UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549


___________________




FORM
10-Q


_______________________




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




For the
quarterly period ended March 31, 2008




oTRANSITION 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 shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈ Nox




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




Large
      accelerated filer  ̈
            Accelerated filer ̈
            Non-accelerated
      filer x




At March
31, 2008, the Registrant had 49,816,439 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
            
            
            18ITEM
      3.
            
            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            
            
            21ITEM
      4T.
            
            CONTROLS AND
      PROCEDURES
            
            
            21PART
      II - OTHER INFORMATIONITEM
      1.
            
            LEGAL
      PROCEEDINGS
            
            
            22ITEM
      1A.
            
            RISK FACTORS
            
            
            22ITEM
      2.
            
            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            
            
            22ITEM
      3.
            
            DEFAULTS UPON
      SENIOR SECURITIES
            
            
            22ITEM
      4.
            
            SUBMISSION OF MATERS
      TO A VOTE OF SECURITY HOLDERS
            
            
            22ITEM
      5.
            
            OTHER
      INFORMATION
            
            
            22ITEM
      6.
            
            EXHIBITS AND REPORTS ON FORM
      8-K
            
            
            22
















PART
I - FINANCIAL INFORMATION






ITEM1. FINANCIAL STATEMENTS




Financial
Statements




Condensed
      Consolidated Financial StatementsUnaudited Condensed
      Consolidated Balance Sheets - March 31, 2008 and December 31, 2007
      (Audited)
            4Unaudited Condensed
      Consolidated Statement of Operations - Three months ended March 31, 2008
      and 2007
            5Unaudited Condensed
      Consolidated Statement of Cash Flows - Three months ended March 31, 2008
      and 2007
            6Notes to Unaudited
      Financial Statements
            7





Back to Table of Contents





HAMMONDSINDUSTRIES, INC.Consolidated
      Balance SheetsMarch
      31, 2008 and December 31, 2007




March
      31, 2008
              
              
              December
      31, 2007(Unaudited)
              
              
              (Audited)AssetsCurrent
      assets:Cash
              
              $
              351,780
              
              
              $
              1,597,361Trading securities
              
              
              -
              
              
              
              28,314Accounts
      receivable, less allowance for doubtful accounts of$102,610
      at March 31, 2008 and $104,169 at December 31, 2007
              
              
              974,643
              
              
              
              791,374Inventories, net
              
              
              1,810,801
              
              
              
              1,656,801Prepaid expenses and other assets
              
              
              103,398
              
              
              
              89,236Total current assets
              
              
              3,240,622
              
              
              
              4,163,086Property
      and equipment, net
              
              
              1,337,339
              
              
              
              1,132,472Intangible
      assets, net
              
              
              5,305,785
              
              
              
              5,457,365Other
      assets
              
              
              130,380
              
              
              
              62,315Total assets
              
              $
              10,014,126
              
              
              $
              10,815,238Liabilities
      and Stockholders' Equity (Deficiency)Current
      liabilities:Accounts payable and accrued expenses
              
              $
              1,227,737
              
              
              $
              1,326,808Short-term note payable
              
              
              89,999
              
              
              
              89,999Current
      installments of long-term capital lease obligations
              
              
              26,740
              
              
              
              29,967Current installments of long-term debt
              
              
              57,601
              
              
              
              56,058Total current liabilities
              
              
              1,402,077
              
              
              
              1,502,832Long-term
      capital lease obligations, less current installments
              
              
              252,124
              
              
              
              123,100Long-term
      debt, less current installments
              
              
              2,648,140
              
              
              
              2,665,585Due
      to American International Industries, Inc.
              
