price of $0.25 per share,
the price of the Company's common stock at the date of the transaction. As a
result of this transaction, the Company owns 100% of each of the Hammonds
subsidiaries.




2006
Private Financing Transactions


On August
8, 2006,  the Company entered into a stock purchase agreement with
Vision Opportunity Fund Limited ("VOMF"), an institutional investor, pursuant to
which the Company sold VOMF 833,333 shares of Series A Convertible Preferred
Stock for $1,500,000 and issued a Series A Warrant exercisable for a period of 5
years to purchase 8,333,333 shares of the Company’s common stock at $0.18 per
share and a Series B Warrant exercisable for a period of 2 years to
purchase an additional 8,333,333 shares of the Company’s common stock at $0.18
per share.




On
September 29, 2006, the Company entered into another stock purchase
agreement with VOMF pursuant to which the Company sold 833,333 shares of Series
B Convertible Preferred Stock for $1,500,000 and issued a Series C Warrant
exercisable for a period of 5 years to purchase 8,333,333 shares of the
Company’s common stock at $0.50 per share.




The stock
purchase agreements in the 2006 Private Financing Transactions provide
that each share of Series A and Series B Convertible Preferred Stock is
convertible into 10 shares of Hammonds' common stock.





2007
Private Financing Transactions


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 of the Series C
Warrants 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 net proceeds of $694,672 to the Company.




On
September 20, 2007, the Company entered into an agreement with VOMF
pursuant to which the Series A, B and C Warrants were amended to: (i)
adjust the exercise price of all of the Warrants to $0.10; and
(ii) provide for the issuance of a total of 2,102,960 shares of the
Company's newly authorized Series C Convertible Preferred Stock in lieu of
21,029,599 shares of common stock. On September 21, 2007, VOMF delivered a
notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per warrant, from which the Company received net proceeds of
$981,162 and VOMF cancelled Hammonds’ short-term promissory note payable in the
amount of $1,000,000, representing a loan made by VOMF to the Company on August
17, 2007.





In total,
the Company has received approximately $5.4 million from the 2006 and 2007 VOMF
Private Financing Transactions.  The material terms of these preferred
stock issuances are included in note 10 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,
2007.






General
Background of Hammonds




Hammonds
Technical Services, Inc. and Hammonds Fuel Additives, Inc. were separate
privately-owned Texas companies. In connection with the 2005 acquisition by the
Company, Hammonds Fuel Additives was merged into Hammonds Technical Services. In
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, manufacturer representatives and original
equipment manufacturers. Hammonds was founded in 1982 by Carl Hammonds and
provides the following diverse products and services:






Description
of Hammonds Products and Services




Omni Directional
Vehicles




Hammonds'
new line of Omni Directional Vehicles (ODV®), we believe, should establish
a new standard for industrial utility vehicles based on vehicle safety and
performance.  Hammonds' ODV® is based on a round chassis, driven by
two individually powered wheels located at the center axis of the circle and is
able to move in any radial direction from a given point.   The
unique material handling capabilities of a Hammonds’ ODV® make it possible to
position large, heavy objects with exact precision in confined areas with
limited maneuvering room.  The Hammonds’ ODV® is a highly versatile
vehicle that has been configured to handle aircraft, position large components,
and for use as a platform for snow management equipment, among other uses and
applications.  Hammonds has been granted multiple United States and
foreign patents on the ODV® covering forklifts, high capacity pallet jacks,
people movers, security vehicles, highway mowing machines, and terminal freight
tractors.   The Hammonds’ ODV® has been selected by both the
United States Air Force and Army to position materials and
aircraft.




On
January 16, 2008, Hammonds received an initial purchase order from The Boeing
Company (NYSE: BA) for
four G-90 Series Omni Directional Vehicles (ODV®).  Hammonds delivered
the first two units during the first week of March 2008.  The vehicles have
a 90,000-pound towing capacity and will be utilized to handle materials and
fixtures supporting the assembly of Boeing’s new 787 Dreamliner. Boeing has
chosen the Hammonds’ ODV® as a preference over other competitors to support this
project.  We are working closely with Boeing engineers to provide a
production tool ideally suited for the demanding task of commercial aircraft
manufacturing and to demonstrate a variety of applications designed around the
ODV® that will enhance the efficiency and safety of their material handling
operations.






Fuel Handling
Equipment




Hammonds
manufactures a wide variety of fluid injector systems that are driven and
controlled by the flow of product. They utilize a fluid driven motor that
furnishes power 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 injection of fuel system icing
inhibitors, corrosion inhibitors, conductivity and thermal stability additives.
Hammonds' fuel handling equipment provides an advanced means of blending
additives and chemicals. New demand for the technology is being experienced for
injecting fuel performance and fuel-economy enhancing additives. Businesses
which consume large quantities of diesel, such as railroads, ships, long-haul
truckers and similar operations, are targeted for programs which can offer
immediate savings of about 10% on fuel consumption. Significant performance and
maintenance benefits have been demonstrated as well. Hammonds continues to enjoy
“best-in-class” distinction in the field of fuel injection technology, having
been selected as sole-source provider of fuel blending and injection systems to
the U.S. Military, worldwide.




"Smart" Electronic Injectors
combine fluid powered technology with electronic process controls for use in
data collection analysis and performance verification of Hammonds' fuel handling
systems. This enables input into billing systems directly from the truck
delivering the product.  Hammonds’ truck-mounted injectors are the
technology of choice for custom blending jet fuel and a wide range of products,
including diesel, LPGN (propane), home heating oil, and bio-diesel.






Water Treatment for
Municipal and Industrial Use




Hammonds
manufactures patented 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.  Purification and treatment of municipal drinking water
and wastewater is a worldwide concern. The water treatment market is highly
fragmented, consisting of many companies, 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.
Hammonds’ technology is used in many municipal water and waste-treatment
applications and our equipment is frequently specified as components in systems
manufactured by other companies. Rapid growth has been experienced in the
installation of our patented systems for dispensing calcium hypochlorite
disinfectant in food and poultry processing plants.






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. In 1991, Hammonds purchased the exclusive world-wide rights to
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. Biobor® JF continues to command the
majority of the aviation market. Also widely used indiesel and heavy fuels
of all grades, 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 to the commercial and marine, industry, aviation, railroad and off-road
equipment markets. 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.






Innovative Pump
Design




Hammonds
received a United States patent on October 9, 2007 covering a uniquely designed
metering pump (“Hammonds PumpTM”)
capable of delivering a constant rate of flow of a wide range of fluids, over a
wide range of viscosities, at infinitely variable delivery rates. The Hammonds
PumpTM is able
to provide the continuous delivery of fluid, which is achieved by using two
identical pumping chambers, one operating in suction mode as the other is in
discharge mode, switching modes with each cycle. Large displacement pumping
chambers in the Hammonds PumpTM allow
for a slow operating speed, reducing cavitation and other volumetric
inefficiencies. Cavitation describes a condition occurring when a void or bubble
is created in a pumping system, such as when the pump outruns its supply of
product to be pumped. This condition results in inefficient operation and can
result in complete destruction of the pump. Operated by ball-screw mechanisms,
the Hammonds PumpTM’spistons can be digitally actuated to dispense precise volumes of fluids
ranging from fractions of an ounce to as much as hundreds of gallons of flow per
minute, with pharmaceutical accuracy. The Hammonds PumpTM  represents
a significant departure from prior art in the design of pumps as a result of the
fact that the valves in the Hammonds PumpTM are
mechanically operated, providing positive sealing and enabling operation at very
low speeds.  Historically, most pumps have relied on the movement of
the fluid being pumped to affect closure of the valves. That design feature
limits operation of the pump to higher speeds in order to maintain effective
closure of valves. Poorly sealing valves can contribute to cavitation and other
operating problems. The dramatic difference in the new Hammonds PumpTM design
is the use of mechanically operated valves, which permit operation over a much
greater range of flow and working pressures.  One of the significant
advantages of this design is that the reduced number of pumping cycles results
in much less wear and maintenance of the pumping equipment.




Potential
applications of the Hammonds PumpTM’
technology include many large industries, such as systems for injection of
long-chain polymers into oil and gas transmission pipelines, injection
systems for enhanced oil and gas recovery, municipal water and waste treatment,
as well as refinery and chemical plant industries, among others. Hammonds
revolutionary design is able to dispense with digital accuracy, shear sensitive
liquids such as polymers, petroleum products, pharmaceuticals, and food
products; serving many industries such as cosmetics, refined products, oilfield
exploration and production, water and waste treatment, mining, and food
processing.









Hammonds
Business Strategy




“Innovation,
Pure & Simple”TM is the
way Hammonds describes its philosophy and business model. Since its inception,
Hammonds has been a leader in providing new technology to several diverse
industries. Hammonds continues to expand its scope as a leader in serving the
fuels, water treatment and utility vehicle industries. We also believe that
Hammonds will experience growth through sales of water treatment products, the
addition of new pumping and dispensing technologies, and expansion of fuel
additive applications. With Hammonds’ development of the Omni Directional
Vehicle (ODV®) in addition to its other products and services, Hammonds
continues to experience revenue growth with an expanding presence in
multiple markets, sectors and industries.  During the past three
fiscal years, Hammonds’ revenues increased by 90% from 2005 to 2006 and by 56%
from 2006 to 2007.




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 satisfactory terms and
conditions.




Competition




The
markets in which Hammonds operates are highly competitive. Several of our
products and services compete against several large companies and many
companies in fragmented, highly competitive markets. Many of our
competitors have greater resources than Hammonds. 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 seek new and more effective ways to purify a
diminishing supply of usable water. Hammonds holds multiple patents for products
used 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 than Hammonds. Hammonds must
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.




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 are not
available. Hammonds has been a sole-source vendor supplying fuel-injection and
blending technology 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. Biobor® JF is one of only two biocides approved for use in aviation fuels
and it has also been tested and approved as a preservative for manufactured
wood products such as engineered trusses, windows and sheet building materials.
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 our 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 $436,380 and has sufficient
production capacity to meet the Company’s anticipated needs 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.  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, which makes 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, Boeing, 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 Company could be adversely affected.






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,
pumping technology, water treating equipment and Omni Directional Vehicles
(ODV®). There are an additional 12 patents in pending status.






Employees




As of
December 31, 2007, Hammonds had 65 full time employees, including Carl Hammonds,
Hammonds’ founder, president and a director. 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 in the future that Hammonds
will be able 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 operations.
In the event that Hammonds is unable to comply with such applicable
environmental laws and regulations, 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-K.




This
annual report on Form 10-K 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-K.






ITEM1A. RISK FACTORS RELATED TO OUR BUSINESS




Dependence Upon Parent 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. (NasdaqCM: AMIN), which loan
at December 31, 2007 was $594,640, and our parent's ability to secure and
maintain our existing $2,000,000 revolving credit line from a financial
institution.




