UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


___________________




FORM 10-Q


_______________________




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




For the
quarterly period ended June 30, 2008




 ̈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 235, Kemah, TX
            77565-3077(Address
      of Principal Executive Offices)
            (ZIP
      Code)




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






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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company.  See the definitions of "large accelerated filer, "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.




Large
      accelerated filer  ̈
            Accelerated filer ̈Non-accelerated
      filer  ̈(Do not check if a
      smaller reporting company)
            Smaller
      reporting company x




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


At August
14, 2008 the Registrant had 49,962,745 shares of common stock
outstanding.





TABLE OF CONTENTS
  Item
                
                Description
                
                PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
                
                FINANCIAL STATEMENTS
                
                3ITEM
      2.
                
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
      AND RESULTS OF OPERATION
                
                15ITEM
      3.
                
                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                
                18ITEM
      4T.
                
                CONTROLS AND PROCEDURES
                
                18PART
      II - OTHER INFORMATIONITEM
      1.
                
                LEGAL PROCEEDINGS
                
                19ITEM
      1A.
                
                RISK FACTORS
                
                19ITEM
      2.
                
                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                
                19ITEM
      3.
                
                DEFAULTS UPON SENIOR
    SECURITIES
                
                19ITEM
      4.
                
                SUBMISSION OF MATERS TO A VOTE OF SECURITY
      HOLDERS
                
                19ITEM
      5.
                
                OTHER INFORMATION
                
                19ITEM
      6.
                
                EXHIBITS AND REPORTS ON FORM 8-K
                
                19
       2
 PART
I - FINANCIAL INFORMATION
   ITEM 1. FINANCIAL STATEMENTS
  Financial
Statements
  Consolidated
      Financial StatementsUnaudited
      Consolidated Balance Sheets - June 30, 2008 and December 31,
      2007
              4Unaudited Consolidated
      Statements of Operations - Three and six months ended June 30, 2008 and
      2007
              5Unaudited Consolidated
      Statements of Cash Flows - Six months ended June 30, 2008 and
      2007
              6Notes to Unaudited
      Consolidated Financial Statements
              7
 Back to Table of Contents
 3


HAMMONDS INDUSTRIES, INC.Consolidated
      Balance SheetsJune
      30, 2008 and December 31, 2007(Unaudited)  June
      30, 2008
                
                
                December
      31, 2007AssetsCurrent
      assets:Cash
                
                $
                104,821
                
                
                $
                1,597,361Trading securities
                
                
                -
                
                
                
                28,314Accounts
      receivable, less allowance for doubtful accounts of$102,838
      and $104,169, respectively
                
                
                1,386,873
                
                
                
                791,374Inventories, net
                
                
                1,889,372
                
                
                
                1,656,801Prepaid expenses and other assets
                
                
                100,464
                
                
                
                89,236Total current assets
                
                
                3,481,530
                
                
                
                4,163,086Property
      and equipment, net
                
                
                1,382,851
                
                
                
                1,132,472Intangible
      assets, net
                
                
                5,153,942
                
                
                
                5,457,365Other
      assets
                
                
                57,330
                
                
                
                62,315Total assets
                
                $
                10,075,653
                
                
                $
                10,815,238Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable and accrued expenses
                
                $
                1,966,440
                
                
                $
                1,326,808Short-term note payable
                
                
                89,999
                
                
                
                89,999Current
      installments of long-term capital lease obligations
                
                
                64,842
                
                
                
                29,967Current installments of long-term debt
                
                
                59,053
                
                
                
                56,058Total current liabilities
                
                
                2,180,334
                
                
                
                1,502,832Long-term
      capital lease obligations, less current installments
                
                
                260,688
                
                
                
                123,100Long-term
      debt, less current installments
                
                
                2,631,896
                
                
                
                2,665,585Due
      to American International Industries, Inc. - related party
                
                
                592,063
                
                
                
                594,640Deferred
      tax liability
                
                
                156,535
                
                
                
                156,535Total liabilities
                
                
                5,821,516
                
                
                
                5,042,692Stockholders'
      equity:Preferred stock, $0.001par value, authorized 5,000,000
    shares:3,769,626 issued and outstanding
                
                
                377
                
                
                
                377Additional paid-in capital - preferred stock
                
                
                4,811,573
                
                
                
                4,811,573Additional paid-in capital - beneficial conversion feature
                
                
                3,272,060
                
                
                
                3,272,060Common stock, $0.0001 par value, authorized 195,000,000
      shares:49,904,695 and 49,748,257 shares issued and outstanding,
      respectively
                
                
                4,991
                
                
                
                4,975Additional paid-in capital - common stock
                
                
                7,543,439
                
                
                