              
              592,063
              
              
              
              594,640Deferred
      tax liability
              
              
              156,535
              
              
              
              156,535Total liabilities
              
              
              5,050,939
              
              
              
              5,042,692Stockholders'
      equity (deficiency):Preferred stock, $0.001par value, authorized 5,000,000
    shares:3,769,626 issued and outstanding at March 31, 2008 and December 31,
      2007
              
              
              377
              
              
              
              377Additional paid-in capital - preferred stock
              
              
              4,811,573
              
              
              
              4,811,573Additional paid-in capital - beneficial conversion
              
              
              3,272,060
              
              
              
              3,272,060Additional paid-in capital - warrants
              
              
              -
              
              
              
              -Common stock, $0.0001 par value, authorized 195,000,000
      shares:49,816,439
      shares issued and outstanding at March 31, 2008 ,
      and49,748,257 shares issued and outstanding at December 31,
    2007
              
              
              4,982
              
              
              
              4,975Additional paid - in capital
              
              
              7,514,448
              
              
              
              7,480,255Accumulated deficit
              
              
              (10,640,253
              )
              
              
              (9,796,694
              )Total stockholders' equity
              
              
              4,963,187
              
              
              
              5,772,546Total liabilities and stockholders' equity
              
              $
              10,014,126
              
              
              $
              10,815,238The
      accompanying notes are an integral part of these consolidated financial
      statements.


Back to Table of Contents





HAMMONDSINDUSTRIES, INC.Consolidated
      Statements of OperationsFor
      three three months ended March 31, 2008 and 2007
    (Unaudited)Three
      Months
            
            
            Three
      Monthsended
            
            
            endedMarch
      31, 2008
            
            
            March
      31, 2007Revenues
            
            $
            2,205,157
            
            
            $
            1,619,399Costs
      and expenses:Cost of sales
            
            
            1,764,652
            
            
            
            1,465,241Selling, general and administrative
            
            
            1,127,100
            
            
            
            864,719Total operating expenses
            
            
            2,891,752
            
            
            
            2,329,960Operating
      loss
            
            
            (686,595
            )
            
            
            (710,561
            )Other
      income (expenses):Interest income
            
            
            4,620
            
            
            
            6,276Interest expense
            
            
            (79,523
            )
            
            
            (100,987
            )Realized loss on trading securities
            
            
            (100,000
            )
            
            
            -Unrealized gain (loss) on trading securities
            
            
            71,686
            
            
            
            (40,781
            )Other income (expense)
            
            
            129
            
            
            
            186Total other expenses
            
            
            (103,088
            )
            
            
            (135,306
            )Net
      loss before income tax
            
            
            (789,683
            )
            
            
            (845,867
            )Income tax expense (benefit)
            
            
            8,876
            
            
            
            -Net
      loss from operations before minority interest
            
            
            (798,559
            )
            
            
            (845,867
            )Net
      loss
            
            
            (798,559
            )
            
            
            (845,867
            )Preferred
      dividends
            
            
            (45,000
            )
            
            
            (45,000
            )Net loss applicable to common shareholders
            
            $
            (843,559
            )
            
            $
            (890,867
            )Net
      loss per common share - basic
            
            $
            (0.02
            )
            
            $
            (0.02
            )Weighted
      average common shares - basic
            
            
            49,784,156
            
            
            
            36,307,626See
      accompanying notes to consolidated financial statements





Back to Table of Contents




HAMMONDSINDUSTRIES, INC.Consolidated
      Statements of Cash FlowsThree
      months ended March 31, 2008 and 2007 (Unaudited)Three
      Months
              
              
              Three
      MonthsEnded
              
              
              EndedMarch
      31, 2008
              
              
              March
      31, 2007Cash
      flows from operating activities:Net loss
              
              $
              (798,559
              )
              
              $
              (845,867
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization of property and equipment
              
              
              61,818
              
              
              
              37,571Amortization of intangibles
              
              
              161,557
              
              
              
              166,605Stock-based compensation
              
              
              34,200
              
              
              
              -Realized
      loss on trading securities
              
              
              100,000
              
              
              
              -Unrealized (gain) loss on trading securities
              
              
              (71,686
              )
              