The
Company received approximately $5.4 million from the 2006 and 2007 VOMF Private
Financing Transactions (See the discussion under "2006 Private Financing
Transactions" and "2007 Private Financing Transactions" in “ITEM 1. DESCRIPTION
OF BUSINESS”).  As a result of the fact that VOMF has exercised all of
the warrants issued in the Private Financing Transactions, the Company will not
receive any additional funding from VOMF unless new funding arrangements are
negotiated. At present, the Company is not negotiating with VOMF or other
institutional or private investors for additional funding.




If
additional debt and/or equity financing is required in 2008, we believe that
such financing will be available from our parent and institutional or other
private investors at terms and conditions acceptable to the
Company.  However, there can be no assurance 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, or that such deficiencies will not be discovered
through our internal reviews, 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® line.
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 entities and possess far greater financial, technical, human
and other resources than does the Company.




We must
compete against many companies in fragmented, highly competitive markets and we
have fewer resources than many 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
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®) line. We are dependent upon the ability of the
third party manufacturers and subcontractors of the ODV® components necessary
for us 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 highway 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. 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, and has recently received an order for two ODVs® from
The Boeing Company, 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 must face competition from older
and more established companies and will be dependent on gaining market approval
for our patented new ODV® technology. We must compete with providers of
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 effect 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 U.S., state 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®. We
are dependent upon our distributors' success in generating customer orders for
the stocking inventory they have purchased and in continued orders for future
shipment.




Any material 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. Any material 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 affects 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 is 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, Boeing, 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 Company could be
adversely affected.




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




While we
believe that our current personnel of 65 employees is sufficient for the
forseeable future, our ability to attract and retain qualified engineers, and
other professional personnel to satisfy our needs is an important factor in
determining our future success. The market for these skilled professionals is
competitive, and there can be no assurance that we will be successful in our
efforts to attract and retain additional professionals as our need increases. 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, our president, and the loss of Mr. Hammonds
could adversely affect 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® line, which
uses 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 greater financial resources for marketing such products. If the
market for our ODV® product line takes longer to develop and grow than
anticipated, this would have an adverse effect on revenues and potential
profitability. While we believe the ODV® represents an important innovation in
industrial utility vehicles, we cannot be assured that 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 will be
dependent upon our parent to provide or otherwise secure necessary financing at
acceptable terms and conditions.


Our
revolutionary pump design incorporated in the Hammonds PumpTM
represents a significant departure from the existing standard in the design of
pumping technology. The new Hammonds PumpTM has
potential application in a number of markets and uses, and the Company is
developing plans to introduce the technology in the near
future. Introduction of completely new products presents challenges and
requires investment of significant financial and personnel resources to
establish market presence through, among other means, media advertising and
trade show participation, establishing the requisite marketing and sales
infrastructure, developing and refining processes for manufacturing and
information flow, and establishing appropriate quality assurance
processes.





There can
be no assurance that the Company will be successful in its ability to continue
to obtain the financing necessary to introduce the technology, or that having
obtained such financing, will be successful in marketing the line of Hammonds’
products.




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. In
order for us to continue to grow and remain competitive, we must be
able to anticipate changes in technological and regulatory standards. We
must be able 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
subject to change 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. There can be no assurance that our operations in the future
will be able to continue to comply with future laws and
regulations.




The level
of enforcement of these laws and regulations also affects the demand for many of
our services. Changes in regulations and the perception that enforcement of
current environmental laws has been reduced have 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, especially if marketing
efforts for our new ODV® are successful. In such event we will require effective
management and additional 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 Hammonds PumpTM, 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-K;


-
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, an
NASD-sponsored and operated inter-dealer automated quotation system for equity
securities not included on The Nasdaq Stock Market.There has only
been limited trading activity in our common stock. 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.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.




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 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. Furthermore, 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 on its common stock for 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, 2007, we had 49,748,257 shares of common stock issued
and 3,769,626 shares of preferred stock issued. We may issue additional shares
of common stock in connection with any future acquisitions of operating
businesses or assets or to raise additional funding for our operations. 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, 833,333 shares of Series B Preferred
Stock, and 2,102,960 of Series C Preferred Stock issued to VOMF are converted
into shares of common, we would be required to issue an additional 37,696,260
shares of common stock.




Compliance with Penny Stock
Rules




Our
securities are presently 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, 2007, the Registrant had 49,748,257 shares of common stock issued
and outstanding, 46,073,750 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.






ITEM1B. UNRESOLVED STAFF COMMENTS








ITEM2. DESCRIPTION OF PROPERTIES




Hammonds' 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 1,730 square feet of
executive office space and are leased by American International Industries from
an unaffiliated third party. Hammonds believes that the office facilities are
sufficient for the foreseeable future.




Hammonds'
production 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 $36,365. This facility has
sufficient production capacity to meet our anticipated needs for the
foreseeable future.






ITEM3. LEGAL PROCEEDING




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






ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS




During
the year ended December 31, 2007, no matters were submitted to a vote of our
security holders.


Back to Table of Contents




PART
II






ITEM5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES




Market
Information




Our
common stock is currently quoted under the symbol HMDI 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
      2008
            
            
            Fiscal
      2007
            
            
            Fiscal
      2006High
            
            
            Low
            
            
            High
            
            
            Low
            
            
            High
            
            
            LowFirst
      Quarter ended March 31
            
            $
            ---
            
            
            $
            ---
            
            
            $
            0.35
            
            
            $
            0.20
            
            
            $
            0.60
            
            
            $
            0.35Second
      Quarter ended June 30
            
            $
            ---
            
            
            $
            ---
            
            
            $
            0.44
            
            
            $
            0.20
            
            
            $
            0.45
            
            
            $
            0.30Third
      Quarter ended September 30
            
            $
            ---
            
            
            $
            ---
            
            
            $
            0.75
            
            
            $
            0.21
            
            
            $
            0.55
            
            
            $
            0.25Fourth
      Quarter ended December 31
            
            $
            ---
            
            
            $
            ---
            
            
            $
            0.60
            
            
            $
            0.29
            
            
            $
            0.44
            
            
            $
            0.20




As of
December 31, 2007, our shares of common stock were held by approximately 200
stockholders of record. The transfer agent for 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 our 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 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.
   Securities
Authorized for Issuance Under Equity Compensation Plans
  On
September 1, 2007, we entered into a service agreement with Sherry Couturier,
CFO, pursuant to which the Company shall pay Ms. Couturier compensation of
$4,000 per month by the issuance of a number of shares of the Company’s common
stock registered on Form S-8 in an amount equivalent to $4,000 per
month.
  On
November 1, 2007, the Company entered into an employment agreement with Daniel
Dror, Chairman and CEO, pursuant to which Mr. Dror will be issued common stock
of 10,000 restricted shares per month commencing on December 1, 2007 and on each
consecutive month.
   Sale
of Unregistered Securities
  On March
27, 2007, Vision Opportunity Fund Limited ("VOMF"), an institutional investor,
exercised 3,970,400 Series C Warrants at an exercise price of $0.18 per share or
gross proceeds of $714,672 to the Company and VOMF was issued 3,970,400
restricted shares of common stock.
  On June
1, 2007, the Company issued 100,000 shares of restricted stock valued at $40,000
as a signing bonus to Sherry L. Couturier, for agreeing to serve as our new
CFO.
  On July
20, 2007, the Company issued 50,000 shares of restricted stock valued at $20,000
as a director’s fee to John W. Stump III.
  On August
24, 2007, the Company issued 1,850,000 shares of restricted stock valued at
$388,500 in bonuses to the officers and key employees of the Company, and
500,000 shares of restricted stock to American International Industries, Inc.
valued at $105,000 as a management fee.
 
 On
September 20, 2007, the Company entered into an agreement with VOMF
pursuant to which the Series A, B and C Warrants were amended to: (i)
adjust the exercise price of all of the Warrants to $0.10; and
(ii) provide for the issuance of a total of 2,102,960 shares of the
Company's newly authorized Series C Convertible Preferred Stock in lieu of
21,029,599 shares of common stock. On September 21, 2007, VOMF delivered a
notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per warrant, from which the Company received net proceeds of
$981,162 and VOMF cancelled a short-term promissory note in the amount of
$1,000,000, representing a loan made by VOMF to the Company on August 17,
2007.
 
 On October
15, 2007, the Company issued 7,142,857 shares of restricted common stock at
$0.14 per share to its parent in connection with the parent's conversion of a
$1,000,000 promissory note.
  The
Company believes that the issuances of these restricted shares were 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.
   Issuer
purchases of equity securities
  The
following table provides information with respect to purchases made by or on
behalf of the Corporation or any “affiliated purchaser” (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the
Corporation’s common stock during the fourth quarter of
2007.




MaximumNumber
      of SharesTotal
      Number of
            
            
            That
      May Yet BeShares
      Purchased
            
            
            Purchased
      UnderTotal
      Number of
            
            
            Average
      Price
            
            
            as
      Part of Publicly
            
            
            the
      Plans at thePeriod
            
            Shares
      Purchased
            
            
            Paid Per
      Share
            
            
            Announced
      Plans
            
            
            End of the
      PeriodOctober
      1, 2007 to October 31, 2007
            
            
            2,000
            
            
            $
            0.54
            
            
            
            -
            
            
            
            -November
      1, 2007 to November 30, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -December
      1, 2007 to December 31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -2,000
            
            
            $
            0.54
            
            
            
            -
            
            
            
            -


Back to Table of Contents




ITEM6. SELECTED FINANCIAL DATA




Year Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Operating
      Results Data:Revenues
            
            $
            10,096,538
            
            
            $
            6,467,393
            
            
            $
            3,395,151
            
            
            $
            -
            
            
            $
            -Net
      income (loss)
            
            $
            (2,671,904
            )
            
            $
            (2,446,563
            )
            
            $
            (1,194,652
            )
            
            $
            (6,993
            )
            
            $
            25,096Regular
      preferred dividends
            
            $
            (29,575
            )
            
            $
            (60,425
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -Deemed
      preferred dividends
            
            $
            (1,981,162
            )
            
            $
            (1,290,898
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -Net
      income (loss) applicable to common shareholders
            
            $
            (4,682,641
            )
            
            $
            (3,797,886
            )
            
            $
            (1,194,652
            )
            
            $
            (6,993
            )
            
            $
            25,096Net
      income (loss) per basic common share
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.06
            )
            
            $
            -
            
            
            $
            -Net
      income (loss) per diluted common share
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.06
            )
            
            $
            -
            
            
            $
            -Basic
      weighted average common shares
            
            
            41,588,128
            
            
            
            26,841,849
            
            
            
            20,111,000
            
            
            
            20,000,000
            
            
            
            20,000,000Diluted
      weighted average common shares
            
            
            41,588,128
            
            
            
            26,841,849
            
            
            
            20,111,000
            
            
            
            20,000,000
            
            
            
            20,000,000Financial
      Position Data:Total
      assets
            
            $
            10,815,238
            
            
            $
            10,384,397
            
            
            $
            5,749,767
            
            
            $
            832,142
            
            
            $
            839,120Long-term
      debt, less current installments
            
            $
            2,665,585
            
            
            $
            2,464,050
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Stockholders'
      equity
            
            $
            5,772,546
            
            
            $
            3,858,357
            
            
            $
            (344,775
            )
            
            $
            832,127
            
            
            $
            839,120


Back to Table of Contents


ITEM7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION




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" of this
annual report.