                7,480,255Accumulated deficit
                
                
                (11,378,303
                )
                
                
                (9,796,694
                )Total stockholders' equity
                
                
                4,254,137
                
                
                
                5,772,546Total liabilities and stockholders' equity
                
                $
                10,075,653
                
                
                $
                10,815,238The
      accompanying notes are an integral part of these consolidated financial
      statements.
 Back to Table of Contents
 4


HAMMONDS
      INDUSTRIES, INC.Consolidated Statements of
      OperationsFor
      three and six months ended June 30, 2008 and 2007(Unaudited)





Three
    Months
            
            
            Three
    Months
            
            
            Six
    Months
            
            
            Six
    Monthsended
            
            
            ended
            
            
            ended
            
            
            endedJune 30,
      2008
            
            
            June 30,
      2007
            
            
            June 30,
      2008
            
            
            June 30,
      2007Revenues
            
            $
            2,420,771
            
            
            $
            2,417,776
            
            
            $
            4,625,928
            
            
            $
            4,037,175Costs
      and expenses:Cost of sales
            
            
            1,790,454
            
            
            
            1,867,448
            
            
            
            3,555,106
            
            
            
            3,332,690Selling, general and administrative
            
            
            1,258,272
            
            
            
            968,899
            
            
            
            2,385,372
            
            
            
            1,833,617Total operating expenses
            
            
            3,048,726
            
            
            
            2,836,347
            
            
            
            5,940,478
            
            
            
            5,166,307Operating
      loss
            
            
            (627,955
            )
            
            
            (418,571
            )
            
            
            (1,314,550
            )
            
            
            (1,129,132
            )Other
      income (expenses):Interest income
            
            
            61
            
            
            
            6,175
            
            
            
            4,681
            
            
            
            12,450Interest expense
            
            
            (79,946
            )
            
            
            (147,377
            )
            
            
            (159,469
            )
            
            
            (248,364
            )Realized
      loss on trading securities
            
            
            -
            
            
            
            -
            
            
            
            (100,000
            )Unrealized gain (loss) on trading securities
            
            
            -
            
            
            
            (33,730
            )
            
            
            71,686
            
            
            
            (74,510
            )Other income
            
            
            -
            
            
            
            40
            
            
            
            129
            
            
            
            226Total other expenses
            
            
            (79,885
            )
            
            
            (174,892
            )
            
            
            (182,973
            )
            
            
            (310,198
            )Net
      loss before income tax
            
            
            (707,840
            )
            
            
            (593,463
            )
            
            
            (1,497,523
            )
            
            
            (1,439,330
            )Income tax benefit
            
            
            (29,790
            )
            
            
            -
            
            
            
            (20,914
            )
            
            
            -Net
      loss
            
            
            (678,050
            )
            
            
            (593,463
            )
            
            
            (1,476,609
            )
            
            
            (1,439,330
            )Preferred
      dividendsRegular dividend
            
            
            (60,000
            )
            
            
            (45,000
            )
            
            
            (105,000
            )
            
            
            (90,000
            )Forgiveness of dividends
            
            
            -
            
            
            
            150,425
            
            
            
            -
            
            
            
            150,425Net loss applicable to common shareholders
            
            $
            (738,050
            )
            
            $
            (488,038
            )
            
            $
            (1,581,609
            )
            
            $
            (1,378,905
            )Net
      loss per common share - basic and diluted
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.03
            )
            
            $
            (0.04
            )Weighted
      average common shares - basic and diluted
            
            
            49,855,565
            
            
            
            40,093,765
            
            
            
            49,820,058
            
            
            
            38,234,934The
      accompanying notes are an integral part of these consolidated financial
      statements.


Back to Table of Contents
 5


HAMMONDS
      INDUSTRIES, INC.Consolidated Statements of Cash
      FlowsSix
      months ended June 30, 2008 and 2007(Unaudited)





Six
    Months
            
            
            Six
    MonthsEnded
            
            
            EndedJune 30,
      2008
            
            
            June 30,
      2007Cash
      flows from operating activities:Net loss
            
            $
            (1,476,609
            )
            
            $
            (1,439,330
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization of property and equipment
            
            
            130,879
            
            
            
            79,203Amortization of intangibles
            
            
            323,357
            
            
            
            333,250Realized loss on trading securities
            
            
            100,000
            
            
            
            -Unrealized (gain) loss on trading securities
            
            
            (71,686
            )
            
            
            74,510Stock based compensation
            
            
            63,200
            
            
            
            40,000Change in operating assets and liabilities:Accounts receivable
            
            
            (595,499
            )
            
            
            (11,057
            )Inventories
            
            
            (232,571
            )
            
            
            (130,958
            )Prepaid expenses and other current assets
            
            
            (11,228
            )
            