              
              40,781(Increase) decrease of operating assets:
              
              
              
              
              
              
              -Accounts receivable
              
              
              (183,269
              )
              
              
              271,574Inventories
              
              
              (153,999
              )
              
              
              (272,344
              )Prepaid expenses and other current assets
              
              
              (14,162
              )
              
              
              46,622Other
              
              
              (68,065
              )
              
              
              (37,050
              )Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
              
              
              (144,071
              )
              
              
              98,196Net cash used in operating activities
              
              
              (1,076,236
              )
              
              
              (493,912
              )Cash
      flows from investing activities:Patents and trademarks
              
              
              (9,978
              )
              
              
              (4,840
              )Purchase of property and equipment
              
              
              (127,243
              )
              
              
              (79,991
              )Purchase of option to buy American International Industries, Inc.
      stock
              
              
              -
              
              
              
              (100,000
              )Notes receivable
              
              
              -
              
              
              
              7,164Amount due to American International Industries, Inc.
              
              
              (2,577
              )
              
              
              90,271Net cash provided by (used in) investing activities
              
              
              (139,798
              )
              
              
              (87,396
              )Cash
      flows from financing activities:Proceeds from issuance of common stock
              
              
              -
              
              
              
              694,672Proceeds from long-term borrowing
              
              
              -
              
              
              
              243,247Principal payments under capital lease obligations
              
              
              (13,645
              )
              
              
              -Principal payment of short-term borrowings
              
              
              -
              
              
              
              (175,899
              )Principal payments of long-term borrowings
              
              
              (15,902
              )
              
              
              (6,136
              )Net cash provided by (used in) financing activities
              
              
              (29,547
              )
              
              
              755,884Net increase (decrease) in cash
              
              
              (1,245,581
              )
              
              
              174,576Cash
      and cash equivalents at beginning of year
              
              
              1,597,361
              
              
              
              396,505Cash
      and cash equivalents at end of period
              
              $
              351,780
              
              
              $
              571,081Supplemental
      schedule of cash flow information:Interest paid
              
              $
              79,523
              
              
              $
              100,987Taxes paid
              
              $
              -
              
              
              $
              -Non-cash transactions:Acquisition of fixed assets under capital lease obligations
              
              $
              139,441
              
              
              $
              -See
      accompanying notes to consolidated financial statements


Back to Table of Contents







HAMMONDSINDUSTRIES, INC.


Notes to
Unaudited Consolidated Financial Statements


March 31,
2008






(1)
Summary of Significant Accounting Policies




Organization,
Ownership and Business




Hammonds
Industries, Inc., f/k/a International American Technologies, Inc. (the
"Company"), is a 48.1% 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 9 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 three months ended March 31, 2007 have been
reclassified to conform to the presentations for the three months ended March
31, 2008.
 
 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.
  The
Company reviews long-lived assets, including property, plant and equipment and
amortizable intangible assets, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the asset may not be
fully recoverable. The Company performs undiscounted operating cash flow
analyses to determine if impairment exists. For purposes of recognition and
measurement of an impairment for assets held for use, the Company groups assets
and liabilities at the lowest level for which cash flows are separately
identified. If an impairment is determined to exist, any related impairment loss
is calculated based on fair value. Impairment losses on assets to be disposed
of, if any, are based on the estimated proceeds to be received, less costs of
disposal.
  During
April, 2005 the Company acquired Hammonds Technical Services, Inc. for a
purchase price of approximately $2,455,700 (See Note 2). The operations of
the Hammonds companies are included in the consolidated statements of operations
from date of acquisition.
   Revenue
Recognition
  Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured.  The
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.  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 expired in February
2008.  For more information, see note 3.
 
  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
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.
  Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133." This
Statement requires enhanced disclosures about an entity’s derivative and hedging
activities, including (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 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 6.
   (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 was revalued at $28,314, and the unrealized loss of $71,686
had been recorded in other income (expense) through 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.  The
net loss resulting from this transaction for the first quarter of $28,314
is included in other income (expense).
 