General




Hammonds is
a 48.2% owned subsidiary of American International Industries, Inc., NasdaqCM:
AMIN. AMIN consolidates Hammonds even though its ownership is less than 51%,
because AMIN appoints the members of Hammonds’ board of directors.
Since Hammonds is incurring losses and the minority interest has no recorded
common stock equity value, AMIN recognizes 100% of Hammonds’
losses.  AMIN’s ownership percentage will be diluted in the event of
the conversion by Vision Opportunity Fund Limited (VOMF) of their shares of
Hammonds' Series A, B and C Convertible Preferred Stock into shares of Hammonds'
common stock.  The Company received approximately $5.4 million from
the 2006 and 2007 VOMF Private Financing Transactions (See the discussion under
"2006 Private Financing Transactions" and "2007 Private Financing Transactions"
in “ITEM 1. DESCRIPTION OF BUSINESS”).





In 2005,
the Company, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. See Note 2 “Acquisition” below. Hammonds
Technical Services, Inc. and Hammonds Fuel Additives, Inc. were separate
privately-owned Texas companies. In connection with the 2005 acquisition by the
Company, Hammonds Fuel Additives was merged into Hammonds Technical Services. In
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. 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. in consideration for the
issuance to Carl Hammonds of 16,000,000 restricted shares of common stock,
valued at a price of $0.25 per share, the price of the Company's common
stock at the date of the transaction. As a result of this transaction, the
Company owns 100% of each of the Hammonds subsidiaries.




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,
2007.




RESULTS
OF OPERATIONS




YEAR
ENDED DECEMBER 31, 2007 VERSUS YEAR ENDED DECEMBER 31, 2006




Revenues




Gross
revenues for the year ended December 31, 2007 were $10,096,538 compared to
$6,467,393 for the year ended December 31, 2006, representing an increase of
$3,629,145, or 56%.  The increase was due to higher demand for
Hammonds Water Treatment products and increased sales of Hammonds Technical
Services’ transport mounted injection systems.  Hammonds Water
Treatment revenues increased by $1,113,616, or 54%, and Hammonds Technical
Services revenues increased by $2,608,935, or 82%.




Cost
of Sales




Cost of
sales for the year ended December 31, 2007 was $7,859,639 or 77.8% of revenues
compared to $5,336,529 or 82.5% of revenues for the year ended December 31,
2006. Costs of sales are anticipated to continue to decrease during 2008 as a
percentage of revenues, as a result of improved absorption of fixed costs over
an increasing revenue base and manufacturing efficiencies resulting from new,
more efficient equipment and production techniques.




General
and administrative expenses




In 2007,
selling, general and administrative expenses totaled $4,343,934 or 43.0% of
revenues compared to $3,311,656 or 51.2% of revenues in 2006. The selling,
general and administrative expenses increased primarily due to stock based
compensation issued to officers and key employees of $469,600, increased
depreciation and amortization expense of $201,273, increased rent and utilities
of $155,574, and other increases for sales and marketing expenses related to our
increase in revenues.  To accommodate increased production, Hammonds
now occupies the entire Rankin Road warehouse and office facility, of which
24,000 square feet was occupied by another tenant prior to 2007, resulting in
increased rent and utilities.




Operating
Loss




Our
operating loss decreased to $2,107,035 in 2007 compared to $2,180,792 in 2006.
Our 2007 and 2006 operating loss was mainly attributable to 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. 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 / Loss




Other
income / loss for the Company in 2007 includes interest expense of $436,325 and
finance expense associated with the issuance and sale of Series A, B and C
Convertible Preferred Stock of $386,334. Other income / loss for the Company in
2006 includes interest expense of $491,344, interest and other income of
$75,573, and Hammonds participation in the parent's gain on the sale of the
Rankin Road property of $150,000.




Net
Loss




Our net
loss was $2,671,904 in 2007 and $2,446,563 in 2006.




YEAR
ENDED DECEMBER 31, 2006 VERSUS YEAR ENDED DECEMBER 31, 2005




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, or an increase of 90.5%. 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. 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.




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.




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.




Other
Income / Loss




Other
Income / loss for the Company in 2006 includes interest expense of $491,344,
interest and other income of $75,573, and Hammonds’ participation in the
parent's gain on the sale of the Rankin Road property of $150,000. Other income
/ loss in 2005 consisted primarily of interest expense of $106,617.




Net
Loss




Our net
loss was $2,446,563 in 2006 and $1,194,652 in 2005.






LIQUIDITY
AND CAPITAL RESOURCES




Our
current assets were $4,163,086 at December 31, 2007, consisting mainly of
cash, inventories and accounts receivable, compared to $3,382,293 at December
31, 2006, or an increase of 23.1%.  Working capital was $2,660,254 at
December 31, 2007 compared to $1,754,559 at December 31, 2006. Our total assets
at December 31, 2007 and 2006 were $10,815,238 and $10,384,397,
respectively.




We had
current liabilities of $1,502,832 at December 31, 2007 compared to $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, 2007, we had
long-term liabilities of $3,539,860 consisting primarily of notes payable to
banks of $2,665,585, and a note payable to our parent, American International
Industries, Inc. in the amount of $594,640.  At December 31, 2006, we
had long-term liabilities of $4,898,306 consisting of notes payable to banks of
$2,464,050, a note payable to our parent, American International Industries,
Inc. in the amount of $1,931,056, and a deferred tax liability of
$503,200.  During 2007, the note payable to our parent was reduced by
$1,336,416.  The company transferred notes receivable of $370,927 as a
partial payment toward this note and issued 7,142,857 shares of restricted
common stock for the conversion of $1,000,000 of the note.




During
2007, we had a negative cash flow from operations of $1,037,921 mainly due to
our net loss of $2,671,904, a decrease in the provision for deferred taxes of
$346,665, and an increase in inventories of $347,189, offset by depreciation and
amortization of $828,773, stock based compensation of $469,600, and finance
expense associated with the issuance and sale of Series A, B and C Convertible
Preferred Stock of $386,334.




In  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 2007 through proceeds from the issuance
of preferred stock in the amount of $1,981,162, proceeds from the issuance of
common stock in the amount of $694,672, short-term borrowings of $1,000,000, and
long-term borrowings in the amount of $284,551. We made payments of $1,186,411
on short-term borrowings and $44,451 on long-term borrowings during
2007.




During
2006, we funded our cash used in operating activities 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 used
cash in investing activities of $487,114 in 2007. Cash was used to purchase
property and equipment in the amount of $365,290, secure patents and trademarks
in the amount of $75,718, and an option to buy American International
Industries, Inc. stock for $100,000 as part of a lawsuit
settlement.




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 our parent 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 its ability to secure a 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, 2007, the Company owed
the parent $594,640 (see note 15).




Off-Balance
Sheet Arrangements




As of
December 31, 2007 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.




New
Accounting Pronouncements




In June
2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48"), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” which is effective for fiscal years beginning after November
15, 2007. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option is elected would be reported in
earnings.





In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations".
SFAS 141R requires the acquiring entity in a business combination to record
all assets acquired and liabilities assumed at their respective acquisition-date
fair values, changes the recognition of assets acquired and liabilities assumed
arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related
costs as incurred. SFAS 141R also requires additional disclosure of
information surrounding a business combination, such that users of the entity's
financial statements can fully understand the nature and financial impact of the
business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date.





In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008.




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.




Contractual
Obligations and Commitments




As of
December 31, 2007, Hammonds leases its 106,000 square foot manufacturing and
office facility in Houston, TX from an unrelated third party at annual rental of
$436,380 (see note 14 to the consolidated financial statements).




Critical
Accounting Estimates




Our
significant accounting policies are described in note 1 to our consolidated
financial statements for the year ended December 31, 2007. 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 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. Hammonds has
begun to generate improving economies in manufacturing. New manufacturing
equipment and manufacturing processes are coming on-line, resulting in
significant improvement in efficiency and product quality.




Subsequent
to year end December 31, 2005, Hammonds Technical Services, Inc. was separated
into three segments: (i) Hammonds Technical Services, Inc., which is the
manufacturing segment for all Hammonds product lines (ii) Hammonds Fuel
Additives, Inc., which supplies all of the fuel additives; and (iii) Hammonds
Water Treatment Solutions, Inc. which provides water and waste treatment,
chlorination and pumping technologies and systems.






ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




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 December 31, 2007, due to
the generally short maturities of these items. December 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 December 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.





Back to Table of Contents




ITEM8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




Management’s Annual Report on Internal Control
      Over Financial Reporting
            23Report of Independent Registered Public Accounting
      Firm
            24Report of Independent Registered Public Accounting
      Firm
            25Financial
      Statements:Balance Sheets - December 31, 2007 and
      2006
            26Statements of Operations - Years ended December 31,
      2007, 2006, and 2005
            27Statements of Stockholders' Equity (Deficit) - Years
      ended December 31, 2007, 2006, and 2005
            28Statements of Cash Flows - Years ended December 31, 2007,
      2006, and 2005
            29Notes to Consolidated Financial
      Statements
            31Supplemental
      Financial InformationSupplemental Selected Quarterly Financial Information
      (Unaudited)
            43






Back to Table of Contents


MANAGEMENT’SANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL


REPORTING




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined by SEC rules adopted under the
Securities Exchange Act of 1934, as amended. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. It
consists of policies and procedures that:




•
            Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;•
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of the financial statements in accordance with generally
      accepted accounting principles, and that our receipts and expenditures are
      being made only in accordance with authorizations of our management and
      directors; and•
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.




Under the
supervision and with the participation of management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), we made an assessment
of the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, we used the criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our evaluation, we
concluded that our internal control over financial reporting was effective as of
December 31, 2007.


Back to Table of Contents




REPORTOF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM




To the
Stockholders


Hammonds
Industries, Inc. and Subsidiary


Houston,
Texas






We have
audited the accompanying consolidated balance sheet of Hammonds Industries, Inc.
and Subsidiary as of December 31, 2007 and 2006 and the related consolidated
statements of operations, changes in shareholders’ deficit, and cash flows for
the years ended December 31, 2007 and 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 Hammonds Industries, Inc. and
Subsidiary as of December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2007 and
2006 in conformity with accounting principles generally accepted in the United
States of America.