            
            33,575Other assets
            
            
            4,985
            
            
            
            (28,295
            )Accounts payable and accrued expenses
            
            
            534,632
            
            
            
            192,661Net cash used in operating activities
            
            
            (1,230,540
            )
            
            
            (856,441
            )Cash
      flows from investing activities:Costs of securing patents and trademarks
            
            
            (19,934
            )
            
            
            (4,840
            )Purchase of property and equipment
            
            
            (177,742
            )
            
            
            (190,984
            )Purchase of option to buy American International Industries, Inc.
      stock
            
            
            -
            
            
            
            (100,000
            )Proceeds from notes receivable
            
            
            -
            
            
            
            14,453Change in amount due to American International Industries,
      Inc.
            
            
            (2,576
            )
            
            
            168,771Net cash used in investing activities
            
            
            (200,252
            )
            
            
            (112,600
            )Cash
      flows from financing activities:Proceeds from issuance of common stock
            
            
            -
            
            
            
            694,672Proceeds from long-term borrowing
            
            
            -
            
            
            
            284,551Principal
      payments under capital lease obligations
            
            
            (31,054
            )
            
            
            -Principal payments of short-term borrowings
            
            
            -
            
            
            
            (181,096
            )Principal payments of long-term borrowings
            
            
            (30,694
            )
            
            
            (19,708
            )Net cash (used in) provided by financing activities
            
            
            (61,748
            )
            
            
            778,419Net decrease in cash
            
            
            (1,492,540
            )
            
            
            (190,622
            )Cash
      and cash equivalents at beginning of period
            
            
            1,597,361
            
            
            
            396,505Cash
      and cash equivalents at end of period
            
            $
            104,821
            
            
            $
            205,883Supplemental cash
      flow information:Interest paid
            
            $
            106,914
            
            
            $
            248,364Income taxes paid
            
            $
            -
            
            
            $
            -Non-cash transactions:Acquisition
      of fixed assets under capital lease obligations
            
            $
            203,515
            
            
            $
            -The
      accompanying notes are an integral part of these consolidated financial
      statements.


Back to Table of Contents
 6


HAMMONDS INDUSTRIES,
INC.


Notes to
Unaudited Consolidated Financial Statements


June 30,
2008






Note 1 - Summary of Significant
Accounting Policies




The
accompanying unaudited interim financial statements of Hammonds Industries, Inc.
(“Hammonds”), f/k/a International American Technologies, Inc., have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
and should be read in conjunction with the audited financial statements and
notes thereto contained in Hammonds’ latest Annual Report filed with the SEC on
Form 10-K. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements that would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year as
reported in the Form 10-K have been omitted.




Organization, Ownership and
Business




Hammonds
is a 48% owned subsidiary of American International Industries,
Inc.
 In 2005,
Hammonds, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. Hammonds Technical Services, Inc. and Hammonds
Fuel Additives, Inc. were separate privately-owned Texas companies. In
connection with the 2005 acquisition by Hammonds, 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 Hammonds. On
August 1, 2006, Hammonds 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 Hammonds' common stock at the date of the transaction. As a result
of this transaction, Hammonds owns 100% of each of the Hammonds
subsidiaries.
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of Hammonds 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 Hammonds is incurring losses
and the minority interest has no recorded common stock equity value, the parent
recognizes 100% of Hammonds’ losses. All significant intercompany transactions
and balances have been eliminated in consolidation.
 
 Revenue
Recognition
 
 Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured.  The Hammonds Companies
have purchase orders for all sales, of which many of the items are requested to
be container shipped and shipped directly to the end users.  All sales are
recorded when the inventory items are shipped.  Taxes assessed by a
governmental authority that are incurred as a result of a revenue transaction
are not included in revenues.  Hammonds has no significant sales
returns or allowances.
 
 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.
 Back to Table of Contents
 7
 Fair
Value of Financial Instruments
 
 Hammonds
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, Hammonds estimates of fair value are not necessarily
indicative of the amounts that Hammonds 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 Hammonds on its notes payable approximate market rates.
Hammonds believes that the fair value of its financial instruments comprising
accounts receivable, notes receivable, accounts payable, and notes payable
approximate their carrying amounts.
  Note
2 - Trading Securities
  In
February 2007, Hammonds 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. Hammonds
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 was revalued to $28,314, and an unrealized loss of $71,686
was recorded in other income (expense) for the year ended December 31,
2007.  This option expired in February 2008, resulting in a realized loss
of $100,000 and a reversal of the previously recorded unrealized loss of
$71,686.
  Note
3 - Inventory
  Inventory
at June 30, 2008 and December 31, 2007 consisted of the following:
  June
      30, 2008
              