 
 (4)
Inventory
  Inventory
at March 31, 2008 and December 31, 2007 consisted of the following:
  March
      31, 2008
              
              
              December
      31, 2007Finished
      goods
              
              $
              252,095
              
              
              $
              231,870Work
      in process
              
              
              5,521
              
              
              
              36,045Parts
      and materials
              
              
              1,584,342
              
              
              
              1,420,0431,841,958
              
              
              
              1,687,958Less:
      Obsolescence reserve
              
              
              (31,157
              )
              
              
              (31,157
              )$
              1,810,801
              
              
              $
              1,656,801
   (5)
Property and Equipment
  A summary
of property and equipment and related accumulated depreciation and amortization
are as follows:
  March
      31, 2008
              
              
              December
      31, 2007Machinery
      and equipment
              
              $
              1,683,207
              
              
              $
              1,416,522Leasehold
      improvements
              
              
              96,796
              
              
              
              96,796Total
      property and equipment
              
              
              1,780,003
              
              
              
              1,513,318Less:
      Accumulated depreciation and amortization
              
              
              (442,664
              )
              
              
              (380,846
              )Net
      property and equipment
              
              $
              1,337,339
              
              
              $
              1,132,472
 
 
 Depreciation
expense for the three months ended March 31, 2008 and 2007 was $61,818 and
$37,571, respectively.
 
 During
the fourth quarter of 2007 and first quarter of 2008, the Company entered into
capital lease agreements for machinery and equipment included in the March 31,
2008 and December 31, 2007 balances as follows:
  March
      31, 2008
                  
                  
                  December
      31, 2007Machinery
      and equipment
                  
                  $
                  308,647
                  
                  
                  $
                  163,174Less
      accumulated depreciation and amortization
                  
                  
                  (11,817
                  )
                  
                  
                  -Net
      property and equipment
                  
                  $
                  296,830
                  
                  
                  $
                  163,174
 Principal
repayment provisions of long-term capital leases are as follows at March 31,
2008:
  2008
                
                $
                54,3582009
                
                
                45,7742010
                
                
                64,7782011
                
                
                61,6542012
                
                
                52,300Total
                
                $
                278,864
 (6)
Intangible Assets
  Intangible
assets at March 31, 2008 consisted of the following:
  As
      of March 31, 2008Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                Average
      Weighted LivesPatents
                
                $
                4,554,476
                
                
                $
                936,991
                
                12
      yearsTrademarks
                
                
                1,149,199
                
                
                
                249,683
                
                10
      yearsSole
      Source Contract
                
                
                1,144,039
                
                
                
                355,255
                
                7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                
                $
                6,847,714
                
                
                $
                1,541,929
                
                11
      years
 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
  Aggregate
      Amortization ExpenseFor
      year ending December 31, 2008
              
              $
              646,855For
      year ending December 31, 2009
              
              $
              647,064For
      year ending December 31, 2010
              
              $
              647,064For
      year ending December 31, 2011
              
              $
              647,064For
      year ending December 31, 2012
              
              $
              602,766For
      year ending December 31, 2013
              
              $
              539,849For
      year ending December 31, 2014
              
              $
              482,819For
      year ending December 31, 2015
              
              $
              450,722For
      year ending December 31, 2016
              
              $
              404,102For
      year ending December 31, 2017
              
              $
              270,523For
      year ending December 31, 2018
              
              $
              128,341
 
 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 March 31, 2008Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              Average
      Weighted LivesPatents
              
              $
              1,806,387
              
              
              $
              561,087
              
              12
      yearsTrademarks
              
              
              465,199
              
              
              
              135,683
              
              10
      yearsSole
      Source Contract
              
              
              464,039
              
              
              