/s/ GLO
CPAs LLLP




March 18,
2008


Houston,
Texas






Back to Table of Contents


REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Stockholders


Hammonds
Industries, 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
Hammonds Industries, 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




Back to Table of Contents





HAMMONDS
      INDUSTRIES, INC.ConsolidatedBalance SheetsDecember
      31, 2007 and December 31, 2006





December
      31, 2007
            
            
            December
      31, 2006(Restated)AssetsCurrent
      assets:Cash
            
            $
            1,597,361
            
            
            $
            396,505Trading securities
            
            
            28,314
            
            
            
            -Accounts
      receivable, less allowance for doubtful accounts of$104,169
      at December 31, 2007 and $99,387 at December 31, 2006
            
            
            791,374
            
            
            
            1,328,215Current portion of notes receivable
            
            
            -
            
            
            
            229,418Inventories, net
            
            
            1,656,801
            
            
            
            1,309,612Prepaid expenses and other assets
            
            
            89,236
            
            
            
            118,543Total current assets
            
            
            4,163,086
            
            
            
            3,382,293Long-term
      notes receivable, less current portions
            
            
            -
            
            
            
            160,892Property
      and equipment, net
            
            
            1,132,472
            
            
            
            782,032Intangible
      assets, net
            
            
            5,457,365
            
            
            
            6,038,870Other
      assets
            
            
            62,315
            
            
            
            20,310Total assets
            
            $
            10,815,238
            
            
            $
            10,384,397Liabilities
      and Stockholders' Equity (Deficiency)Current
      liabilities:Accounts payable and accrued expenses
            
            $
            1,326,808
            
            
            $
            1,333,831Short-term note payable
            
            
            89,999
            
            
            
            276,410Current
      installments of long-term capital lease obligations
            
            
            29,967
            
            
            
            -Current installments of long-term debt
            
            
            56,058
            
            
            
            17,493Total current liabilities
            
            
            1,502,832
            
            
            
            1,627,734Long-term
      capital lease obligations, less current installments
            
            
            123,100
            
            
            
            -Long-term
      debt, less current installments
            
            
            2,665,585
            
            
            
            2,464,050Due
      to American International Industries, Inc.
            
            
            594,640
            
            
            
            1,931,056Deferred
      tax liability
            
            
            156,535
            
            
            
            503,200Total liabilities
            
            
            5,042,692
            
            
            
            6,526,040Stockholders'
      equity (deficiency):Preferred stock, $0.001par value, authorized 5,000,000
    shares:3,769,626
      issued and outstanding at December 31, 2007, and1,666,666 issued and outstanding at December 31, 2006
            
            
            377
            
            
            
            167Additional paid-in capital - preferred stock
            
            
            4,811,573
            
            
            
            1,290,731Additional paid-in capital - beneficial conversion
            
            
            3,272,060
            
            
            
            1,290,898Additional paid-in capital - warrants
            
            
            -
            
            
            
            1,419,222Common stock, $0.0001 par value, authorized 195,000,000
      shares:49,748,257
      shares issued and outstanding at December 31, 2007, and36,135,000 shares issued and outstanding at December 31,
    2006
            
            
            4,975
            
            
            
            3,614Additional paid - in capital
            
            
            7,480,255
            
            
            
            4,967,778Accumulated deficit
            
            
            (9,796,694
            )
            
            
            (5,114,053
            )Total stockholders' equity
            
            
            5,772,546
            
            
            
            3,858,357Total liabilities and stockholders' equity
            
            $
            10,815,238
            
            
            $
            10,384,397The
      accompanying notes are an integral part of these consolidated financial
      statements.




Back to Table of Contents




HAMMONDS
      INDUSTRIES, INC.ConsolidatedStatements of OperationsYears
      ended December 31, 2007, 2006, and
2005





2007
            
            
            2006
            
            
            2005(restated)Revenues
            
            $
            10,096,538
            
            
            $
            6,467,393
            
            
            $
            3,395,151Costs
      and expenses:Cost of sales
            
            
            7,859,639
            
            
            
            5,336,529
            
            
            
            2,396,950Selling, general and administrative
            
            
            4,343,934
            
            
            
            3,311,656
            
            
            
            2,104,473Total operating
      expenses
            
            
            12,203,573
            
            
            
            8,648,185
            
            
            
            4,501,423Operating
      income (loss)
            
            
            (2,107,035
            )
            
            
            (2,180,792
            )
            
            
            (1,106,272
            )Other
      income (expenses):Finance
      expense for issuance of preferred stock
            
            
            (386,334
            )
            
            
            -
            
            
            
            -Gain (loss) on sale of assets
            
            
            -
            
            
            
            150,000
            
            
            
            -Interest income
            
            
            25,992
            
            
            
            76,665
            
            
            
            18,237Interest expense
            
            
            (436,325
            )
            
            
            (491,344)
            
            
            
            (106,617
            )Unrealized
      loss on trading securities
            
            
            (71,686
            )
            
            
            -
            
            
            
            -Other
      expenses
            
            
            (2,543
            )
            
            
            (1,092)
            
            
            
            -Total other income (expenses)
            
            
            (870,896
            )
            
            
            (265,771)
            
            
            
            (88,380
            )Net income (loss) before income tax
            
            
            (2,977,931
            )
            
            
            (2,446,563
            )
            
            
            (1,194,652
            )Income
      tax expense (benefit)
            
            
            (306,027
            )
            
            
            -
            
            
            
            -Net income (loss)
            
            $
            (2,671,904
            )
            
            $
            (2,446,563
            )
            
            $
            (1,194,652
            )Preferred
      dividends of subsidiaryRegular dividends
            
            
            (29,575
            )
            
            
            (60,425
            )
            
            
            -Deemed dividend
            
            
            (1,981,162
            )
            
            
            (1,290,898
            )
            
            
            -Net loss applicable to common shareholders
            
            
            (4,682,641
            )
            
            
            (3,797,886
            )
            
            
            (1,194,652
            )Net
      loss applicable to common shareholders:Basic and diluted
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.06
            )Weighted
      average common shares:Basic and diluted
            
            
            41,588,128
            
            
            
            26,841,849
            
            
            
            20,111,000






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




Back to Table of Contents


HAMMONDS
      INDUSTRIES, INC.ConsolidatedStatements of Stockholders’ Equity
      (Deficit)Years
      ended December 31, 2007, 2006 (restated), and
  2005





Preferred
      Stock
            
            
            Additional
            
            
            Common
      Stock
            
            
            Additional
            
            
            Accumulated
            
            
            Totalshares
            
            
            amount
            
            
            Paid-in
      Capital
            
            
            shares
            
            
            amount
            
            
            Paid-in
      Capital
            
            
            Deficit
            
            
            Stockholders’
      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 for 49% ownership in Hammonds
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            16,000,000
            
            
            
            1,600
            
            
            
            3,998,400
            
            
            
            -
            
            
            
            4,000,000Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,446,563
            )
            
            
            (2,446,563
            )Regular preferred dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (60,425
            )
            
            
            (60,425
            )Deemed
      preferred dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,290,898
            )
            
            
            (1,290,898
            )Balance,
      December 31, 2006 (restated)
            
            
            1,666,666
            
            
            $
            167
            
            
            $
            4,000,851
            
            
            
            36,135,000
            
            
            $
            3,614
            
            
            $
            4,967,778
            
            
            $
            (5,114,053
            )
            
            $
            3,858,357Series
      C Warrants exercised
            
            
            -
            
            
            
            -
            
            
            
            (265,666
            )
            
            
            3,970,400
            
            
            
            397
            
            
            
            959,941
            
            
            
            -
            
            
            
            694,672Issuance
      of common stock for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,000,000
            
            
            
            200
            
            
            
            448,300
            
            
            
            -
            
            
            
            448,500Management
      fee paid to American International Industries, Inc. with common
      stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            500,000
            
            
            
            50
            
            
            
            104,950
            
            
            
            -
            
            
            
            105,000Issuance
      of preferred stock
            
            
            2,102,960
            
            
            
            210
            
            
            
            4,348,448
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,348,658Issuance
      of common stock to convert promissory note due to American International
      Industries, Inc.
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,142,857
            
            
            
            714
            
            
            
            999,286
            
            
            
            -
            
            
            
            1,000,000Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,671,904
            )
            
            
            (2,671,904
            )Regular preferred dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (29,575
            )
            
            
            (29,575
            )Deemed
      preferred dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,981,162
            )
            
            
            (1,981,162
            )Balance,
      December 31, 2007
            
            
            3,769,626
            
            
            $
            377
            
            
            $
            8,083,633
            
            
            
            49,748,257
            
            
            $
            4,975
            
            
            $
            7,480,255
            
            
            $
            (9,796,694
            )
            
            $
            5,772,546





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




Back to Table of Contents




HAMMONDS
      INDUSTRIES, INC.ConsolidatedStatements of Cash FlowsYears
      ended December 31, 2007, 2006 and
2005





2007
            
            
            2006
            
            
            2005(restated)Cash
      flows from operating activities:Net income (loss)
            
            $
            (2,671,904
            )
            
            $
            (2,446,563
            )
            
            $
            (1,194,652
            )Adjustments to reconcile net income (loss) to net cash provided (used in)
      operating activities:Depreciation and amortization
            
            
            828,773
            
            
            
            627,500
            
            
            
            304,946Provision
      for deferred income taxes
            
            
            (346,665
            )Unrealized
      loss on trading securities
            
            
            71,686
            
            
            
            -(Gain) loss on disposal of assets
            
            
            -
            
            
            
            (150,000
            )
            
            
            -Finance
      expense for issuance of preferred stock
            
            
            386,334
            
            
            
            -
            
            
            
            -Stock based compensation
            
            
            469,600
            
            
            
            -
            
            
            
            17,750Management
      fee paid to American International Industries, Inc. with common
      stock
            
            
            105,000
            
            
            
            -
            
            
            
            -Miscellaneous write-off
            
            
            -
            
            
            
            (22,684
            )
            
            
            -(Increase) decrease of operating assets, net of
    acquisitions:Accounts receivable
            
            
            536,841
            
            
            
            (498,920
            )
            
            
            (319,928
            )Inventories
            
            
            (347,189
            )
            
            
            (304,955
            )
            
            
            (195,819
            )Prepaid expenses
            
            
            29,306
            
            
            
            (104,654
            )
            
            
            -Other
            
            
            (42,005
            )
            
            
            36,685
            
            
            
            (22,538
            )Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
            
            
            (57,698
            )
            
            
            (180,791
            )
            
            
            (9,751
            )Net cash used in
      operating activities
            
            
            (1,037,921
            )
            
            
            (3,044,382
            )
            
            
            (1,419,992
            )Cash
      flows from investing activities:Purchase of property and equipment
            
            
            (365,290
            )
            
            
            (51,841
            )
            
            
            (119,006
            )Costs
      of securing patents and trademarks
            
            
            (75,718
            )
            
            
            (26,393
            )
            
            
            -Purchase
      of option to buy American International Industries, Inc.
    stock
            
            
            (100,000
            )
            
            
            -
            
            
            
            -Proceeds from the sale of property
            
            
            -
            
            
            
            150,000
            
            
            
            -Proceeds from payments on long-term notes receivable
            
            
            19,383
            
            
            
            27,434
            
            
            
            25,586Redemption
      of certificate of deposit
            
            
            -
            
            
            
            -
            
            
            
            300,000Purchase
      of stock in majority-owned subsidiary
            
            
            -
            
            
            
            -
            
            
            
            (998,300
            )Cash
      acquired in acquisition of majority-owned subsidiary
            
            
            -
            
            
            
            -
            
            
            
            56,506Amount due from (to) affiliates
            
            
            34,511
            
            
            
            87,467
            
            
            