              
              December
      31, 2007Finished
      goods
              
              $
              358,740
              
              
              $
              231,870Work
      in process
              
              
              178,602
              
              
              
              36,045Parts
      and materials
              
              
              1,383,187
              
              
              
              1,420,0431,920,529
              
              
              
              1,687,958Less:
      Obsolescence reserve
              
              
              (31,157
              )
              
              
              (31,157
              )$
              1,889,372
              
              
              $
              1,656,801
   Note
4 - Property and Equipment
  A summary
of property and equipment and related accumulated depreciation and amortization
are as follows:
  June
      30, 2008
              
              
              December
      31, 2007Machinery
      and equipment
              
              $
              1,797,780
              
              
              $
              1,416,522Leasehold
      improvements
              
              
              96,796
              
              
              
              96,796Total
      property and equipment
              
              
              1,894,576
              
              
              
              1,513,318Less:
      Accumulated depreciation and amortization
              
              
              (511,725
              )
              
              
              (380,846
              )Net
      property and equipment
              
              $
              1,382,851
              
              
              $
              1,132,472
 
 
 Depreciation
expense for the three and six months ended June 30, 2008 and 2007 was
$69,061, $41,633, $130,879, and $79,203, respectively.
  Back to Table of Contents
 8
 During
the year ended December 31, 2007 and six months ended June 30, 2008, Hammonds
entered into capital lease agreements for machinery and equipment included in
the June 30, 2008 and December 31, 2007 balances as follows:
 June
      30, 2008
                  
                  
                  December
      31, 2007Machinery
      and equipment
                  
                  $
                  372,722
                  
                  
                  $
                  163,174Less
      accumulated depreciation and amortization
                  
                  
                  (14,571
                  )
                  
                  
                  -Net
      property and equipment
                  
                  $
                  358,151
                  
                  
                  $
                  163,174
 Principal
repayment provisions of long-term capital leases are as follows at June 30,
2008:
  2008
                
                $
                29,7612009
                
                
                71,2982010
                
                
                76,7452011
                
                
                75,0432012
                
                
                67,2802013
                
                
                5,403Total
                
                $
                325,530
 Note
5 - Intangible Assets
  Intangible
assets at June 30, 2008 consisted of the following:
 Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  
                  Intangibles,
      net
                  
                  Average
      Weighted LivesPatents
                  
                  $
                  4,564,433
                  
                  
                  $
                  1,029,204
                  
                  
                  $
                  3,535,229
                  
                  12
      yearsTrademarks
                  
                  
                  1,149,199
                  
                  
                  
                  278,413
                  
                  
                  
                  870,786
                  
                  10
      yearsSole
      Source Contract
                  
                  
                  1,144,039
                  
                  
                  
                  396,112
                  
                  
                  
                  747,927
                  
                  7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                  
                  $
                  6,857,671
                  
                  
                  $
                  1,703,729
                  
                  
                  $
                  5,153,942
                  
                  11
      years
 Intangible
assets at December 31, 2007 consisted of the following:
  Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                
                
                Intangibles,
      net
                
                Average
      Weighted LivesPatents
                
                $
                4,544,498
                
                
                $
                845,022
                
                
                $
                3,699,476
                
                12
      yearsTrademarks
                
                
                1,149,199
                
                
                
                220,953
                
                
                
                928,246
                
                10
      yearsSole
      Source Contract
                
                
                1,144,039
                
                
                
                314,396
                
                
                
                829,643
                
                7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                
                $
                6,837,736
                
                
                $
                1,380,371
                
                
                $
                5,457,365
                
                11
      years
  Amortization
expense for the three and six months ended June 30, 2008 and 2007 was
$161,800, $166,645, $323,357, and $333,250 respectively.
  Note
6 - Short-term Notes Payable
  June
      30, 2008
              
              
              December
      31, 2007Note
      payable with interest at 10.5%, interest payments due monthly, principal
      due on demand
              
              $
              89,999
              
              
              $
              89,999
  At June
30, 2008 and December 31, 2007, the average annual interest rate of our
short-term borrowing was approximately 10.5%.
 
 Back to Table of Contents
 9
 Note
7 - Long-term Debt
  June
      30, 2008
              
              
              December
      31, 2007Note
      payable to a bank, interest due quarterly at prime plus 1%, principal
      balance due January 1, 2010, secured by assets of Hammonds' 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 payment due on January 1, 2010, secured by
      assets of Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              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 Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              204,932
              
              
              
              220,338Note
      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 Hammonds' subsidiary, Hammonds Technical Services, Inc.
              
              
              33,086
              
              
              
              36,727Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,120 through April 3, 2011, secured by assets of Hammonds'
      subsidiary, Hammonds Technical Services, Inc.
              