              193,350
              
              7
      yearsPatents,
      Trademarks, and Sole Source Contracts
              
              $
              2,735,625
              
              
              $
              890,120
              
              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, $75,718 during the year ended December 31, 2007 and
$9,978 during the three months ended March 31, 2008. The following table
contains a summary of the intangible assets acquired in 2006, during the year
ended December 31, 2007, and during the three months ended March 31,
2008:
  As
      of March 31, 2008Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              Average
      Weighted LivesPatents
              
              $
              2,748,089
              
              
              $
              375,904
              
              12
      yearsTrademarks
              
              
              684,000
              
              
              
              114,000
              
              10
      yearsSole
      Source Contract
              
              
              680,000
              
              
              
              161,905
              
              7
      yearsPatents,
      Trademarks, and Sole Source Contracts
              
              $
              4,112,089
              
              
              $
              651,809
              
              11
      years
 
 Amortization
expense for the three months ended March 31, 2008 and 2007 was $161,557 and
$166,605, respectively.
  (7)
Short-term Notes Payable
  March 31,
      2008
              
              
              December
      31, 2007Note
      payable with interest at 10.50%, interest payments due
    monthly
              
              $
              89,999
              
              
              $
              89,999
  At March
31, 2008 and December 31, 2007, the average annual interest rate of our
short-term borrowing was approximately 10.5%.
 
 (8)
Long-term Debt
  March
      31, 2008
              
              
              December
      31, 2007Note
      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.
              
              
              212,697
              
              
              
              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 the Company’s subsidiary, Hammonds Technical Services,
    Inc.
              
              
              34,906
              
              
              
              36,727Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
              
              
              65,949
              
              
              
              72,3892,705,741
              
              
              
              2,721,643Less
      current portion
              
              
              (57,601
              )
              
              
              (56,058
              )$
              2,648,140
              
              
              $
              2,665,585
 
 Principal
repayment provisions of long-term debt are as follows at March 31,
2008:
  2008
              
              $
              57,6012009
              
              
              2,438,9632010
              
              
              67,7532011
              
              
              54,6702012
              
              
              86,754Total
              
              $
              2,705,741
 
 (9)
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.  As a result of this agreement, there are no warrants outstanding
related to the Series A, B and C Convertible Preferred Stock.
 
 The
Company reviewed the following accounting standards to determine the appropriate
accounting for these issuances:
 - SFAS
No. 133: Accounting for
Derivative Instruments and Hedging Activities
 -
SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity
 -
EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock
 -
EITF 98-5: Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios
 -
EITF 00-27: Application of Issue No. 98-5 to Certain Convertible
Instruments
 -
EITF Topic D-98: Classification and Measurement of Redeemable
Securities
 -
ASR No. 268: Redeemable Preferred Stocks
  We
concluded that all components of these issuances should be classified as equity,
because the only way for the value of the conversion feature 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.
  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.
  The
Company 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, 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. 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.
 
  (10)
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
three months ended March 31, 2008, Hammonds Water Treatment Systems (HWT) had
one customer that represented 29% of total Hammonds' sales.
  
 (11)
Income Taxes
  The
provision for income taxes as of March 31, 2008 and 2007 consists of the
following:
  March
      31, 2008
                  
                  
                  March
      31, 2007Current
      taxes
                  
                  $
                  -
                  
                  
                  $
                  (287,595
                  )Deferred
      tax benefit
                  
                  
                  (175,293
                  )
                  
                  
                  -Benefits
      of operating loss carryforwards
                  
                  
                  175,293
                  
                  
                  
                  287,595Current
      Federal Taxes
                  
                  $
                  -
                  
                  
                  $
                  -Texas
      Margin Tax
                  
                  
                  8,876
                  
                  
                  
                  -Total
      provision for income taxes
                  
                  $
                  8,876
                  
                  
                  $
                  -
  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 $9,380;
and
 - the
valuation allowance for deferred tax assets increased by $268,321.
 The
following table sets forth a reconciliation of the statutory income tax for the
years ended March 31, 2008 and 2007:
 