            (342,700
            )Net cash provided by
      (used in) investing activities
            
            
            (487,114
            )
            
            
            186,667
            
            
            
            (1,077,914
            )Cash
      flows from financing activities:Proceeds from issuance of preferred stock
            
            
            1,981,162
            
            
            
            2,710,120
            
            
            
            -Proceeds
      from issuance of common stock
            
            
            694,672
            
            
            
            -
            
            
            
            -Proceeds from long-term borrowing
            
            
            284,551
            
            
            
            1,012,231
            
            
            
            2,131,605Proceeds from short-term borrowing
            
            
            1,000,000
            
            
            
            -
            
            
            
            -Proceeds
      from borrowings from related parties
            
            
            -
            
            
            
            -
            
            
            
            998,300Net borrowings under line of credit
            
            
            -
            
            
            
            570
            
            
            
            -Principal
      payments under capital lease obligations
            
            
            (3,632
            )
            
            
            -
            
            
            
            -Principal payments of short-term borrowing
            
            
            (1,186,411
            )
            
            
            (15,592
            )
            
            
            (570,223
            )Principal
      payments of long-term borrowing
            
            
            (44,451
            )
            
            
            (514,984
            )
            
            
            -Net cash provided by
      (used in)  financing activities
            
            
            2,725,891
            
            
            
            3,192,345
            
            
            
            2,559,682Net increase (decrease) in cash and cash equivalents
            
            $
            1,200,856
            
            
            $
            334,630
            
            
            $
            61,776Cash
      and cash equivalents at beginning of year
            
            
            396,505
            
            
            
            61,875
            
            
            
            99Cash
      and cash equivalents at end of year
            
            $
            1,597,361
            
            
            $
            396,505
            
            
            $
            61,875Supplemental
      schedule of cash flow information:Interest paid
            
            $
            436,325
            
            
            $
            491,344
            
            
            $
            106,617Taxes paid
            
            $
            11,589
            
            
            $
            1,575
            
            
            $
            2,367Non-cash transactions:Acquisition
      of fixed assets under capital lease obligations
            
            $
            156,700
            
            
            $
            -
            
            
            $Issuance of note payable for equipment
            
            $
            
            
            
            $
            4,855
            
            
            $Issuance
      of note payable and assumption of liabilities for acquisition of
      subsidiary
            
            $
            
            
            
            $
            -
            
            
            $
            1,457,400Transfer
      of notes receivable to pay long-term note due to American International
      Industries, Inc.
            
            $
            370,927
            
            
            $
            -
            
            
            $Issuance
      of common stock to convert promissory note due to American International
      Industries, Inc.
            
            $
            1,000,000
            
            
            $
            -
            
            
            $Non-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)





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


Back to Table of Contents


HAMMONDS
INDUSTRIES, INC.


Notesto Consolidated Financial Statements


December
31, 2007 and 2006




(1)
Summary of Significant Accounting Policies




Organization,
Ownership and Business


Hammonds
Industries, Inc., f/k/a International American Technologies, Inc. (the
"Company"), is a 48.2% owned subsidiary of American International
Industries, Inc.
  In 2005,
the Company, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. See Note 2 “Acquisition” below. Hammonds
Technical Services, Inc. and Hammonds Fuel Additives, Inc. were separate
privately-owned Texas companies. In connection with the 2005 acquisition by the
Company, Hammonds Fuel Additives was merged into Hammonds Technical Services. In
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. 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. in consideration for the
issuance of 16,000,000 restricted shares of common stock, valued at a price of
$0.25 per share, the price of the Company's common stock at the date of the
transaction. As a result of this transaction, the Company owns 100% of each of
the Hammonds subsidiaries.
  2006 Private Financing
Transactions
 On August
8, 2006,  the Company entered into a stock purchase agreement with
Vision Opportunity Fund Limited ("VOMF"), an institutional investor, pursuant to
which the Company sold VOMF 833,333 shares of Series A Convertible Preferred
Stock for $1,500,000 and issued a Series A Warrant exercisable for a period of 5
years to purchase 8,333,333 shares of the Company’s common stock at $0.18 per
share and a Series B Warrant exercisable for a period of 2 years to
purchase an additional 8,333,333 shares of the Company’s common stock at $0.18
per share.
  On
September 29, 2006, the Company entered into another stock purchase
agreement with VOMF pursuant to which the Company sold 833,333 shares of Series
B Convertible Preferred Stock for $1,500,000 and issued a Series C Warrant
exercisable for a period of 5 years to purchase 8,333,333 shares of the
Company’s common stock at $0.50 per share.
  The stock
purchase agreements in the 2006 Private Financing Transactions provide
that each share of Series A and Series B Convertible Preferred Stock is
convertible into 10 shares of Hammonds' common stock.
 
 2007
Private Financing Transactions
 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 of the Series C
Warrants 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 net proceeds of $694,672 to the Company.
  On
September 20, 2007, the Company entered into an agreement with VOMF
pursuant to which the Series A, B and C Warrants were amended to: (i)
adjust the exercise price of all of the Warrants to $0.10; and
(ii) provide for the issuance of a total of 2,102,960 shares of the
Company's newly authorized Series C Convertible Preferred Stock in lieu of
21,029,599 shares of common stock. On September 21, 2007, VOMF delivered a
notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per warrant, from which the Company received net proceeds of
$981,162 and VOMF cancelled Hammonds’ short-term promissory note payable in the
amount of $1,000,000, representing a loan made by VOMF to the Company on August
17, 2007.
 
 In total,
the Company has received approximately $5.4 million from the 2006 and 2007 VOMF
Private Financing Transactions.  The material terms of these preferred
stock issuances are included in note 10 to the consolidated financial
statements.  If the 833,333 shares of Series A Preferred Stock,
833,333 shares of Series B Preferred Stock, and 2,102,960 of Series C Preferred
Stock issued to VOMF are converted into shares of common, we would be required
to issue an additional 37,696,260 shares of common stock.
   Principles of Consolidation
  The
consolidated financial statements include the accounts of the Company and its
wholly-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., our parent, consolidates
Hammonds even though its ownership is less than 51%, because the parent appoints
the members of Hammonds’ board of directors. Since the Company is incurring
losses and the minority interest has no recorded common stock equity value, the
parent recognizes 100% of the Company’s losses. All significant intercompany
transactions and balances have been eliminated in consolidation.
  Presentation
of certain amounts for the years ended December 31, 2005 and 2006 have been
reclassified to conform to the presentations for the current
year.
 
 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 – 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 resulting gain or loss being recognized as a component of other income or
expense. As required by SFAS No. 141, the Company 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 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. Taxes assessed by a
governmental authority that are incurred as a result of a revenue transaction
are not included in revenues.  The Company has no significant sales
returns or allowances.
  
 Income
Taxes
  The
Company is a taxable entity and recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.  Interest and
penalties associated with income taxes are included in selling, general and
administrative expense.
   Earnings
(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.
 
 Investments
in the Stock of our Parent
 
 Typically,
the Company does not invest in the stock of our parent.  However, in
February 2007, the Company paid $100,000 for an option to buy 104,398 shares of
American International Industries, Inc. stock for $5.00 per share from a former
Hammonds' minority shareholder as part of a lawsuit settlement. The Company
estimated the fair value of this stock option at December 31, 2007, by using the
Black-Scholes option-pricing model.  This option expires in February
2008.
 
  Stock-Based
Compensation
  The
Company sometimes grants shares of stock for goods and services and in
conjunction with certain agreements. These grants are accounted for under FASB
Statement No. 123R, "Accounting for Stock-Based Compensation" based on the grant
date fair values.
  New
Standards Implemented
  In June
2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48"), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” which is effective for fiscal years beginning after November
15, 2007. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option is elected would be reported in
earnings.
 
 In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations".
SFAS 141R requires the acquiring entity in a business combination to record
all assets acquired and liabilities assumed at their respective acquisition-date
fair values, changes the recognition of assets acquired and liabilities assumed
arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related
costs as incurred. SFAS 141R also requires additional disclosure of
information surrounding a business combination, such that users of the entity's
financial statements can fully understand the nature and financial impact of the
business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date.
 
 In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008.
  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
  On
February 28, 2005, the Company acquired 51% of the capital stock of Hammonds
Technical Services, Inc., a privately-owned Texas corporation, 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)American International Industries, Inc. 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. The sellers of
51% of Hammonds and Mr. Daniel Dror entered into a stock repurchase agreement as
of April 28, 2005, where the sellers agreed to sell the 145,000 shares to Mr.
Daniel Dror for $10.00 per share through the third anniversary of the effective
date of the agreement. These restricted shares were exchanged for two minority
equity interests in Hammonds owned by third parties, which minority interests
were canceled. The total purchase price to acquire the 51% in Hammonds was
$2,455,700 representing cash payments of $825,000, 145,000 shares of the
parent’s restricted common stock valued at $1,450,000 and the assumption of a
note payable to one of the former shareholders in the amount of $173,300 and
liabilities in excess of assets in the amount of $7,400. Pursuant to the
Agreement, which became effective on April 28, 2005, Hammonds became a
majority-owned subsidiary of the Registrant. In 2006, Hammonds Technical
Services was separated into three separate entities, Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc.
  Prior to
the acquisition, Hammonds was two separate legal entities, Hammonds Technical
Services, Inc. and Hammonds Fuel Additives, Inc. (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. 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




A summary
of the intangible assets acquired is included in note 7.






(3)
Trading Securities




In
February 2007, the Company paid $100,000 for an option to buy 104,398 shares of
American International Industries, Inc. stock for $5.00 per share from a former
Hammonds' minority shareholder as part of a lawsuit settlement. The Company
estimated the fair value of this stock option at December 31, 2007, by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions as follows:




December
      31, 2007Dividend
      yield
            
            
            0.00
            %Expected
      volatility
            
            
            39.74
            %Risk
      free interest
            
            
            6.25
            %Expected
      life
            
            2
      months







As a
result, this option has been revalued at $28,314, and the unrealized loss of
$71,686 has been recorded in other income (expense) through December 31,
2007.








(4)
Inventory




Inventory
at December 31, 2007 and 2006 consisted of the following:




December
      31, 2007
            
            
            December
      31, 2006Finished
      goods
            
            $
            231,870
            
            
            $
            106,000Work
      in process
            
            
            36,045
            
            
            
            40,680Parts
      and materials
            
            
            1,420,043
            
            
            
            1,332,4461,687,958
            
            
            
            1,479,126Less:
      Obsolescence reserve
            
            
            (31,157
            )
            
            
            (169,514
            )$
            1,656,801
            
            
            $
            1,309,612









(5)
Long-term Notes Receivable




Long-term
notes receivable at December 31, 2007 and 2006 consisted of the
following:




December
      31, 2007
            
            
            December
      31, 2006Sale
      of former subsidiary, Marald, Inc., principal and interest due monthly
      through June 5, 2012
            
            $
            -
            
            
            $
            190,310Sale
      of former subsidiary, Marald, Inc., principal due October 5,
      2007
            
            
            -
            
            
            
            200,000Notes
      receivable
            
            
            -
            
            
            
            390,310Less
      current portion
            
            
            -
            
            
            
            229,418Notes
      receivable, less current portion
            
            $
            -
            
            
            $
            160,892




During
the third quarter of 2007, the Company transferred the above notes receivable as
a partial payment for long-term debt due to its parent, American International
Industries, Inc.