              
              60,742
              
              
              
              72,3892,690,949
              
              
              
              2,721,643Less
      current portion
              
              
              (59,053
              )
              
              
              (56,058
              )$
              2,631,896
              
              
              $
              2,665,585
 
 Principal
repayment provisions of long-term debt are as follows at June 30,
2008:
  2008
              
              $
              28,8092009
              
              
              61,8592010
              
              
              2,460,0492011
              
              
              54,1832012
              
              
              86,049Total
              
              $
              2,690,949
 
 Note
8 - Preferred Stock
  In August
and September 2006, Hammonds sold to Vision Opportunity Fund Limited (“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, Hammonds
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, Hammonds 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) Hammonds 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 Hammonds' common stock.
 Back to Table of Contents
 10
 On
September 20, 2007, Hammonds and VOMF agreed to amend 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
Hammonds' 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 Hammonds 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 Hammonds on August 17,
2007.  As a result of this agreement, there are no warrants outstanding
related to the Series A, B and C Convertible Preferred Stock.
 
 Hammonds
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 to be realized
is through the issuance of shares. Hammonds has sufficient authorized and
unissued shares available to settle the contracts after considering all other
commitments that may require the issuance of stock.
  We valued
the warrants using the Black-Scholes model and allocated t he
proceeds from the preferred share issuances based on the relative fair values of
the securities issued.
  We
determined that a beneficial conversion feature exists for the Series A, B and C
Convertible Preferred Stock issuances. 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
              
              $
              387,499Preferred
      A – August 23, 2006
              
              
              176,643Preferred
      B – September 30, 2006
              
              
              726,756Preferred C
      – September 20, 2007
              
              
              1,981,162Total
      deemed dividend
              
              $
              3,272,060
  On July
25, 2007, Hammonds 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. Additionally, VOMF agreed that future
accrued dividends may be paid, at Hammonds' option, in cash or in restricted
shares of Hammonds' 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 Hammonds.
  Note
9 - Concentration of Credit Risk
  Financial
instruments that potentially subject Hammonds to credit risk are primarily
accounts receivable – trade.  Hammonds grants credit to customers
throughout the United States. Generally, Hammonds does not require collateral or
other security to support customer receivables. During the six months ended June
30, 2008, Hammonds Water Treatment Systems, Inc. and Hammonds Technical
Services, Inc. each had one customer that represented 29% and 10%,
respectively, of total Hammonds' sales.
 Back to Table of Contents
 11
 Note
10 - Income Taxes
  The
provision for income taxes consists of the following:


Three months
      ended
            
            
            Six months
      endedJune 30,
      2008
            
            
            June 30,
      2007
            
            
            June 30,
      2008
            
            
            June 30,
      2007Current
      taxes
            
            $
            -
            
            
            $
            (201,777
            )
            
            $
            
            
            
            $
            (489,372
            )Deferred
      tax benefit
            
            
            (1,008,972
            )
            
            
            
            
            
            
            (1,184,265
            )Benefits
      of operating loss carryforwards
            
            $
            1,008,972
            
            
            $
            201,777
            
            
            $
            1,184,265
            
            
            $
            489,372Current Federal Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Difference
      between actual and estimated 2007 Texas Margin Tax
            
            
            (27,853
            )
            
            
            -
            
            
            
            (27,853
            )
            
            
            -Texas
      Margin Tax estimated for 2008
            
            
            (1,937
            )
            
            
            -
            
            
            
            6,939
            
            
            
            -Tax
      benefit
            
            $
            (29,790
            )
            
            $
            -
            
            
            $
            (20,914
            )
            
            $
            -


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


Three
      months ended
                
                
                Six
      months endedJune
      30, 2008
                
                
                June
      30, 2007
                
                
                June
      30, 2008
                
                
                June
      30, 2007Net
      loss before taxes
                
                $
                (707,840
                )
                
                $
                (593,463
                )
                
                $
                (1,497,523
                )
                
                $
                (1,439,330
                )Income
      tax benefit computed at statutory rate
                
                $
                (220,641
                )
                
                $
                201,777
                
                
                $
                (489,133
                )
                
                $
                489,372Permanent
      differences - non deductible expenses
                
                
                9,694
                
                
                
                -
                
                
                
                12,883
                
                
                
                -Net
      effects of temporary differences
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Effect
      of federal graduated rates
                
                
                (798,025
                )
                
                
                -
                
                
                
                (708,015
                )
                
                
                -Increase
      (decrease) in valuation allowance
                
                
                1,008,972
                
                
                
                (201,777
                )
                
                
                1,184,265
                
                
                
                (489,372
                )Difference
      between actual and estimated 2007 Texas Margin Tax
                