 March
      31, 2008
                  
                  
                  March
      31, 2007Net
      income (loss) before taxes
                  
                  $
                  (789,683
                  )
                  
                  $
                  (845,867
                  )Income
      tax benefit computed at statutory rate
                  
                  $
                  (268,492
                  )
                  
                  $
                  (287,595
                  )Permanent
      differences - non deductible expenses
                  
                  
                  3,189
                  
                  
                  
                  -Net
      effects of temporary differences
                  
                  
                  -
                  
                  
                  
                  -Effect
      of federal graduated rates
                  
                  
                  90,010
                  
                  
                  
                  -Increase
      (decrease) in valuation allowance
                  
                  
                  175,293
                  
                  
                  
                  287,595Texas
      Margin Tax
                  
                  
                  8,876
                  
                  
                  
                  -$
                  8,876
                  
                  
                  $
                  -
  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:
 March
      31, 2008
                  
                  
                  December
      31, 2007Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  2,278,333
                  
                  
                  $
                  2,103,040Valuation
      allowance
                  
                  
                  (2,371,361
                  )
                  
                  
                  (2,103,040
                  )Net
      deferred tax asset
                  
                  $
                  (93,028
                  )
                  
                  $
                  -Deferred
      tax liabilities:Fixed
      asset temporary difference
                  
                  $
                  1,854
                  
                  
                  $
                  149,120Intangible
      asset temporary difference
                  
                  
                  37,280
                  
                  
                  
                  7,415Unrealized
      gain on trading securities
                  
                  
                  24,373
                  
                  
                  
                  -Net
      deferred tax liability
                  
                  $
                  63,507
                  
                  
                  $
                  156,535Net
      deferred tax liability
                  
                  $
                  156,535
                  
                  
                  $
                  156,535
 
 The
Company has loss carryforwards totaling $6,700,980 available at March 31, 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$
                    3,597,711
                    
                    2022$
                    515,568
                    
                    2023
 
 (12)
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:
 March
      31, 2008
                    
                    
                    March
      31, 2007Revenues:Hammonds
      Technical Services
                    
                    $
                    1,151,872
                    
                    
                    $
                    650,483Hammonds
      Fuel Additives
                    
                    
                    272,598
                    
                    
                    
                    309,008Hammonds
      Water Treatment
                    
                    
                    780,687
                    
                    
                    
                    659,908$
                    2,205,157
                    
                    
                    $
                    1,619,399Income
      (loss) from operations:Hammonds
      Technical Services
                    
                    $
                    (676,328
                    )
                    
                    $
                    (761,401
                    )Hammonds
      Fuel Additives
                    
                    
                    14,477
                    
                    
                    
                    40,162Hammonds
      Water Treatment
                    
                    
                    29,266
                    
                    
                    
                    20,298Corporate
                    
                    
                    (54,010
                    )
                    
                    
                    (9,620
                    )Income
      (loss) from operations
                    
                    
                    (686,595
                    )
                    
                    
                    (710,561
                    )Other
      income (expenses)
                    
                    
                    (103,088
                    )
                    
                    
                    (135,306
                    )Net
      income (loss) before income tax
                    
                    $
                    (789,683
                    )
                    
                    $
                    (845,867
                    )March
      31, 2008
                    
                    
                    December
      31, 2007Identifiable
      assets:Hammonds
      Technical Services
                    
                    $
                    8,840,047
                    
                    
                    $
                    8,925,595Hammonds
      Fuel Additives
                    
                    
                    2,076,051
                    
                    
                    
                    2,025,761Hammonds
      Water Treatment
                    
                    
                    758,902
                    
                    
                    
                    772,179Corporate
                    
                    
                    (1,660,874
                    )
                    
                    
                    (908,297
                    )$
                    10,014,126
                    
                    
                    $
                    10,815,238
  (13)
Earnings Per Share
  Basic
earnings per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted earnings per share, in addition to the
weighted average determined for basic loss per share, include common stock
equivalents, which would arise from the conversion of the preferred stock to
common shares.
 