(6)
Property and Equipment




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




December
      31, 2007
            
            
            December
      31, 2006Machinery
      and equipment
            
            $
            1,416,522
            
            
            $
            894,533Leasehold
      improvements
            
            
            96,796
            
            
            
            96,796Total
      property and equipment
            
            
            1,513,318
            
            
            
            991,329Less:
      Accumulated depreciation and amortization
            
            
            (380,846
            )
            
            
            (209,297
            )Net
      property and equipment
            
            $
            1,132,472
            
            
            $
            782,032








Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 was $171,549,
$103,714, and $104,385, respectively.





During
the fourth quarter of 2007, the Company entered into capital lease agreements
for machinery and equipment included in the December 31, 2007 balances as
follows:





December
      31, 2007Machinery
      and equipment
            
            $
            163,174Less:
      Accumulated depreciation and amortization
            
            
            (0
            )Net
      property and equipment
            
            $
            163,174









Principal
repayment provisions of long-term capital leases are as follows at December 31,
2007:




2008
            
            $
            29,9672009
            
            
            32,3442010
            
            
            34,3392011
            
            
            33,2152012
            
            
            23,202Total
            
            $
            153,067





(7)
Intangible Assets




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




As
      of December 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            4,544,498
            
            
            $
            845,022
            
            12
      yearsTrademarks
            
            
            1,149,199
            
            
            
            220,953
            
            10
      yearsSole
      Source Contract
            
            
            1,144,039
            
            
            
            314,396
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            6,837,736
            
            
            $
            1,380,371
            
            11
      years




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
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            6,762,018
            
            
            $
            723,148
            
            11
      years




Aggregate
      Amortization ExpenseFor
      year ending December 31, 2008
            
            $
            646,066For
      year ending December 31, 2009
            
            $
            646,066For
      year ending December 31, 2010
            
            $
            646,066For
      year ending December 31, 2011
            
            $
            646,066For
      year ending December 31, 2012
            
            $
            601,768For
      year ending December 31, 2013
            
            $
            538,851For
      year ending December 31, 2014
            
            $
            481,821For
      year ending December 31, 2015
            
            $
            449,725For
      year ending December 31, 2016
            
            $
            403,105For
      year ending December 31, 2017
            
            $
            269,518For
      year ending December 31, 2018
            
            $
            128,139





The
Company’s patents, trademarks, and sole source contract for the additive
injection system 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, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            526,629
            
            12
      yearsTrademarks
            
            
            465,199
            
            
            
            124,053
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            
            
            176,777
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            2,735,625
            
            
            $
            827,459
            
            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. owned by Carl Hammonds, in consideration for the issuance of
16,000,000 restricted shares of common stock at a price of $0.25 a share. The
additional cost of $4,000,000 has been allocated to patents, trademarks, and
sole source contract for the additive injection system and is being amortized in
a manner equivalent to the amortization used on the intangible assets acquired
in the initial purchase of 51% of Hammonds. Additionally, the
Company incurred costs related to the securing of additional patents
totaling $26,393 in 2006 and $75,718 during the year ended December 31, 2007.
The following table contains a summary of the intangible assets acquired in 2006
and during the year ended December 31, 2007:




As
      of December 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            2,738,111
            
            
            $
            318,393
            
            12
      yearsTrademarks
            
            
            684,000
            
            
            
            96,900
            
            10
      yearsSole
      Source Contract
            
            
            680,000
            
            
            
            137,619
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            4,102,111
            
            
            $
            552,912
            
            11
      years





Amortization
expense for the years ended December 31, 2007, 2006, and 2005 was $657,224,
$523,786 and $200,561, respectively.




(8)
Short-term Notes Payable




December
      31, 2007
            
            
            December
      31, 2006Note
      payable with interest at 10.50%, interest payments due
    monthly
            
            $
            89,999
            
            
            $
            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$
            89,999
            
            
            $
            276,410




At
December 31, 2007 and 2006, the average annual interest rates of our
short-term borrowings were approximately 10.5% and 11.08%,
respectively.
 
 In the
first quarter of 2007, the Company settled a claim with the former owner of an
equity interest in Hammonds by paying off the $173,300 note plus interest of
$26,700.  Since the note payable was in dispute, no interest expense
had been recorded in prior years and the entire $26,700 was recognized as
expense in 2007.  Interest
expense on the other short-term notes was approximately $10,000 for the years
ended December 31, 2007 and 2006.


(9)
Long-term Debt




December
      31, 2007
            
            
            December
      31, 2006Note
      payable to a bank, interest due quarterly at prime plus 1%, principal
      payment due August 26, 2009, secured by assets of the Company's
      subsidiary, Hammonds Technical Services, Inc.
            
            $
            1,992,189
            
            
            $
            1,992,189Note
      payable to a bank, due in quarterly installments of interest only at prime
      plus 1%, with a principal balance due on August 26, 2009
            
            
            400,000
            
            
            
            400,000Note
      payable to a bank, with interest at 9.25%, due in monthly installments of
      principal and interest of $4,054.12 through February 26, 2012, secured by
      assets of the Company’s subsidiary, Hammonds Technical Services,
      Inc.
            
            
            220,338
            
            
            
            -Note
      payable to a bank, with interest at 8.25%, due in monthly installments of
      principal and interest of $842.44 through April 7, 2012, secured by assets
      of the Company’s subsidiary, Hammonds Technical Services,
    Inc.
            
            
            36,727
            
            
            
            -Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
            
            
            72,389
            
            
            
            89,3542,721,643
            
            
            
            2,481,543Less
      current portion
            
            
            (56,058
            )
            
            
            (17,493
            )$
            2,665,585
            
            
            $
            2,464,050





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




2007
            
            $
            56,0582008
            
            
            2,453,7032009
            
            
            67,4802010
            
            
            56,9682011
            
            
            87,4342012
            
            
            -Total
            
            $
            2,721,643







(10)
Preferred Stock




In August
and September 2006, the Company sold to VOMF 833,333 shares of Series A
Preferred Stock and 833,333 shares of Series B Preferred Stock, respectively
(the “2006 Private Financing Transactions”). In connection with the sale of the
Series A Convertible Preferred Stock, the Company issued VOMF: (i) Series A
Warrants to purchase 8,333,333 shares of common stock at $0.18 per share,
expiring in August 2011; and (ii) Series B Warrants to purchase an additional
8,333,333 shares of common stock at $0.18 per share, expiring in August 2007. In
connection with the sale of the Series B Convertible Preferred Stock, the
Company issued VOMF: (i) Series C Warrants to purchase an additional 8,333,333
shares of common stock at $0.50 per share, expiring on September 29, 2011; and
(ii) the Company agreed to extend the expiration dates on the Series B Warrants
issued in the 2006 Private Financing Transactions from August 2007 to August
2008.




Each
share of Series A and Series B Convertible Preferred Stock is convertible into
ten shares of the Company's common stock. The Company received net proceeds of
approximately $2,710,120 from the sale of Series A and Series B Preferred
Stock.




On
September 20, 2007, the Company entered into an agreement with VOMF
pursuant to which the Company and VOMF agreed to the amendment of the Series A,
B and C Warrants to: (i) adjust the exercise price of all of the Warrants
to $0.10; and (ii) provide for the issuance of a total of 2,102,960 shares of
the Company's newly authorized Series C Convertible Preferred Stock in lieu of
21,029,599 shares of common stock. On September 21, 2007, VOMF delivered a
notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per warrant from which the Company received net proceeds of
$981,162 and VOMF cancelled a short-term promissory note in the amount of
$1,000,000, representing a loan made by VOMF to the Company on August 17,
2007.





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, more costly to produce, and, in the
opinion of the Company, are not inherently more meaningful than the method
utilized.




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




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 reverted 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 has been 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




On July
25, 2007, the Company and VOMF entered into an agreement pursuant to which VOMF
waived the cash dividends of $150,425 on the Series A and Series B Convertible
Preferred Stock accrued from August and September 2006, respectively, through
September 30, 2007. This dividend waiver is recorded in the December 31,
2007 financial statements presented in this report. Additionally, VOMF agreed
that future accrued dividends may be paid, at the Company’s option, in cash or
in restricted shares of the Company’s common stock. The number of shares of
common stock to be issued as payment of accrued and unpaid dividends shall be
determined by dividing (i) the total amount of accrued and unpaid dividends to
be converted into common stock by (ii) eighty percent (80%) of the average of
the VWAP for the twenty (20) Trading Days immediately preceding the dividend
payment date. The term "VWAP" means, for any date, (i) the daily volume weighted
average price of the common stock for such date on the OTC Bulletin Board as
reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m.
Eastern Time to 4:02 p.m. Eastern Time); (ii) if the common stock is not then
listed or quoted on the OTC Bulletin Board and if prices for the common stock
are then reported in the "Pink Sheets" published by the Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the common stock so reported; or (iii) in
all other cases, the fair market value of a share of common stock as determined
by an independent appraiser selected in good faith by the Investor and
reasonably acceptable to the Company.





The
Company has determined that a beneficial conversion feature exists for the
issuance of the Convertible Preferred C Stock, because the fair value of the
issuance exceeded the proceeds by $10.6 million, based on a market price of
$0.60 vs. the exercise price of $0.10 per share. Based on our review of 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
received for the Series C 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 proceeds of $1,981,162 to the embedded
conversion feature and recorded a deemed dividend to the preferred
shareholders.




The
modification of the exercise price to $0.10 per share for the Warrants 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
increase of $386,334 for this modification. Since additional value was given to
the holders of these warrants, $386,334 has been recognized and recorded as
finance expense in accordance with SFAS No. 123R, Share-Based
Payment.




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




Stock
      Price on Date of Reduction
            
            
            Volatility
            
            
            Risk-Free
      Interest RateWarrants
      A, B, & C – September 20, 2007
            
            $
            0.60
            
            
            
            106.18
            %
            
            
            6.25
            %




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




Exercise
      Price / Term
            
            Fair
      ValueWarrants
      A, B, & C – September 20, 2007
            $0.10
      / 0.03 years
            
            $
            10,518,678Warrants
      A, B, & C – September 20, 2007
            Original
      Terms
            
            
            10,132,344Fair
      value increase
            
            
            $
            386,334






(11)
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. During the year
ended December 31, 2007, Hammonds Water Treatment Systems (HWT) and Hammonds
Technical Services (HTS) each had one customer that represented more than
10% of total sales.