                
                (27,853
                )
                
                
                -
                
                
                
                (27,853
                )
                
                
                -Texas
      Margin Tax estimated for 2008
                
                
                (1,937
                )
                
                
                -
                
                
                
                6,939
                
                
                
                -Income
      tax benefit
                
                $
                (29,790
                )
                
                $
                -
                
                
                $
                (20,914
                )
                
                $
                -
  Hammonds
has loss carryforwards totaling $10,930,451 available at June 30, 2008 that
may be offset against future taxable income.  If not used, the
carryforwards will expire as follows:


Operating
      LossesAmount
                
                Expires$
                2,587,701
                
                2021$
                4,859,618
                
                2022$
                3,483,132
                
                2023
  Back to Table of Contents
 12
 Note
11 - Segment Information
  Hammonds
has three reportable segments: Hammonds Technical Services, Hammonds Fuel
Additives, and Hammonds Water Treatment Systems. 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 Hammonds' 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.  Hammonds evaluates
performances based on profit or loss from operations before income taxes, not
including nonrecurring gains and losses and foreign exchange gains and
losses.
  Hammonds'
reportable segments are strategic business units that offer different technology
and marketing strategies.
  Hammonds'
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:


Three months ended June
      30,
            
            
            Six months ended June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Hammonds
      Technical Services
            
            $
            1,291,104
            
            
            $
            1,325,929
            
            
            $
            2,442,976
            
            
            $
            1,976,412Hammonds
      Fuel Additives
            
            
            235,806
            
            
            
            234,414
            
            
            
            508,403
            
            
            
            543,422Hammonds
      Water Treatment
            
            
            893,861
            
            
            
            857,433
            
            
            
            1,674,549
            
            
            
            1,517,341Total revenue
            
            $
            2,420,771
            
            
            $
            2,417,776
            
            
            $
            4,625,928
            
            
            $
            4,037,175Income
      (loss) from operations:Hammonds
      Technical Services
            
            $
            (570,060
            )
            
            $
            (350,128
            )
            
            $
            (1,246,388
            )
            
            $
            (1,111,529
            )Hammonds
      Fuel Additives
            
            
            (31,439
            )
            
            
            23,786
            
            
            
            (16,962
            )
            
            
            63,948Hammonds
      Water Treatment
            
            
            28,363
            
            
            
            29,123
            
            
            
            57,629
            
            
            
            49,421Corporate
            
            
            (54,819
            )
            
            
            (121,352
            )
            
            
            (108,829
            )
            
            
            (130,972
            )Total
      loss from operations
            
            $
            (627,955
            )
            
            $
            (418,571
            )
            
            $
            (1,314,550
            )
            
            $
            (1,129,132
            )Other
      income (expense)
            
            
            (79,885
            )
            
            
            (174,892
            )
            
            
            (182,973
            )
            
            
            (310,198
            )Total
      net loss before income taxes
            
            
            (707,840
            )
            
            
            (593,463
            )
            
            
            (1,497,523
            )
            
            
            (1,439,330
            )June
      30, 2008
            
            
            
            December
      31, 2007Identifiable
      assets:Hammonds
      Technical Services
            
            
            
            
            
            
            
            
            
            $
            9,078,951
            
            
            $
            8,925,595Hammonds
      Fuel Additives
            
            
            
            
            
            
            
            
            
            
            1,993,412
            
            
            
            2,025,761Hammonds
      Water Treatment
            
            
            
            
            
            
            
            
            
            
            915,450
            
            
            
            772,179Corporate
            
            
            
            
            
            
            
            
            
            
            (1,912,160
            )
            
            
            (908,297
            )Total identifiable assets
            
            
            
            
            
            
            
            
            
            $
            10,075,653
            
            
            $
            10,815,238




Back to Table of Contents
 13


Note
12 - Earnings Per Share


Basic
earnings per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share, in addition to the
weighted average determined for basic loss per share, include common stock
equivalents, which would arise from the conversion of the preferred stock to
common shares.
  Three months ended June
      30,
                
                
                Six months ended June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Basic loss
      per share:Net
      loss
                
                $
                (678,050
                )
                
                $
                (593,463
                )
                
                $
                (1,476,609
                )
                
                $
                (1,439,330
                )Weighted
      average common shares outstanding
                
                
                49,855,565
                
                
                
                40,093,765
                
                
                
                49,820,058
                
                
                
                38,234,934Weighted
      average common shares outstanding for diluted net loss per
      share
                
                
                49,855,565
                
                
                
                40,093,765
                
                
                
                49,820,058
                
                
                
                38,234,934Net
      loss per share - basic
                
                $
                (0.01
                )
                
                $
                (0.01
                )
                
                $
                (0.03
                )
                
                $
                (0.04
                )Net
      loss per share - diluted
                
                $
                (0.01
                )
                
                $
                (0.01
                )
                
                $
                (0.03
                )
                
                $
                (0.04
                )


Note
13 - 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
  
 Note
14 - Related Party Transactions and Economic Dependence
  Hammonds has
been and continues to be dependent upon funding from its parent, American
International Industries, Inc. At June 30, 2008 and December 31, 2007, Hammonds
owed the parent $592,063 and $594,640, respectively.  Interest on the
balance owed to the parent is payable monthly at a rate of 6% per
year.