 Quarter
      Ended
                
                
                Quarter
      EndedMarch
      31, 2008
                
                
                March
      31, 2007Basic
      income (loss) per share:Net
      income (loss)
                
                $
                (798,559
                )
                
                $
                (845,867
                )Weighted
      average common shares outstanding
                
                
                49,784,156
                
                
                
                36,307,626Weighted
      average common shares outstanding for diluted net income (loss) per
      share
                
                
                49,784,156
                
                
                
                36,307,626Net
      income (loss) per share - basic
                
                $
                (0.02
                )
                
                $
                (0.02
                )Net
      income (loss) per share - diluted
                
                $
                (0.02
                )
                
                $
                (0.02
                )
  (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 March 31, 2008 and December 31, 2007,
the Company 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.
 (16)
Subsequent Events
 On April
16, 2008, the board of directors of American International Industries, Inc.
(AMIN), the Company's parent, declared a special dividend of shares of
common stock of the Company to AMIN shareholders. AMIN shareholders of
record as of the close of business on Monday, May 12, 2008 will be issued one
share of the Company's common stock (free-trading to non-affiliates) for each
share of AMIN common stock owned and held on the record date. According
to the announcement of the special dividend, the shares of the Company's common
stock should be issued on or about Tuesday, August 12, 2008.  On May
7, 2008, AMIN announced that the record date for the special dividend had to be
postponed and would be rescheduled.  After the
distribution of the special dividend of approximately 7.1 million shares, AMIN's
ownership will be approximately 34%.  AMIN will continue to consolidate
Hammonds although its ownership is less than 51%, because it appoints the
members of Hammonds' board of directors.
  Back to Table of Contents


ITEM2. 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 48.1% 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".  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. See Note 2 “Acquisition”. 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 9 to the consolidated financial
statements.
  The
condensed consolidated balance sheets, statements of operations and
comprehensive income, and cash flow included herein are unaudited, except for
the condensed consolidated balance sheet as of December 31, 2007. The unaudited
financial statements include, in the opinion of management, all the adjustments,
consisting only of the normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The unaudited financial statements included herein have
been prepared in accordance with the rules of the Securities and Exchange
Commission for Form 10-Q and accordingly do not include all footnote disclosures
that would normally be included in financial statements prepared in accordance
with generally accepted accounting principles, although the Company believes
that the disclosures presented are adequate to make the information presented
not misleading.




The
nature of the Company’s business is such that the results of interim periods are
not necessarily indicative of results that may be expected for any future
interim period or for a full year.






Results of
Operations




Three
Months Ended March 31, 2007 Compared to Three Months Ended March 31,
2006




The
following is derived from, and should be read in conjunction with, our unaudited
condensed consolidated financial statements, and related notes, as of and for
the three months ended March 31, 2008 and 2007.




Revenues. Hammonds revenues
for the three months ended March 31, 2008 were $2,205,157, compared to
$1,619,399 for the three months ended March 31, 2007, representing an increase
of $585,758, or 36%. The increase in revenues 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®).  Hammonds Water Treatment
revenues increased by $120,779, or 18%, and Hammonds Technical Services revenues
increased by $501,389, or 77%. In
addition, Hammonds projected backlog of orders is $4.2 million as of March 31,
2008.  The backlog is principally comprised of orders for injectors and
skids.




Cost of Sales. Cost of
sales for the three months ended March 31, 2008 was $1,764,652, or 80% of
revenues, compared to $1,465,241, or 90% 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 $1,127,100, or 51% of revenues,
for the three months ended March 31, 2008, from $864,719, or 53% of
revenues, for the three months ended March 31, 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 March 31, 2008, was
$686,595 compared to an operating loss of $710,561 for the same period
of the prior year.  Operating expenses include non-cash items, such as
depreciation, amortization, and stock based compensation.  Our loss from
operations excluding these non-cash items was $429,020 for the three months
ended March 31, 2008, compared to $506,385 for the same period of the prior
year.