Customer
      A
            HWT
            
            
            24
            %Customer
      B
            HTS
            
            
            24
            %







(12)
Income Taxes




The
provision for income taxes as of December 31, 2007 consists of the
following:




December
      31, 2007Current
      taxes
            
            $
            -Deferred
      tax benefit
            
            
            (1,569,887
            )Benefits
      of operating loss carryforwards
            
            
            1,223,222Texas
      Margin Tax
            
            
            40,638$
            (306,027
            )




The tax
provision differs from amounts that would be calculated by applying federal
statutory rates to income before income taxes primarily because:




- no tax
benefits have been recorded for nondeductible expenses totaling
$57,632;


- the
valuation allowance for deferred tax assets increased by $1,360,215;
and




The
following table sets forth a reconciliation of the statutory income tax for the
years ended December 31, 2007, 2006, and 2005:
 
 December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Net
      loss before taxes
              
              $
              (2,977,931
              )
              
              $
              (2,446,563
              )
              
              $
              (1,194,652
              )Income
      tax benefit computed at statutory rate
              
              $
              (1,012,497
              )
              
              $
              (831,831
              )
              
              $
              (406,182
              )Permanent
      differences – non deductible expenses
              
              
              19,595
              
              
              
              
              
              
              
              84,600Net
      effects of temporary differences
              
              
              (223,818
              )Effect
      of federal graduated rates
              
              
              (353,167
              )Increase
      in valuation allowance
              
              
              1,223,222
              
              
              
              831,831
              
              
              
              321,582Texas
      Margin Tax
              
              
              40,638$
              (306,027
              )
              
              $
              -
              
              
              $
              -
   Deferred
taxes are recognized for temporary differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences
relate primarily to depreciable assets (using accelerated depreciation methods
for income tax purposes).  The tax effects of temporary differences
and carryforwards that give rise to significant portions of deferred tax assets
and liabilities consist of the following:
 
 December
      31, 2007
              
              
              December
      31, 2006Deferred
      tax assets:Net
      operating loss carryforwards
              
              $
              2,103,040
              
              
              $
              742,825Valuation
      allowance
              
              
              (2,103,040
              )
              
              
              (742,825
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -Deferred
      tax liabilities:Fixed
      asset temporary difference
              
              $
              149,120
              
              
              $
              138,775Intangible
      asset temporary difference
              
              
              7,415
              
              
              
              364,425Net
      deferred tax liability
              
              $
              156,535
              
              
              $
              503,200
 
 
 The
Company has loss carryforwards totaling $6,185,412 available at December 31,
2007 that may be offset against future taxable income.  If not used,
the carryforwards will expire as follows:


Operating
      LossesAmount
            
            Expires$
            2,587,701
            
            2021$
            3,597,711
            
            2022





(13)
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:





Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Revenues:Hammonds
      Technical Services
            
            $
            5,789,098
            
            
            $
            3,180,163
            
            
            $
            2,583,887Hammonds
      Fuel Additives
            
            
            1,129,100
            
            
            
            1,222,506
            
            
            
            811,264Hammonds
      Water Treatment
            
            
            3,178,340
            
            
            
            2,064,724
            
            
            
            -$
            10,096,538
            
            
            $
            6,467,393
            
            
            $
            3,395,151Income
      (loss) from operations:Hammonds
      Technical Services
            
            $
            (1,723,637
            )
            
            $
            (2,286,217
            )
            
            $
            (1,076,259
            )Hammonds
      Fuel Additives
            
            
            149,099
            
            
            
            31,499
            
            
            
            (10,888
            )Hammonds
      Water Treatment
            
            
            135,324
            
            
            
            112,209
            
            
            
            -Corporate
            
            
            (667,821
            )
            
            
            (38,283
            )
            
            
            (19,125
            )Income
      (loss) from operations
            
            
            (2,107,035
            )
            
            
            (2,180,792
            )
            
            
            (1,106,272
            )Other
      income (expenses)
            
            
            (870,896
            )
            
            
            (265,771
            )
            
            
            (88,380
            )Net
      income (loss) before income tax
            
            $
            (2,977,931
            )
            
            $
            (2,446,563
            )
            
            $
            (1,194,652
            )Identifiable
      assets:Hammonds
      Technical Services
            
            $
            8,925,595
            
            
            $
            8,969,439
            
            
            $
            2,193,207Hammonds
      Fuel Additives
            
            
            2,025,761
            
            
            
            374,313
            
            
            
            3,138,302Hammonds
      Water Treatment
            
            
            772,179
            
            
            
            590,861
            
            
            
            -Corporate
            
            
            (908,297
            )
            
            
            449,784
            
            
            
            418,258$
            10,815,238
            
            
            $
            10,384,397
            
            
            $
            5,749,767







(14)
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,
            
            Amount2008
            
            $
            436,3802009
            
            
            436,3802010
            
            
            436,3802011
            
            
            436,3802012
            
            
            436,380Thereafter
            
            
            1,745,520$
            3,927,420







(15)
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, 2007 and 2006, the
Company owed the parent $594,640 and $1,931,056,
respectively.  Interest on the balance owed to the parent is payable
monthly at a rate of 6% per year.  During the third quarter of 2007,
the Company transferred $370,927 in notes receivable as a partial payment for
long-term debt due to its parent.  On October 15, 2007, the
Company issued 7,142,857 shares of restricted common stock at $0.14 per share to
its parent in connection with the parent’s conversion of a $1,000,000 promissory
note.  Interest expense associated with the amount due the parent was
$153,304 for the year ended December 31, 2007.
 
 During
2007, the Company issued 2,000,000 shares of restricted stock valued at $448,500
in bonuses to the officers, directors and key employees of the Company, and
500,000 shares of restricted stock to American International Industries, Inc.
valued at $105,000 as a management fee.




(16)
Subsequent Events








(17)
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 10 above, we have restated the financial statements as of
December 31, 2006. The Company filed an amended 10-KSB for the year ended December 31, 2006
on March 18, 2008.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
            )





(18)
QuarterlyFinancial Data (Unaudited)





Three Months EndedMarch 31
            
            
            June 30
            
            
            September 30
            
            
            December 312007:Revenues
            
            $
            1,619,399
            
            
            $
            2,417,776
            
            
            $
            3,083,286
            
            
            $
            2,976,077Operating
      income (loss)
            
            $
            (710,561
            )
            
            $
            (418,571
            )
            
            $
            (419,244
            )
            
            $
            (558,659
            )Net
      income (loss)
            
            $
            (845,867
            )
            
            $
            (593,463
            )
            
            $
            (787,081
            )
            
            $
            (445,493
            )Regular
      preferred dividends
            
            $
            (45,000
            )
            
            $
            105,425
            
            
            $
            (45,000
            )
            
            $
            (45,000
            )Deemed
      preferred dividends
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,981,162
            )
            
            $
            -Net
      income (loss) applicable to common shareholders
            
            $
            (890,867
            )
            
            $
            (488,038
            )
            
            $
            (2,813,243
            )
            
            $
            (490,493
            )Net
      income (loss) per basic common share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )
            
            $
            (0.01
            )Net
      income (loss) per diluted common share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )
            
            $
            (0.01
            )Basic
      weighted average common shares
            
            
            36,307,626
            
            
            
            40,093,765
            
            
            
            41,189,639
            
            
            
            48,583,661Diluted
      weighted average common shares
            
            
            36,307,626
            
            
            
            40,093,765
            
            
            
            41,189,639
            
            
            
            48,583,6612006:Revenues
            
            $
            1,325,169
            
            
            $
            1,835,659
            
            
            $
            1,527,863
            
            
            $
            1,778,702Operating
      income (loss)
            
            $
            (369,247
            )
            
            $
            (158,205
            )
            
            $
            (746,259
            )
            
            $
            (907,081
            )Net
      income (loss)
            
            $
            (447,974
            )
            
            $
            (184,892
            )
            
            $
            (925,489
            )
            
            $
            (888,208
            )Regular
      preferred dividends
            
            $
            -
            
            
            $
            -
            
            
            $
            (20,000
            )
            
            $
            (40,425
            )Deemed
      preferred dividends
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,290,898
            )
            
            $
            -Net
      income (loss) applicable to common shareholders
            
            $
            (447,974
            )
            
            $
            (184,892
            )
            
            $
            (2,236,387
            )
            
            $
            (928,633
            )Net
      income (loss) per basic common share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )Net
      income (loss) per diluted common share
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )Basic
      weighted average common shares
            
            
            20,135,000
            
            
            
            20,135,000
            
            
            
            30,743,696
            
            
            
            36,135,000Diluted
      weighted average common shares
            
            
            20,135,000
            
            
            
            20,135,000
            
            
            
            30,743,696
            
            
            
            36,135,000




Back to Table of Contents




ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE






Not
Applicable.






ITEM9T. CONTROLS AND PROCEDURES






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 CEO and CFO 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 CEO and CFO concluded that our disclosure controls and procedures were
ineffective as of December 31, 2005. The CEO and CFO 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 CEO and CFO 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 CEO and CFO 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 hired a full
time controller who has been directed to implement procedures to correct the
noted deficiencies; (ii) the Company hired a qualified consultant with
accounting and auditing experiences to perform an internal audit function; and
the Company’s parent hired a full time CFO to oversee financial and accounting
transactions to include the financial reporting and disclosure.




Subsequent
to December 31, 2006, 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 improve
internal disclosure controls and procedures: (i) financial statements and
account reconciliations are being prepared and reviewed by the CEO, CFO, and
Controller on a monthly vs. quarterly basis; (ii) the Company replaced the CFO
on June 1, 2007, with a Certified Public Accountant with experience in both
public and industry accounting; and (iii) the Company appointed a Certified
Public Accountant as a new director of the Company, who is also the chairman of
the audit committee.  This new director participates in the review of
the Company’s quarterly filings.






ITEM9B. OTHER INFORMATION




None.




Back to Table of Contents


PART
III






ITEM10. DIRECTORS AND EXECUTIVE OFFICERSAND CORPORATE
GOVERNANCE






At
present, we have three officers and five 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
            67
            Chairman
      and CEOCarl
      Hammonds
            63
            Director
      and PresidentSherry
      L. Couturier
            47
            Director,
      VP and CFOJohn
      W. Stump, III
            63
            DirectorCharles
      R. Zeller
            66
            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.




Carl
Hammonds founded the Hammonds Companies in 1982.  In April 2005, Mr.
Carl Hammonds entered into a five-year employment agreement with Hammonds
Technical Services to serve as Hammonds’ President.  In June 2007, Mr.
Hammonds was appointed as a director of the Company.




Sherry L.
Couturier has served as Chief Financial Officer of Hammonds Industries, Inc. and
American International Industries, Inc. since June 1, 2007, and has been with
the company since August 1, 2006.  Sherry graduated with a B.S. in
Accounting from the University of Alabama and has been a Certified Public
Accountant since 1986.  She has held positions in both public and
industry accounting.  Prior to joining the Company, Sherry worked for
El Paso Corporation for 14 years as a supervisor for various accounting
departments and as a training and development consultant.




John W.
Stump, III has served as a director of the Company since July
2007.  From October 2005 through September 2007, Mr. Stump served as
the controller for Lifechek, Inc., a large regional pharmacy
chain.  He served as Chief Financial Officer of the Company’s parent,
American International Industries, Inc., from August 1998 through October
2003.  Mr. Stump also served as Chief Executive Officer of Changes
International and as Chief Operating Officer and Chief Financial Officer of
Nutrition Resources, Inc.  Mr. Stump is a Certified Public Accountant
and has over twenty-five years experience in financial and accounting management
in manufacturing and distribution as well as service and retail companies,
and SEC compliance and investor relations for public reporting
companies.