Back to Table of Contents
 14


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATION
  As used
in this Quarterly Report, the terms "we", "us", "our" and the
"Company" means Hammonds Industries, Inc., formerly International
American Technologies, Inc., a Nevada corporation, and its subsidiaries,
Hammonds Technical Services, Inc., Hammonds Fuel Services, Inc. and Hammonds
Water Treatment Systems, Inc. (collectively, "Hammonds"). To the extent that we
make any forward-looking statements in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this
Quarterly Report, we emphasize that forward-looking statements involve risks and
uncertainties and our actual results may differ materially from those expressed
or implied by our forward-looking statements. Our forward-looking statements in
this Quarterly Report reflect our current views about future events and are
based on assumptions and are subject to risks and uncertainties. Generally,
forward-looking statements include phrases with words such as "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate" and similar expressions to identify
forward-looking statements.
  Overview
  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% 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 "2007 Private Financing Transactions".  Further, AMIN’s equity
interest will be reduced to 34% upon the completion of the special dividend by
AMIN of the Company’s shares, which is presently scheduled to commence in
August 2008.
  In 2005,
the Company, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. 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.
 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 8 to the consolidated financial
statements.
 Back to Table of Contents
 15
 Results of
Operations




Three and Six Months Ended June 30,
2008 Compared to Three and Six Months Ended June 30, 2007.




The
following is derived from, and should be read in conjunction with, our unaudited
condensed consolidated financial statements, and related notes for the three and
six months ended June 30, 2008 and 2007.
  Revenues. Hammonds
generated revenues for the three months ended June 30, 2008 of $2,420,771,
compared to $2,417,776 for the three months ended June 30, 2007, representing an
increase of $2,995. Revenues for the six months ended June 30, 2008 were
$4,625,928, compared to $4,037,175 for the same period in 2007, representing an
increase of $588,753, or 15%. The increase was due to higher demand for Hammonds
Water Treatment products and increased sales of Hammonds Technical Services’
transport mounted injection systems and Hammonds’ line of Omni Directional
Vehicles (ODVs®). For the six months ended June 30, 2008 compared to 2007,
Hammonds Water Treatment revenues increased by $157,208, or 10%, and Hammonds
Technical Services revenues increased by $466,564, or 24%. Hammonds' projected
backlog of orders at June 30, 2008 is $3.1 million, compared to a backlog of
orders of $5.0 million at June 30, 2007.  The backlog is principally
comprised of orders for injectors and skids.  All of the projected
backlog at June 30, 2008 is expected to be delivered over the next twelve
months.
  Cost of Sales.Cost of sales
for the three months ended June 30, 2008 was $1,790,454, or 74% of
revenues, compared to $1,867,448, or 77% of revenues for the same period of
the prior year. Cost of sales for the six months ended June 30, 2008 was
$3,555,106, or 77% of revenues, compared to $3,332,690, or 83% of
revenues for the same period of the prior year.  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.
 