Other Income (Expense). Other
expense was $103,088 for the three month period ended March 31, 2008, compared
to $135,306 for the three month period ended March 31, 2007. The decrease was
primarily due to a reduction in interest expense of $21,464.




Net Income (Loss). Our net
loss decreased to $798,559 for the three month period ended March 31, 2008,
compared to a net loss of $845,867 for the three month period ended March 31,
2007.




Liquidity and Capital
Resources




At March
31, 2008 and December 31, 2007, we had total assets of $10,014,126 and
$10,815,238, respectively. We had positive working capital of $1,838,545 at
March 31, 2008, compared to $2,660,254 at December 31, 2007, representing a
reduction of $821,709, due primarily to funding operations and investment in
production equipment.




Net cash
used in operations was $1,076,236 during the three months ended March 31, 2008,
compared to $493,912 for the same period of the prior year. The cash used
during the three months ended March 31, 2008 was derived primarily from the net
loss of $798,559 and increases in accounts receivable of $183,269, inventories
of $153,999, prepaid expenses and other assets of $82,227, and a decrease
in accounts payable of $144,071.  Significant non-cash items included in
the net loss are depreciation and amortization of $223,375. The cash
used during the three months ended March 31, 2007 was derived primarily from the
net loss of $845,867 and an increase in inventories of $272,344, offset by a
decrease in accounts receivable of $271,574, an increase in accounts payable of
$98,196, depreciation and amortization of $204,176, and an unrealized loss on
trading securities of $40,781.




Net cash
used in investing activities was $139,798 during the three month period
ended March 31, 2008, compared to cash used of $87,396 for the same period of
the prior year.  The cash used during the three months ended March 31, 2008
was primarily from the investment in production equipment of $127,243. The cash
used during the three months ended March 31, 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 $79,991, and patents and
trademarks of $4,840, offset by an increase of $90,271 in amounts due to our
parent, American International Industries, Inc.




Net cash
used in financing activities was $29,547 during the three months ended March 31,
2008, compared to net cash provided in financing activities of $755,884 at March
31, 2007.  The net cash used in financing activities during the three
month period ended March 31, 2008 was mainly due to payments on long-term debt
and capital lease obligations. The net
cash provided by financing activities during the three month period ended March
31, 2007 was mainly 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 gross proceeds of $714,672 and net proceeds of
$694,672, and proceeds from long-term borrowings of $243,247, offset by payments
on debt of $182,035.


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, which loan at March 31, 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 (See the discussion under "2006 Private Financing
Transactions" and "2007 Private Financing Transactions" in footnote 1). 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.
 Back to Table of Contents




ITEM3.  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 March 31, 2008 and December 31, 2007, due to
the generally short maturities of these items. At March 31, 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 March 31, 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.






ITEM4T. CONTROLS AND PROCEDURES






Evaluation of disclosure controls
and procedures. As of March 31, 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.


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
restated the financial statements for the quarter ended March 31,
2007.
  The
Company’s Chief Executive Officer and Chief Financial Officer have reassessed
our disclosure controls and procedures for the quarter ended March 31,
2007.  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 March 31, 2007, 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.
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.




Back to Table of Contents




PART
II - OTHER INFORMATION






ITEM1. LEGAL PROCEEDINGS




None.






ITEM


For the
three months ended March 31, 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.
   ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS










ITEM3. DEFAULTS UPON SENIOR SECURITIES




None.






ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None.






ITEM5. OTHER INFORMATION




None.






ITEM6. 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 March 19, 2008 with disclosure under
Item 4.02, "Non-reliance on previously issued financial statements or a related
audit report or completed interim review."





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


CEO


Dated:  May
14, 2008






/s/ Sherry L.
Couturier


CFO


Dated:  May
14, 2008