Charles
R. Zeller has served as a director of the Company since August 2007. Mr. Zeller
is a developer of residential subdivisions including Cardiff Estates, 800 acres
subdivision in Houston, TX and estate of Gulf Crest in downtown Pearland, Texas.
He has extensive experience in real estate and finance and has been a real
estate investor and developer for over 35 years, including shopping
centers, office buildings, and apartment complexes and the financing of such
projects. Mr. Zeller is the President of RealAmerica Corporation.


Independent
Public Accountants
   Our
parent company’s Audit Committee has approved the appointment by the Company's
Board of Directors of GLO CPAs LLLP as independent public accountants for the
fiscal year ending December 31, 2007, and the appointment was ratified by the
parent company’s shareholders at the annual meeting held on June 21,
2007.
   Audit
Committee Pre-Approval Policy
   Pursuant
to the terms of the parent company’s Audit Committee Charter, the Audit
Committee is responsible for the appointment, compensation and oversight of the
work performed by the Company’s independent auditor. The Audit Committee, or a
designated member of the Audit Committee, must pre-approve all audit (including
audit-related) and non-audit services performed by the independent auditor in
order to assure that the provisions of such services does not impair the
auditor’s independence. The Audit Committee has delegated interim pre-approval
authority to the Chairman of the Audit Committee. Any interim pre-approval of
permitted non-audit services is required to be reported to the Audit Committee
at its next scheduled meeting. The Audit Committee does not delegate its
responsibilities to pre-approve services performed by the independent auditor to
management.
  The term
of any pre-approval is 12 months from the date of pre-approval, unless the Audit
Committee specifically provides for a different period. With respect to each
proposed pre-approved service, the independent auditor must provide detailed
back-up documentation to the Audit Committee regarding the specific service to
be provided pursuant to a given pre-approval of the Audit Committee. Requests or
applications to provide services that require separate approval by the Audit
Committee will be submitted to the Audit Committee by both the independent
auditor and the Company’s Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC’s rules on auditor independence. All of the services described in
Item 14 Principal Accountant Fees and Services were approved by the parent
company's Audit Committee.




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).






Back to Table of Contents




ITEM11. EXECUTIVE COMPENSATION






The
following tables contain compensation data for the Chief Executive Officer and
other named executive officers of the Company for the fiscal years ended
December 31, 2007:




Summary
      Compensation TableLong
      TermAnnual
      Compensation
            Compensation
      AwardsOther
            
            SecuritiesAnnual
            Stock
            Underlying
            TotalSalary
            Bonus
            Compensation
            Award(s)
            Options
            CompensationName and Principal
      Position
            
            Year
            ($)
            ($)
            ($)
            ($)
      (1)
            ($)
            ($)Daniel
      Dror, Chairman and CEO
            
            2007
            4,000
            -
            -
            110,100
            
            114,100Sherry
      Couturier, Director, VP and CFO
            
            2007
            -
            -
            -
            77,000
            
            77,000Carl
      Hammonds, Director and President
            
            2007
            97,184
            -
            9,310
      (2)
            210,000
            
            316,494




(1)
            See
      "Stock-Based Compensation" in note 1 to the financial statements for
      valuation assumptions.(2)
            Represents
      total payments for an automobile owned by the Company used by Mr.
      Hammonds.




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 that 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.




On
September 1, 2007, we entered into a service agreement with Sherry Couturier,
CFO, pursuant
to which the Company shall pay Ms. Couturier compensation of $4,000 per month by
the issuance of a number of shares of the Company’s common stock registered on
Form S-8 in an amount equivalent to $4,000 per month.




On
November 1, 2007, the Company entered into a five-year employment agreement with
Daniel Dror, Chairman and CEO, pursuant to which the Executive will be paid
$2,000 in base compensation per month.  At the election of the
Executive, his compensation may be payable in shares of the Company’s common
stock, registered on Form S-8 under the Securities Act of 1933 or such other
form as may be appropriate, or at the election of the Executive pursuant to an
exemption from registration under the Act.  In addition to the
Executive’s base compensation, Executive will be entitled to a bonus as
determined by the Company’s board of directors from time to time and issued
common stock of 10,000 restricted shares per month commencing on December 1,
2007. In the event of a change in control of the Company, resulting in Executive
ceasing to serve as the Company’s Chief Executive Officer and Chairman,
Executive shall be entitled to receive and the Company shall pay to Executive
within ninety (90) days of the change in control a sum equal to five (5) years
of the base salary then payable to Executive under this Employment
Agreement.


Grants
of Plan-Based Awards
    Name
                Grant
      date
                
                Stock
      awards: Number of shares of stock or units
                  (#)
      (1)
                
                
                Warrant
      awards: Number of securities underlying options (#)
                
                
                Exercise
      or base price of warrant awards
                  ($/Sh)
                
                
                Grant date fair value of stock and
      warrant awardsDaniel Dror,
      Chairman and CEO
                August 24,
      2007
                
                
                500,000
                
                
                
                -
                
                
                
                -
                
                
                $
                105,000December 1,
      2007
                
                
                10,000
                
                
                
                -
                
                
                
                -
                
                
                $
                5,100Sherry Couturier,
      Director, VP and CFO
                June 1,
      2007
                
                
                100,000
                
                
                
                -
                
                
                
                -
                
                
                $
                40,000August 24,
      2007
                
                
                100,000
                
                
                
                -
                
                
                
                -
                
                
                $
                21,000December 21,
      2007 (1)
                
                
                29,091
                
                
                
                -
                
                
                
                -
                
                
                $
                16,000Carl Hammonds,
      Director and President
                August 24,
      2007
                
                
                1,000,000
                
                
                
                -
                
                
                
                -
                
                
                $
                210,000
 (1)
              These
      shares were issued to Ms. Couturier pursuant to her service agreement with
      HMDI, pursuant to which she is to receive $4,000 per month in S-8 shares
      of HMDI, beginning September 1, 2007.   The Form S-8
      Registration Statement for these shares was dated December 20,
      2007.  The number of shares to be issued was based on $0.55 per
      share, the closing market price on December 20,
  2007.
   Director
Summary Compensation Table
   The
directors serve without cash compensation, but may be granted stock as bonus
compensation from time to time. The table below summarizes the compensation paid
by the Company to non-employee Directors for the fiscal year ended
December 31, 2007.
  Director
      Summary Compensation Table(a)
              
              (b)
              
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)Name
              
              Fees Earned or
                Paid
      in Cash ($)
              
              
              Stock
                Awards
      ($)
              
              
              Option
                Awards
      ($)
              
              
              Change
      in Pension Value and Deferred
                Compensation
      Earnings ($)
              
              
              All
      Other
                Compensation
      ($)
              
              
              Total
      ($)John
      W. Stump, III
              
              $
              9,000
              
              
              $
              20,000
              
              
              
              -
              
              
              
              0
              
              
              
              -
              
              
              $
              29,000
 (1)
Daniel Dror, Chairman and CEO, Sherry Couturier, VP and CFO,
and Carl Hammonds, President, are not included in this table. The
compensation received by these officers and directors, as employees of the
Company, are shown in the Executive Summary Compensation Table.
 (2) See
"Stock-Based Compensation" in note 1 to the financial statements for valuation
assumptions.


Back to Table of Contents




ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS






The
following table sets forth information regarding the beneficial ownership of our
common stock as of December 31, 2007. 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.
            
            23,954,137
            48.20%601
      Cien Street, Suite 235Kemah,
      TX 77565Carl
      Hammonds, Director and President
            
            17,000,000
            34.20%910
      Rankin RoadHouston,
      TX 77073Vision
      Opportunity Management Fund, Ltd.
            
            3,970,400
            8.00%20
      West 55th
      Street, 5th
      FloorNew
      York, NY 10019Daniel
      Dror, Chairman and CEO
            
            500,000
            1.00%601
      Cien Street, 235Kemah,
      TX 77565Sherry
      Couturier, Director, VP and CFO
            
            205,000
            0.40%601
      Cien Street, Suite 235Kemah,
      TX 77565John
      W. Stump III, Director
            
            50,000
            0.10%601
      Cien Street, 235Kemah,
      TX 77565Charles
      R. Zeller, Director
            
            0
            0.00%601
      Cien Street, 235Kemah,
      TX 77565Directors
      and Officers (4 persons) (2)
            
            41,709,137
            83.90%




(1)
Applicable percentage ownership is based on 49,748,257 shares of common stock
outstanding as of December 31, 2007. 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, 2007 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 our parent, American International Industries,
Inc.






ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




During
2006 and 2007, Hammonds borrowed $87,468 and $34,511, respectively, from
its parent, American International Industries, Inc., which funds were used by
Hammonds for working capital. During the third quarter of 2007, the Company
transferred $370,927 in notes receivable as a partial payment for long-term debt
due to its parent. On October 15, 2007, the Company issued 7,142,857 shares
of restricted common stock at $0.14 per share to its parent for the conversion
of a $1,000,000 promissory note. At December 31, 2007, the Company owed the
parent $594,640, compared to $1,931,056 at December 31, 2006.





During
2007, the Company issued 2,000,000 shares of restricted stock valued at $448,500
in bonuses to the officers, directors and key employees of the Company, and
500,000 shares of restricted stock to American International Industries, Inc.
valued at $105,000 as a management fee.




Back to Table of Contents


ITEM14. PRINCIPAL ACCOUNTING FEES AND SERVICES






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, LLLP, which
firm has issued its report on our consolidated financial statements for the
years ended December 31, 2007 and 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
GLO CPAs, LLLP and Thomas Leger & Co., L.L.P. for the audit of the
Registrant's annual financial statements for the years ended December 31, 2007,
2006 and 2005, and fees billed for other services rendered by GLO CPAs, LLLP and
Thomas Leger & Co., L.L.P. during those years. All of
the services described below were approved by the Audit Committee of our parent
company.




Year EndedDecember
      31,  2007
            
            
            December
      31,  2006
            
            
            December
      31, 2005Audit
      fees (1)
            
            $
            35,071
            
            
            $
            13,007
            
            
            $
            100,000Audit-related
      fees (2)
            
            
            32,196
            
            
            
            4,125
            
            
            
            --Tax
      fees (3)
            
            
            15,055
            
            
            
            --
            
            
            
            --All
      other fees
            
            
            448
            
            
            
            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.





ITEM15. EXHIBITS AND REPORTS ON FORM 8-K


(a) The
following documents are filed as exhibits to this report on Form 10-K 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 and 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 and CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      the Sarbanes-Oxley Act of 2002, filed
herewith.




(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 November 7, 2007 with disclosure
under Item 3.02, "Unregistered Sales of Equity Securities."




Back to Table of Contents




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


CHAIRMAN AND CEO


Dated: March 18, 2008






/s/ SHERRY L.
COUTURIER




Dated: March 18,
2008