 Selling and Administrative.Selling and administrative expenses increased to $1,258,272, or 52%
of revenues, for the three months ended June 30, 2008, from $968,899, or
40% of revenues for the three months ended June 30, 2007. Selling and
administrative expenses were $2,385,372, or 52% of revenues, for the
six months ended June 30, 2008, compared to $1,833,617, or 45% of
revenues, for the six months ended June 30, 2007. The increase was
primarily due to expenses associated with sales promotion for Hammonds' line of
ODVs®.
  Loss from Operations.Our
loss from operations for the three month period ended June 30, 2008, was
$627,955, compared to 2007 of $418,571.  Loss from operations for
the six months ended June 30, 2008, was $1,314,550 compared to $1,129,132
for the six months ended June 30, 2007 due to the increase in selling, general
and administrative costs.
  Other Income (Expense).Other
expense decreased to $79,885 for the three months ended June 30, 2008, from
$174,892 for the three months ended June 30, 2007. Other expense decreased to
$182,973 for the six months ended June 30, 2008, from $310,198 for the six
months ended June 30, 2007. Interest expense for the three and six months ended
June 30, 2008 compared to 2007 decreased by $67,431 and $88,895, respectively,
due to a decrease in the amount owed to the parent of $1.5
million.  Net unrealized and realized loss on trading securities for
the three and six months ended June 30, 2008 compared to 2007 decreased by
$33,730 and $46,196, respectively.
  Net Income (Loss).Net loss
increased to $678,050 for the three months ended June 30, 2008, compared to
a net loss of $593,463 for the three months ended June 30, 2007. Net loss
increased to $1,476,609 for the six months ended June 30, 2008, compared to
a net loss of $1,439,330 for the six months ended June 30,
2007.
  Liquidity and Capital
Resources
  At June
30, 2008 and December 31, 2007, we had total assets of $10,075,653 and
$10,815,238, respectively. We had positive working capital of $1,301,196 at June
30, 2008, compared to $2,660,254 at December 31, 2007, representing a reduction
of $1,359,058, due primarily to funding operations and investment in production
equipment.
  Net cash
used in operations was $1,230,540 during the six months ended June 30,
2008, compared to $856,441 for 2007. The cash used during the six months ended
June 30, 2008 was derived primarily from the net loss of $1,476,609 and
increases in accounts receivable of $595,499, inventories of $232,571, prepaid
expenses and other assets of $6,243, offset by an increase in accounts payable
of $534,632. Significant non-cash items included in the net loss are
depreciation and amortization of $454,236 and stock based compensation of
$63,200. The cash used during the six months ended June 30, 2007 was derived
primarily from the net loss of $1,439,330 and an increase in inventories of
$130,958, offset by an increase in accounts payable of $192,661, depreciation
and amortization of $412,453, an unrealized loss on trading securities of
$74,510, and stock based compensation of $40,000.
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 16
 Net cash
used in investing activities was $200,252 during the six months ended June 30,
2008, compared to cash used of $112,600 for 2007. The cash used during the six
months ended June 30, 2008 was primarily from the investment in production
equipment of $177,742 and the cost of securing patents and trademarks of
$19,934. The cash used during the six months ended June 30, 2007 was from
purchases of an option to buy American International Industries, Inc. stock for
$100,000 as part of a lawsuit settlement, property and equipment of $190,984,
and the cost of securing patents and trademarks of $4,840, offset by an increase
of $168,771 in amounts due to our parent, American International Industries,
Inc.
  Net cash
used in financing activities was $61,748 during the six months ended June
30, 2008, compared to net cash provided in financing activities of $778,419 for
the six months ended June 30, 2007. The net cash used in financing activities
during the six month period ended June 30, 2008 was due to payments on
long-term debt and capital lease obligations. The net cash provided by financing
activities during the six month period ended June 30, 2007 was due to net
proceeds from issuance of 3,970,400 shares of common stock upon the exercise by
VOMF of Series C Warrants at an exercise price of $0.18 per share resulting in
net proceeds of $694,672, and proceeds from long-term borrowings of $284,551,
offset by payments on debt of $181,096.
  In order
to successfully grow Hammonds' business and its plan to increase market share
for Hammonds' products and services, we have been dependent upon funding from
our parent, which loan at June 30, 2008 was $592,063, 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.  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.
  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.
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 17


ITEM 3.  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 June 30, 2008 and December 31, 2007, due to the
generally short maturities of these items. At June 30, 2008 and 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 June 30, 2008 and 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.
   ITEM 4T. CONTROLS AND PROCEDURES
  Evaluation of disclosure controls
and procedures. As of June 30, 2008, the Company's chief executive
officer and chief financial officer conducted an evaluation regarding the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation
of these controls and procedures, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
 Changes in internal controls.
During the quarterly period covered by this report, no changes occurred in our
internal control over financial reporting that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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 18
 PART
II - OTHER INFORMATION
   ITEM 1. LEGAL PROCEEDINGS
  None.
   ITEM 1A. RISK FACTORS
 For the
six months ended June 30, 2008 there were no material changes from risk factors
as disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007.
   ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
     ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  None.
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
   ITEM 5. OTHER INFORMATION
  None.
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  (a) The
following documents are filed as exhibits to this report on Form 10-Q or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing that included such
document.
  Exhibit
      No.
              Description31.1
              Certification
      of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200231.2
              Certification
      of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200232.1
              Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of
    200232.2
              Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
  (b)
Reports on Form 8-K During the Period Covered by this Report: The
Registrant filed a Form 8-K on June 6, 2008 with disclosure under
Item 4.01, "Changes in Registrant's Certifying Accountants."
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 19
 SIGNATURES
   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
   /s/ Daniel
Dror
 CEO
 Dated: 
August 14, 2008
   /s/ Sherry L.
Couturier
 CFO
 Dated: 
August 14, 2008